Equity rewards to energize financing options for startups

The other day a friend of mine asked me whether I knew anything about equity-based crowd-financing and how it works. Her question was certainly interesting, considering that equity-based crowd-funding was a relatively new and innovative financial tool designed to help startups and small businesses.

My friend's reasons for gaining more knowledge about the sector were genuine, considering that she had recently received a job offer from an equity-based crowd-funding company. My friend was at a crossroads of sorts as she was considering a job change after working for 12 years as the news editor of a local television station. " I need to know if the equity-based financing business is legal before I take a final decision," she said.

Her concern about the legal status sounds reasonable, as I am still one of the increasing number of people who still cannot tell the difference between illegal fund-raising and equity-based crowd-funding, with Internet fundraising business booming in some key cities like Beijing, Shanghai, Guangzhou and Shenzhen less than a year ago.

Illegal fundraising involves private individuals who set themselves up as moneylenders and then invite "investors" to contribute to the principal fund, on the understanding that the extremely high rates of interest the borrower is charged will bring them huge profits.

"It seems that equity-based fundraising is somewhat similar to the illegal fundraising, which focuses on bringing huge profits to investors," said my friend.

However, my worries were eased after I chanced upon a report on China's economic and social development plan, which was released earlier this year by the State Council. According to the report, China will launch trials of equity-based crowd-funding later this year to boost public capital-raising.

Unlike illegal fundraising, crowd-funding is subject to relevant laws governing the capital raising business. For example, a project promoted on the equity-based crowd-funding platform needs to have investment from a limited number of investors, as the Corporate Law states that a limited liability company should be established by no more than 50 shareholders who make capital contributions.

According to the China Securities Regulatory Commission, eight Internet companies have formed an industrial alliance and been given permission to conduct equity-based crowd-funding business.

Yu Xiaoli, deputy general manager and co-founder of Yunchou.com, a domestic Internet platform for the capital-raising business, said the approval gives the company a legal status to conduct equity-based crowd-funding.

According to Yu, the business provides finance for projects with a certain portion of equity as the reward and offers incentives to investors by giving them a piece of the pie in a budding startup business.

The Shenzhen-based company has so far raised 100 million yuan ($16.12 million) for more than 30 startup projects since it was established a year ago, according to Yu.

Since the second half of 2014, e-commerce giants such as JD.com, Alibaba Group Holding Ltd and Suning Corp have also mapped out strategies to enter the booming equity-based crowd-funding business.