Over the last year Nesta and BOP consulting have explored opportunities for building bridges and fostering new partnerships between the UK and Chinese equity crowdfunding markets.
Just as the UK has long been seen as a pioneer when it comes to equity-based crowdfunding, UK platforms have shown some of the biggest international appetite by expanding into Europe and the US. However, what it take will for UK platforms to look further east to China remains unclear.
Over the last year Nesta and BOP consulting, with funding from the British Government’s China Prosperity Fund, have explored opportunities for building bridges and fostering new partnerships between the UK and Chinese equity crowdfunding markets.
UK platforms were some of the first in the world to develop equity-based crowdfunding in 2011, allowing retail investors to invest in start-ups and early stage companies, and this market has experienced rapid growth since. This is best exemplified by the growth in investments made through equity-based crowdfunding in the UK, which saw a growth from £28 million in 2013 to £332 million in 2015. The growth in volume of investments has followed a growth in total number of platforms, with there being around 23 regulated platforms in the UK in 2016. Alongside this, the UK was one of the first countries to introduce regulation of crowdfunding, with Seedrs becoming the first platform regulated by the FCA in 2012. The regulation of the industry, reviewed again in 2016, has, alongside tax relief schemes such as SEIS and EIS, often been described as a key factor behind the growth of the UK market.
While the Chinese market has been slower to get started on equity-based crowdfunding, it is picking up fast. Since the first Chinese platform was launched in 2013, the market has experienced rapid growth. From a base of 32 equity crowdfunding platforms that raised approximately 1 billion CNY (£118.6 million) in 2014, the Chinese equity crowdfunding market grew fivefold in 2015 to 130 platforms that raised approximately 5.2 billion CNY (£615.7 million). Growth continued into the first half of 2016, increasing to 144 platforms engaged in equity crowdfunding raising 3.6 billion CNY (£427 million). With the Chinese Government's increased focus on supporting innovation and entrepreneurship the interest in equity crowdfunding is likely to increase.
Platforms in China include a number of large technology and e-commerce companies; for example, Alibaba, JD, 360 and Xiaomi have all established their own equity crowdfunding platforms. These companies leverage their brand and existing user base to support entrepreneurs looking to raise funds.
However, compared with other alternative finance sectors, the market size of equity crowdfunding is still relatively small. For example, the size of the Chinese equity crowdfunding market is less than two per cent than that of the Chinese P2P market which raised 247 billion CNY (approx. £29.3 billion) in 2015.
Why is this so? Part of the answer seems to be regulatory uncertainty. While the Chinese Government has announced policies in support of internet financing and equity crowdfunding, the regulatory environment remains uncertain and in a state of ongoing review. There is no clear catch-all regulation or regulatory body for equity crowdfunding in China. Existing equity crowdfunding platforms that operate in China adhere to one of two sets of regulations for 1) financial institutions or 2) internet financing platforms. Neither set of regulations satisfactorily covers all forms of equity crowdfunding that exist in China (though this might get revised in 2017). For now, however, nominee structures and secondary markets (through issue of shares) are barred, and regulations to monitor and minimise personal foreign exchange transactions effectively block individual investments in cross-border equity crowdfunding.
The deeper cause behind the government’s hesitancy in this area seems to be its wish to strike a balance between encouraging new forms of financing for entrepreneurs, providing new forms of investment services to investors, protecting less sophisticated ‘retail’ investors, guarding against outflows of private capital and avoiding the fraudulent activity that has beset the P2P industry.
There is currently very little interaction between the UK and Chinese crowdfunding markets: in our research we only managed to identify two examples of joint UK/China initiatives.
In 2015, the Sharein platform announced the first attempt at setting up a cross-border equity crowdfunding initiative, allowing Chinese investors to invest in a UK-based company. More recently, in March this year Seedrs announced a new partnership with the China Innovation and Entrepreneurship International Competition (IEIC). In London, Seedrs, working alongside InteBridge Capital and the Shenzhen Government, will be hosting the UK divisional round of a competition which gives UK entrepreneurs the opportunity to win £100,000. The competition is supported by the Ministry of Science and Technology of the PRC, the State Administration of Foreign Experts Affairs and the Shenzhen Government.
However, in spite of the lack of activity there is strong interest in both the UK and China concerning how markets, the regulators, platforms and investors can better collaborate.
UK platforms are interested in the Chinese market, but need for more clarity on regulation of it before they would consider any activities there. In our conversations with platform operators, many highlighted the need for more guidance on the Chinese Government’s position on a foreign platform operating in China, Chinese investors bringing money out of China by investing in UK businesses, and overseas investors taking stakes in Chinese businesses via equity-based crowdfunding.
Chinese investors have a sense of the potential of the UK market: it offers a stable and transparent regulatory environment and access to new ‘advanced’/‘high’ technology that could be scaled for the Chinese market. However, the same opportunities exist on a larger scale in the US, and at time of writing this is a market with which Chinese investors express greater familiarity and a sense of security.
To make the most of the UK/China opportunities governments, and industry, in both UK and China need to invest in initiatives' pilot projects to exchange knowledge and investment in more structured ways, including experimentation with new technologies and providing a proof of market to investors. Below we list four ideas for initiatives that could help improve UK/China equity crowdfunding collaboration:
China-UK equity crowdfunding alliance: There is a huge amount that can be learned through sharing of best practice between platforms. One forum for doing this could be an alliance or similar that brings together UK and Chinese platforms and industry bodies such as the UK Crowdfunding Association (UKCFA) and the National Internet Finance Association of China (NIFA). The aim of this would be to promote regulatory development in the respective countries, promote industry cooperation, share industry best practice and provide support and advice for platforms interested in working in the respective countries.
Regulatory knowledge sharing: There is great interest in how regulation of equity crowdfunding has evolved in the UK and what can be learned from this. At the same time our research has found that platforms in both countries are interested guidance on regulatory frameworks and differences between UK and China. At a minimum, regulatory conditions and changes to regulatory conditions should be translated and made available in the respective countries. Building on the above we also recommend regularly publishing regulatory guidance of the two respective markets for platforms, businesses and investors to promote knowledge of the respective regulatory environments and encourage the adoption of industry best practice.
Data framework: The purpose of standards is to promote inter-operability. An international data framework (or a set of data standards) for equity-crowdfunding platforms could further support collaboration. The data framework would detail the data that platforms should collect and how that data should be made available to support the development of the industry. A common data framework would provide investors, platforms and regulators with a better understanding of the state of the market. It would enable investors to improve their understanding of the risk and opportunity through equity crowdfunding, support knowledge sharing across platforms and enable regulators to make data-informed decisions to develop the industry better. A data framework wouldn't be specific to China and the UK, but its adoption in China and the UK would promote its adoption internationally.
Government-backed pilot programmes and initiatives: There is no precedent for cooperation between equity-crowdfunding platforms in China and the UK. However, both sides have expressed a strong desire to cooperate but lack the knowledge and government support to do so. Government bodies in both China and the UK could support pilot projects and initiatives to create a precedent for and encourages cooperation between Chinese and the UK platforms. Pilot projects could include:
devise and run a number of campaigns that support UK businesses to raise funding on Chinese platforms and vice-versa
support existing UK platforms to localise for the Chinese market i.e. enable a UK platform(s) to deploy a campaign in China and vice-versa
the development of a pilot region/zone in China that provides businesses and platforms registered in the zone with reduced restrictions on outbound individual investment specifically for equity crowdfunding. The zone could be part of the China-UK FinTech bridge initiative.
For a more detailed overview you can download our introduction to equity crowdfunding in China for professionals, investors regulators and policy makers here (PDF).