Crowdfunding Filipino SMEs

Amicus Curiae
Marta B. Garcia-Morera

Posted on April 16, 2014

YOU have a brilliant business idea, but you do not have the funding. Then there is the investor, wanting to invest in an idea, yet he does not know what.

If only you have a way to meet each other...

You do.

Imagine a portal similar to Kickstarter and SoMoLend. Post your brilliant business idea, pictures showing your prototype, implementation plans, and funding requirements. Offer equity to qualified investors. Then read feedback, answer product queries, and see your first funding pledge.

Crowdfunding... a web-based social capital generation system that allows entrepreneurs, artists, and inventors who have insufficient funds to receive collective funding from a multitude of ambitious investors, who, individually, do not meet the minimum financial requirements of traditional investment channels.

Perfect for your brilliant business idea, the Searching Investor, and thousands of other struggling Small- and Medium-Scale Enterprises (SMEs) in the Philippines and ambitious would-be investors.

The Philippines is a developing country, and by “developing country” we mean that the highest average educational attainment is below college level.

We always seek foreign investments, but currently too many foreign investments translate into companies that hire only college-level Filipinos. Understandably, foreign investments aim to generate the most profits; in this new economy, when knowledge allows the greatest returns on investment, foreign investments would naturally seek knowledge-based enterprises.

We are now globally ranked second in business process outsourcing, we have talent in programming, and we are a great resource in computer animation, specializations requiring college education.

For the majority of Filipinos, survival means jobs at enterprises that most new foreign investments dare not touch. So we celebrate our SMEs and give them our utmost support, in spirit and policy.

In the International Finance Corporation-World Bank’s Ease of Doing Business Report, through informed policy changes, the Philippines emerged in the top 10 Most Improved for 2012-2013.

So how can we support our SMEs when they need funding to expand?

For start-ups, especially those based upon novel ideas, equity-based crowdfunding may be most strategic. Students planning to build a company around their class project, a smartphone app that provides data-driven real-time alternate routes to avoid traffic congestions, would attract investors who actually love the app, investors who would be the first customers and endorsers of the product. And why would these investors-turned-customers endorse it? To help friends avoid traffic, save gas, and save time, all while turning a profit.

For established SMEs needing fresh capital to expand or to meet short-term demand, lending-based crowdfunding would be most appropriate. An SME producing lambanog, which is really coconut vodka, gets huge orders from Republiq. Banks may take long to extend a loan, but the sheer mention of Republiq during crowdfunding will definitely draw spirited crowds.

Crowdfunding portals leverage technology to provide investors not only with historical data on the performance of different industries, but also with up-to-date information on the creditworthiness of registered Filipino SMEs, management composition, and product or service demand; similar to what our Credit Information Corp. (CIC), seeks to provide: independent and reliable credit information. While government entities inevitably take longer to set up, private ones are less hamstrung by red tape and are equally useful. Such information can aid investors in evaluating various project proposals at one time and hasten the process of determining which projects to support and the amounts to invest. Because project plans are presented to a network, natural filtering takes place: only the most promising projects get funded, and those that do immediately receive favorable reviews, and, as we all know, favorable reviews usually translate to better than modest sales. SMEs whose projects do not get the nod of investors immediately get feedback from the community, enabling them to correct mistakes and improve offerings.

As crowdfunding fuels the creation of new SMEs and the expansion of existing ones, it facilitates the creation of new jobs and inspires further innovation. However, crowdfunding is relatively new, and can be potentially risky to uninformed investors. Failure in project implementation, unaccountability, and fraud are just some of the dangers facing investors.

In this situation -- we wish to seize an opportunity to create wealth but stop in our tracks because of investment apprehensions -- what we need are portal standards and crowdfunding regulations. Fortunately, we have a government agency that serves the function of regulating the securities industry -- the Securities and Exchange Commission (SEC). The SEC must strike a perfect balance between encouraging the flow of local investments to Filipino SMEs and ensuring investor protection.

Recent efforts by the SEC to improve credit acquisition for SMEs resulted in a jump of 40 places (to 86th in a field of 189 economies) for the Philippines on the Getting Credit ranking in the International Finance Corporation-World Bank’s Ease of Doing Business Report. The establishment of the CIC, a public credit database, operating under the SEC and supervised by the Governance Commission for GOCCs and the passing of the Data Privacy Act of 2012, ensures ready and immediate access to credit information. There will be even more improvements this year as the CIC is coming up with a web portal for borrowers to be able to access data from the BAP Credit Bureau and from credit card systems as well. Moreover, the BAP Credit Bureau is coming up with a new system called the Positive Data Sharing System, to be implemented by May, which intends to generates credit information on a daily basis. The data is made available to financial institutions and is accessible online. In addition, the system will include Consumer Loans (Auto Financing and Home Mortgages), a Microfinance Positive Data Sharing System, a Chattel Mortgage Registry System and a Caution Alert System.

However, on the Protecting Investors ranking, the Philippines actually slipped down one notch to 128th.

To standardize the minimum functionalities of crowdfunding portals, the SEC must require stringent certifications. Portals must provide investor education tools, financial calculators, real-time credit ratings of registered Filipino SMEs, and company and management profiles of member SMEs.

To lessen failure risk to prospective crowdfunding investors, the SEC can certify individuals, not through capacity to invest, but through an investor certification test. The portals will allow only certified investors to participate in crowdfunding activities.

To protect crowdfunding investors, the SEC must require that SMEs allow background checks on their officers, provide extensive corporate disclosures, and submit to external auditing. The SEC must create rules on the accountability and liability of SME officers. The SEC must set limits, depending on the size of the project relative to set standards, on the funds that SMEs can attempt to raise through certified portals. In addition, the SEC can also set limits, algorithmically determined from investment history, on the amount that individuals can invest through the portals.

The SEC can create a regulatory framework that leverages web technology. Crowdfunding portals can monitor and report on the activities of entrepreneurs and investors. The portals can also report on community behavior towards SMEs that attempt to secure funding. Thus, the SEC can create a framework that would help both capital generation and investor protection.

We cannot forever rely upon foreign investments; we ourselves must start investing -- make the leap of faith that would inspire innovation, encourage best practices, and effect high levels of quality in our products and services.

(The author is an Associate of the Angara Abello Concepcion Regala & Cruz Law Offices [ACCRALAW]. She can be contacted at 830-8000 or through e-mail mbgarciamorera@accralaw.com. The views and opinions expressed in this article are those of the author. This article is for general information and educational purposes only and not offered as and does not constitute legal advice or legal opinion).