Crowdfunding is now more popular in Singapore than ever before. It is now a legitimate way to raise funds for a variety of purposes, including collecting the startup capital for a new business or funding an artistic project. Crowdfunding was previously used to raise money for worthy courses such as charities. Read our guide on starting a new business in Singapore.
Crowdfunding could also refer to a platform where retail investors fund or invest in non-listed companies. Here is a guide on how crowdfunding works in Singapore and the available crowdfunding platforms.
What Is Crowdfunding and How Does It Work?
Crowdfunding involves raising money from the public outside the usual stock exchange. It uses the vast networks of people on an online crowdfunding platform and social media to bring investors and entrepreneurs together.
The concept can be traced back to the 18th century, but its recent adaptation was in 1997. Then, the British Rock Roll group, Marillion, raised money for a tour through their fans’ donations. The group’s success inspired the formation of the ArtistShare platform, a platform dedicated to crowdfunding. After that, many crowdfunding platforms emerged.
The first crowdfunding platform in Singapore was FundedHere. The platform offers lending-based and equity crowdfunding to investors. There are many other platforms in Singapore for investors and startups.
How Crowdfunding Works
There are restrictions in more jurisdictions on who can fund a new business venture and how much they are allowed to contribute. The regulations are meant to protect the not-so-wealthy investors and not put much of their savings at risk. Most new businesses fail, and there is a huge risk of losing their principal.
Crowdfunding is relatively new in Singapore, but it is regulated by the Monetary Authority of Singapore (MAS) under the Securities and Futures Act (Cap.298) and the Financial Advisers Act (Cap.110).
Crowdfunding offers entrepreneurs an opportunity to raise a lot of funds from accredited investors. It provides a platform for anyone with a viable business idea to pitch to potential investors. Different types of crowdfunding depend on the relationship between the entrepreneur and the investor.
Types of Crowdfunding
1. Lending-Based Crowdfunding
Also known as peer-to-peer lending, lending-based crowdfunding involves individuals lend money to a business. In this case, the recipient company must pay back the money with the pre-agreed interest and at a predefined time.
The lending process occurs on crowdfunding platforms such as InvestaCrowd, Fundnel, and FundedHere. The company appealing for funding should offer debentures as security. These appeals are subject to a prospectus requirement that involves registering a prospectus with MAS.
2. Equity-Based Crowdfunding
Equity-based crowdfunding is a type of crowdfunding that involves contributing the company’s capital and receiving equity shares that give you the right to participate in the company’s future profits. It is similar to the initial offering in the stock market, only that the company is listed as private.
The shares of an equity-based investment cannot be traded in a secondary market and hence has a high liquidity risk. The equity-based crowdfunding model is common with startups since it provides the right risk-reward combination for investors.
3. Donation-Base Crowdfunding
With donation-based crowdfunding, investors act as donors and do not expect anything for their contribution. They are more common with charity projects, social enterprises, and artistic projects. The MAS regulations do not apply here but follow a code of practice for online charitable fund-raising companies set by the Commissioner of Charity (COC).
The code is designed to ensure legitimacy, accountability, and charitable appeals. This requires the fund raises to complete a declaration of compliance with the fundraising regulations. It also guides the fundraisers to give the appropriate representations to the donors.
4. Rewards-Based Crowdfunding
Rewards-based crowdfunding allows investors not interested in non-financial rewards to bundle their funds to ensure that the desired rewards are materialized. The rewards might be a service or product.
The MAS regulations do not cover reward-based crowdfunding, but the fundraisers must abide by the charity law similar to the COC code of practice.
Things To Consider Before Getting Into Crowdfunding
Crowdfunding is increasingly becoming a viable digital option that business leaders are considering using as a source of capital. Here are the factors you must consider before getting into crowdfunding:
Government Regulations
Singapore has established a regulatory framework that crowdfunding platforms must satisfy before engaging in crowdfunding services. The platforms are regulated by the Monetary Authority of Singapore (MAS), which governs crowdfunding activities under the Securities and Futures Act (Cap.289) and the Financial Adviser Act (Cap. 110).
