SHANGHAI – Conor Roche believes China could kick off a new wave in equity crowd-funding that might even leave the European and the US-based philanthropic and rewards-based crowdfunding movements in the dust.

While the US startups such as Kickstarter have largely dominated the crowdfunding space geared toward art and design projects, Roche sees potential for crowdsourcing private equity stakes to serious entrepreneurial projects.crowdfunding marketing

Roche, a computer scientist from the UK who works in Shanghai as Associate Director of BOP Consulting in China and co-leading a CultureCrowd.co.uk research project into the crowdfunding sector, spoke to The Berlin School of Creative Leadership EMBA participants on their recent module in Shanghai. He talked about the various types of crowdfunding and how the market has room to evolve.

What are the types of crowdfunding?

• Reward-based crowdfunding is based on “donations” for gifts, where funders give money to an artist in exchange for gifts.
• Equity crowdfunding. Rather than donate money, funders in this scenario INVEST money in an activity and, in return, receive shares of equity. It allows anyone to become invested in products or companies and to possibly see a return on their investment.

But Kickstarter has received some backlash as some celebrities such as Spike Lee used the platform to raise money to raise $1.4 million produce a new film (large donors could earn a dinner with Lee). Some thought it gauche that a well-known film-maker would solicit donations as a way to engage with an audience (who might have to pay again to see the film) rather than raising money from investors.Kickstarter has largely dominated the crowdfunding space and, to its credit, provided $323 million to art-related projects in 2012, more than the $146 million that the US National Endowment for the Arts distributed during the same time period.crowdfunding advertising

English: Spike Lee at the Vanity Fair kickoff party for the 2009 Tribeca Film Festival. (Photo credit: Wikipedia)

“This created quite a storm online,” Roche said. “Why is a rich guy who has his own funding doing this on Kickstarter?”

The same was true when virtual reality headset maker Oculus Rift raised startup funds on Kickstarter and, later, went on to sell itself to Facebook for nearly $3 billion, igniting the ire of supporters who thought they were sponsoring an independent project rather than helping to make the founders rich.

These brouhahas, Roche argues, “Might reveal a need for an equity-based crowd funding model, where investors actually get a stake in the project they are sending money toward.” He thinks such equity crowdfunding has the potential to unleash a host of new art investors and patrons among middle-class and younger people rather than a small club of bankers, lawyers and wealthy establishment patrons of the arts. “Wouldn’t it be interesting if there was some equity for early funders?” Roche asked. “With equity funding, there is a legal imperative to get money back.”indiegogo marketing

One major question is the legal basis for such crowdfunding. At present, the UK allows for more experimentation in this space with startups launched already including. The US regulators are still studying the matter, considering whether such a platform could function without fraud or deception.

Roche said:

In the US, the JOBS act of 2012 said that equity crowd-funding is a legal means of raising capital in the US. But the sticking point is who can be an investor or not. As a way to protect against fraud, the Securities and Exchange Commission in Washington DC mandates that an investor in such projects have more than $1 million capital of net worth. But the attempt to protect the market stifles the US potential in equity crowd-funding for the time being.It’s about protecting entrepreneurs if the company goes belly up. So they are not subject to future lawsuits. It’s also about protecting the investor so companies on the sites are legitimate and have done due diligence. It’s an attempt to create a legitimate open market.kickstarter marketing

Meanwhile, China tried a short experiment in equity crowd-funding that allowed users to invest up to RMB 100 up to two times on certain cultural projects and to seek an expected annual return of 7% on the original investment according to Roche. Equity fundraising is currently considered an illegal funding mechanism in China except for this experiment. Roche is hoping to launch an equity crowdfunding platform in the Shanghai Free Trade Zone, a physical piece of land with more relaxed trade regulations.

Roche thinks China may have an advantage to allow for equity crowdfunding kickstarter project

more rapidly than Western economies. China has roughly 30 crowdfunding sites, including two that deal with cultural industries such as cartoon films
and movies. The largest grossing project was on a site called Demohour, which raised $260,000 and 131% of its target from 3,596 users for a cartoon movie named, “Big Fish and Chinese Flowering Crabapple.” Roche cites World Bank research suggesting Chinese crowdfunding could be a $50 billion industry by 2025. He is

“There’s a huge market for us to come together to create a project,” he said.

Marina Guo, head of Arts Management in the School of Creative Studies at the Shanghai Theatre Academy, told us that Shanghai offered RMB 290 million in 2013 for creative industries. Roughly 54% of the funds went to the design sector, while the rest went to arts and culture platforms.

Local and regional governments in China are funneling large amounts of money toward tech incubators, startups and design-oriented businesses. They are desperately hoping to kick-start a culture of technology and innovation on par with Silicon Valley. While many US-based tech giants such as Twitter and Facebook are often blocked in China, the government helps foster copycat versions of these companies, which it hopes will dominate the Chinese market and perhaps even expand abroad, challenging the US giants.CrowdFunding advertizing

Already, creative industries make up 10% of the Chinese economy according to experts. China is going through “museumification,” whereby every city and region is putting together museums. While 40 new museums were built in the US in the economic peak of the 1990s, China built 400 new museums in 2013 according to Guo. In the last five years, roughly 4,000 museums, galleries and art centers were established she said. One problem, however, is that few of China’s new museums are regarded with critical acclaim. Rather, they tend to be poorly-attended, digital-heavy and substance-weak.

Guo and Roche hope that equity crowdfunding can increase the quality of arts within China.

“What I would like to see from a principled perspective is that you have a flattened approach, particularly for arts and culture projects. It’s very difficult to get funding for artistic projects in the US and the UK. It’s getting more and more difficult,” Roche said. “Equity crowdfunding allows people to get more funding through more means and the chance to be more entrepreneurial.”CrowdFunding marketing

Posted from: http://www.forbes.com/sites/berlinschoolofcreativeleadership/2014/07/17/china-has-a-chance-to-introduce-equity-crowdfunding-ahead-of-the-us-and-europe/

By David Khorram  www.CrowdFundingPlanning.com