A New Way of Financing

Here is a college student having a brilliant idea. He wants to start a business project but has no financial resources at hand. A young entrepreneur, in the meantime, has managed to kick off his business with a very competitive item but is having a hard time raising funds because of tight loan regulations. Will crowd funding be a viable option for them?

These days, social networking services are changing the entire landscape of interpersonal communication. Unlike in the past, you do not have to meet someone face-to-face to attract investment. If you are hoping to start a business, yet having trouble with financing, you might benefit from crowd funding.

Crowd funding is a somewhat unp-recedented method of raising funds from a pool of people, even perfect strangers. It is also called social funding as it utilizes various social networking sites. Since it guarantees autonomy during the collection and distribution of money, some have dubbed it the most democratic way of funding. Unlike conventional financial institutions, it focuses on the potential of a beneficiary rather than financial structure or collateral provided. That is why crowd funding is creating such a sensation.

Crowd funding took root quite a while crowdback overseas. However, its history in Korea is as shallow as nine months. Still, it is showing some tangible results even in such a short span of time. The number of companies and projects that have so far benefitted from crowd funding recently surpassed the 500 mark.

The funding method is divided into two types; one guaranteeing the repayment of the principal and the other being more akin to a donation. In the former, those offering money are supposed to receive their investee’s goods and services in return. For example, if you were investing in a music band, the band’s albums and concert tickets would be given to you instead of interest. It has an additional merit on the part of the investee in regards to promotion and publicity.

The latter is pretty similar to making contributions. In most cases, participants invest from just dozens to thousands of dollars per person, meaning the investment risk is relatively low. The target amount and period are specifically set in advance, with nothing being passed on to the beneficiary unless the target is met within the given period in order to prevent funds from flowing into no-go projects. The funding procedure is conducted by an agent, who takes 5% to 15% of the total investment as commission.

Crowd funding is being utilized in various fields, especially art projects, as it allows investors a free hand as to whether to offer resources or not. It is in this vein that the Arts Council Korea under the Ministry of Culture, Sports and Tourism opened a micro site for crowd funding on its official Web site. More recently, Park Won-soon, a candidate in the next Seoul mayoral election, launched a fund named after him. Its annual interest rate is 3.58% and both the principal and interest are redeemed on or before December 25, 2011. It has attracted a lot of attention as an unprecedented way of raising election campaign funds, although not exactly the same as the general crowd funding projects.

Government and Banking Sector Interested in Social Funding

Judging that it could be an effective tool for tackling social divides, the government is maintaining a positive stance in regards to crowd funding. The Korea Communications Commission (KCC) announced preparatory plans for the Internet Business Startup Programs 2011 back in June. The crowd funding-based support program can be compared to the US’s “Kickstarter,” one of the world’s biggest crowd funding platforms.

The banking sector is also joining the trend. The Korea Development Bank (KDB) Foundation raised a fund worth one billion won in May using this method. It is going to be offered to social enterprises that create jobs for the underprivileged, with the Social Solidarity Bank, a non-profit organization, sharing efforts. “As Korea’s first public-purpose social fund, it will significantly contribute to addressing problems like poverty and unemployment,” said the foundation, adding, “The amount of aid will increase ultimately up to 10 billion won, along with the number of beneficiaries.” Kookmin Bank, for its part, has made a donation for the same purpose and shown its will to participate in the initiative. Its prospective beneficiaries range from art groups such as the Seoul Orchestra to social enterprises and non-profit institutions like Working Together Corp. and Northeast Asia Peace Mov-ement.

Inadequate Legal Criteria and Shallow Perception Still Lingering

For now, it can be said that this new trend has had a good start in Korea. Nevertheless, there are still many trials and errors to come and it needs to mature. Such obstacles can be split into systemic and perception-related.

Systemic obstacles mostly regard regulations. Since privately-collected petty sums of money account for the majority of crowd funding, it is not easy to keep the fundraisers in control, meaning the system is open to abuse. Furthermore, the practice of online transactions makes it tricky to decide who should be supervising, the Financial Supervisory Service (FSS) or the KCC. “To fend off side effects such as fraud, crowd funding and peer-to-peer funding still have to be equipped with adequate legal grounds and we are now working on them by modifying the Loan Company Act and so forth,” said the FSS. Meanwhile, the KCC commented, “Though agents are requesting the government stand surety, this is a type of financing made in the private sector, and therefore the government cannot intervene without further consideration,” adding, “There is nothing we can do as of now, but recommend that those in the sector prepare their own safety measures.”

Fundraisers, of course, have their own internal rules. However, they have limitations in taking safety measures on their dimension. For example, the refund clauses of their contracts are too different case by case, meaning compensation matters may become a bone of contention. “We are registered as a telemarketing business for now due to the lack of pertinent laws, but this does not reflect our reality,” said an industry insider. There is no doubt that more regulatory systems need to be in position as market size continues to expand rapidly. However, entry barriers established by legal bases may compromise the intrinsic nature of social funding, which is that anyone is allowed to participate.

Perception-related matters cannot go unnoticed, either. As a recent example, a newly-married couple, not that wealthy, revealed that they had scraped up the money for their wedding by means of crowd funding. Though this is an episode clearly showing the powerful effect of social funding, it also blurs the boundary between funding and donation. It was later discovered that over 60% of the donations came from acquaintances of the couple. This implies that the concept of crowd funding is not yet established in society, and that this innovative new method could simply become a series of one-off events. Another problem is that some non-institutional lenders are attracting investors under the guise of crowd funding in order to shed their negative image as a loan shark. The situation has even driven unfairly some real crowd fundraisers into doubts.

In the United States, more than a few people are grumbling about the flood of donation requests their twitter accounts are receiving. Therefore, in order to protect the system’s sustainability, projects and items that people can truly identify and sympathize with will have to be sought first.

No one can say for sure yet if crowd funding will reshape corporate financing. Looking back on recent past, when social networking sites were mushrooming, some believed their effects would ultimately become negative and unwholesome. However, we are now seeing positive signs of the industry taking shape. Even if crowd funding may be nothing but a businesslike method of gathering money for certain purposes, it is the people participating that infuse it with some compassion. What matters is not the tool itself but how we use it.

An Arirang Advertisement in Piccadilly Circus – You can Make it Possible

The Arts Council Korea, in tandem with Professor Seo Gyeong-deok from Sungshin Women’s University, has begun a crowd funding project to let the world know about Arirang. The amount collected between October 1 and 30 will be spent on screening an Arirang advertisement in Piccadilly Circus, London the following month. The council is running the project’s micro Web site – fund.arko.or.kr – for those wishing to participate. Earlier in August, the professor released an ad, titled Do You Hear? in Times Square, New York.