The Billion-Dollar Question: How to fill Belize’s SME Credit Gap? Part 7

Last week’s column commenced a conversation on yet another alternative or innovative form of financing for start-ups and SMEs. Fundamentally, because the problem of the SME credit gap is so large, the point has to be consistently underscored that over the years there have been a proliferation of solutions, ranging from angel investing; to asset-based financing in all its forms; and Equity Crowdfunding, which is the focus of this week’s column.

Again, this article series makes use of the description of Equity Crowdfunding (EC) as utilized by the Organization of Economic Corporation and Development (OECD, 2015):

“Equity Crowdfunding can provide for a complement or substitute of seed financing for entrepreneurial ventures and start-ups that have difficulties in raising capital from traditional sources, like bank loans, venture capital, business angels and also public programmes, because they are too innovative to be understood, to complex, too risky or simply because business plans are poorly presented”.

As was explained before, EC operates via a Crowdfunding Infrastructure which is usually an online website (also referred to as a Funding Portal). Examples of such websites include those by EC firms such as SEEDRS in the United Kingdom, CIRCLE UP or SeedInvest of the United States. This fairly straightforward structure and the need for funding are likely contributing factors as to why the EC outlook is so promising. According to InfoDev, developing country households would be able to cumulatively deploy up to US$96 billion a year by 2025.

But with anything that has to do with early-stage financing and investing, we cannot escape the conversation on the requisite legal infrastructure. And considering the fact that we are talking about “Seed” to “Series C-level” funding of startups and SMEs, these investments are certainly not without their risks; therefore, demanding legal protections for investors.

Now, Belize does not yet have such legal structures that cater exclusively to EC, because, let’s face it, EC is fairly new even in developed economies. For example, the Jump Start Our Business (JOBS) Act in the United States only went into effect on May 2016, even though it was signed into law four years earlier. Nevertheless, the JOBS Act’s parameters make for a useful benchmark of the type of protections that may necessary for any market.

Apart from the obvious need for a regulator, the law governing EC places a ceiling on the amount of money that could be raised via EC. In the JOBS Act example, this ceiling is $1 million. Additionally, the amounts investors are able to invest are limited based on their net worth or net income. For instance, the rules dictate that an investor with a net worth or income of less than $100,000 can only invest five percent or less of the lesser of their net income or net worth. For those with more than $100,000, it is ten percent or less.
Additionally, other protections include the limit on how much one investor could invest within a given year. In the case of the JOBS Act, this is a limit of $100,000 in any single year. This ceiling applies to investors regardless of their net income/worth.

Among the legal protections for investors, probably the most significant is the fact that disbursements to startups are dependent on whether or not they were successful in raising the targeted amount. Said differently, if a business is unable to attract sufficient investors to commit to funding the business’s targeted capital, then regardless of how much money was already pledged, not one single cent is transferred from the escrow accounts to the business. Instead, these sums are likely to be returned to the investors. This feature ensures that the businesses and startups are setting realistic goals when commencing any round of funding via EC.

Nonetheless, once again, as we had seen with the discussion on Secured Transaction Registries and Movable Assets being utilized as collateral to finance SMEs, EC would also require amendments to the legal framework. Naturally, the above is not suggesting a carbon-copy of the JOBS Act, but rather the principles ought to be customized to suit the realities of the Belizean economy and culture.

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