TALKING NOTES ON CROWDFUNDING: WORLD INNOVATION WEEK1

1. INTRODUCTION

 Crowdfunding is the practice of funding a project or venture by raising funds from a large
number of people who contribute relatively small amounts, typically via a digital platform.

 There are various forms of crowdfunding through which projects especially startup-ups can
secure funding. Some of the most common forms include Equity-based, Debt-based,
Donation-based and Rewards-based crowdfunding.

2. EQUITY-BASED CROWDFUNDING

 Equity-based crowdfunding is when a crowd investor invests a business venture, in

exchange for shares. It is also known as investment crowdfunding or crowd equity.

 The return from investment in equity-based crowdfunding is subject to the start-up company
earning a profit. This is why start-ups are considered to be relatively risky as it is usually
difficult to assess after how long the public will consider their product worthy.

 On the other hand, when successful, startups provide huge returns to investors.
Furthermore, in equity crowdfunding liquidity does not exist, because selling the investment
through to a next investor is often not possible.   Equity-based crowdfunding also results in
dilution of the original shareholders.

 Equity-based crowdfunding has paved a new way of investment for the masses, especially
for an average level investor who could previously basically only invest in listed stocks. 

 Investors in equity crowdfunding should be concerned with and focus on the quality of the
available investments and make use of professional analysts when making decisions to
invest.

 Investors must have enough information to understand the risks involved in investing in a
particular equity, when they are investing through a crowdfunding platform. The projects or
listings on the platform are usually perceived as having been screened and potentially even
endorsed by the platform. This suggests that clear rules and regulations regarding the listing
application process must be in place.

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Materials mostly sourced from Dutch Caribbean Securities Exchange website:
https://www.dcsx.cw/category/publications/
3. DEBT-BASED CROWDFUNDING

 Debt-based crowdfunding involves raising capital by issuance of debt instruments, with

fixed repayment and interest terms to several investors (lenders) through a crowdfunding
platform. The business has to follow those terms and make the payments accordingly.

 Debt-based crowd-funding, also referred to as peer-to-peer lending or P2P, is one of the

easiest ways to raise funds through crowdfunding.

 As with other investments, debt-based crowdfunding bears its risks for both the business and
the investors. In case of insolvency or bankruptcy, the business may be unable to repay the
debt.

 Despite its risks, many debt-based crowdfunding campaigns have proven to be very
profitable for both investors and business owners.

4.  DONATION-BASED CROWDFUNDING

 Donation Based Crowdfunding involves an investment that does not promise a return to the
investor. In some cases, the investor might receive their actual investment back in the end.
However, this often may take a long time, and there are mostly no contracts that bind the
business to return the original investment.

 Donation-Based Crowdfunding is commonly use to raise money for non-profits, social

causes, and art activities. Both -the investor and the business/project- are clear about the
purposes, which make this funding a lot less complicated in contrast to the rest of the
categories.
5. REWARDS-BASED CROWDFUNDING

 Rewards-Based crowdfunding is funding in which an investor is promised to receive a

reward in return for the amount that they invest in the business. These rewards can range
from discount coupons to early access to a launching-soon product.

 Although this funding offers a reward in return for the investment, it is still considered to be
a sub-category of donation-based funding, mainly because the return is a simple reward and
not a financial-asset return.
6. REGULATION OF CROWDFUNDING

 Crowdfunding offers an opportunity for s tartups, small and medium-sized enterprises to

raise funds from the public, but this should be bound in by a set of rules and regulations
to protect the investor and the company’s reputation. It is evident that there are severe
risks that can damage the investment of the public, particularly inexperienced investors.

 Similar to general regulation of securities business, regulation of crowdfunding

platforms, aims at maintaining investor protection, market fairness, integrity, and
systemic risks.

 The International Organization of Securities Commissions (IOSCO) is the standard

setter for the securities industry. The IOSCO urges regulators and policy makers to
balance the need for supporting economic growth and recovery with that of protecting
investors when promoting development of crowdfunding as a means to invest in small
firms and start-ups.

 The IOSCO highlights a number of risks besides common investment risks, such as
conflict of interest and data protection. Such risks include increased default risk,
fraud, money laundering and terrorist financing; platform failure; illiquidity; and
information asymmetry.

 While regulatory regimes for crowdfunding are in their infancy, some of the measures
taken by regulators to address risks related to crowdfunding include:

o customizing entry requirements for funding portals;

o setting disclosure requirements for issuers and funding portals;

o limiting the services that may be provided by crowdfunding platforms;

o requiring investor education and/or statements signed by investors

acknowledging their understanding of risks;

o limiting the size of the investments made by an individual in each offering

and in a given timeframe; and

o requiring the appointment of a third party custodian to hold investor assets.

 As observed by IOSCO, in emerging markets the regulatory environments for

crowdfunding is still at infancy and vary widely. In some jurisdictions, such as
 Malaysia, specific crowdfunding regulations have been introduced whereby platform
operations are regulated as recognized market operators, and the frameworks are built
to adapt to new products and structures.

 In others, there are no tailored regulatory frameworks, and platforms are obliged to
comply with the same regulations as those for non-fin-tech equity issuance and trading
platforms.

 In Kenya, crowdfunding platforms can operate, as long as they raise funds for
domestic SMEs through sources outside the jurisdiction.

 Regional initiatives are also in progress through the East African Securities Regulators
(EASRA) forum where a set of overarching principles for adoption by partner states
have been developed.

 The CMSA encourages applicants to use existing regulations currently applicable to

Collective Investment Schemes (CIS) to meet the objectives intended in crowdfunding.