These requirements ensure that the honest participants are not at the mercy of fraudulent players. If one of the players breaches the MAS rules, a penalty is imposed, and the MAS might perform an audience to revoke the operator’s license if the player repeats the violation.
Business Concerns
Different crowd funding platforms have various models to lay out their pledging process and attract preferred investors. The platforms also charge additional fees, so you need to consider if you are okay with the imposed costs.
It is therefore essential to choose a platform you are comfortable with based on the fees and the business model.
Proof of Concept
Proof of concept is vital for any investor to gauge the market demand for a particular product. It can be hard to estimate the demand for a new product or service. Here is where crowdfunding platforms come in.
Running a crowdfunding campaign is a great way to test the novel concepts of the global market. The number of potential investors is an excellent indication of the company’s success in the market. The crowdfunding platforms offer a perfect hub for entrepreneurs to give valuable feedback on a product or service.
Risk of Idea Theft
Presenting your idea to a crowdfunding platform means that your concept is open to the public. When considering running a crowdfunding campaign, you must consider the potential theft of the idea. This is of primary concern to startups and companies that want to launch a new product. Propositions with no copyrights and patents can easily be replicated and launched by other organizations.
4 Platforms for Crowdfunding in Singapore
Here are among the top crowdfunding platforms in Singapore:
1. Kickstarter: Best for Creative and Tech Projects
Kickstarter is the big wig of crowdfunding websites. It has a great reputation but is saturated with projects that are either big or might fail. Before you launch a campaign on Kickstarter, you require a lot of market planning and know-how. The business model has an all-or-nothing system, so you might lose all the funds if you do not manage the full sum.
Funds on Kickstarter are offered on a non-equity basis, which means, for example, if you are raising funds for an app, you will not need to cede shares in exchange for the funds.
The platform is also famous for documentaries and analog and digital apps.
2. Funding Societies: Best for Small Businesses
Funding Societies facilitated peer-to-peer (P2P) lending, meaning investors can crowdfund business loans and SMEs in Singapore. The loans have an interest of about 8% to 14%, which are then paid to investors as returns. Read more on our 2022 business loan guide.
Funding Societies is one of the largest P2P lending platforms in Southeast Asia. SMEs with good credit can secure loans between $5,000 and $1.5 million on the platform. If you want to invest via Funding Societies, you can do so for $20.
3. Indiegogo: Best for Tech and Creative Projects
Indiegogo is another popular crowdfunding platform that offers more than Kickstarter. You can choose either between the keep-what-you-earn and all-or-nothing options. The keep-what-you-earn might seem the best chance at first, but you need to see the project to completion with the amount raised regardless of the amount.
4. FundedHere: Best for Startups
FundedHere is ideal for tech startups and matches angel investors with early stage startups. The main requirement is for the startup to be a Singapore-incorporated entity that has been operating for more than three months. One of its beneficial owners and founders is Singaporean. It should also have a minimum paid-up capital of not less than $50,000.
The platform offers two options, either Loan or equity, so the startups can decide how much control they are willing to cede to access the funds. FundedHere is registered with the MAS and is among the most prominent platforms in Singapore.
Closing
Crowdfunding campaigns involve a lot of planning and hard work and, in some cases, can be a risky investment. However, companies can easily achieve their goals with the proper structure and plan. Always remember a crowdfunding campaign will only work if the founder does; there is no magic in it.
Key Takeaways
- Crowdfunding allows angel investors to invest in private limited companies such as tech startups.
- FundHere is the largest crowdfunding platform in Singapore.
- There are regulations placed by the MAS that regulate how and who can contribute to crowdfunding campaigns.
- Crowdfunding platforms generate revenue from a portion of the funds raised.
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