Crowdfunding and Financial Inclusion Ivo Jenik, Timothy Lyman, and Alessandro Nava

Home , AngelList, Ketto, LendingClub, OurCrowd, SocietyOne, Symbid

WORKING PAPER

March 2017

TABLE OF CONTENTS

ACKNOWLEDGMENTS...... v

ACRONYMS AND INITIALISMS...... vi

EXECUTIVE SUMMARY...... vii

SECTION 1. WHAT IS CROWDFUNDING?...... 1 ...... 1 ...... 4 1.1. Definition and Evolution SECTION1.2. 2. Ecosystem MAIN CATEGORIES and Categorization OF CROWDFUNDING...... 5 ...... 5 ...... 5 2.1. Donation-Based Crowdfunding ...... 6 2.1.1. Model Description and Use ...... 7 2.1.2. Benefits and Risks ...... 8 2.1.3. Regulation ...... 8 2.2. Reward-Based Crowdfunding ...... 9 2.2.1. Model Description and Use ...... 10 2.2.2. Benefits and Risks ...... 10 2.2.3. Regulation ...... 10 2.3. Debt Crowdfunding ...... 13 2.3.1. Model Description and Use ...... 16 2.3.2. Benefits and Risks ...... 17 2.3.3. Regulation ...... 17 2.4. Equity Crowdfunding ...... 18 2.4.1. Model Description and Use ...... 20 2.4.2. Benefits and Risks SECTION 3.2.4.3. EVOLVING Regulation FRONTIERS...... 21 SECTION 4. CROWDFUNDING AND FINANCIAL INCLUSION...... 24 ...... 24 ...... 26 4.1. Opportunities SECTION4.2. 5. Risks NEXT and STEPS Challenges...... 29 ANNEX 1. EXAMPLES OF CROWDFUNDING PLATFORMS...... 31

ANNEX 2. EXAMPLES OF CROWDFUNDING PLATFORMS SERVING EMDES ��35

BIBLIOGRAPHY...... 37

iii

ACKNOWLEDGMENTS

This paper was prepared by Ivo Jenik, financial sector specialist (CGAP), and Alessandro Nava, senior associate (the Financial Conduct Authority [FCA]), with guidance from Timothy Lyman, lead financial sector specialist (CGAP). Peer review comments were provided by Kate Lauer, senior policy consultant (CGAP); Margaret J. Miller, lead financial sector specialist (World Bank); and Marianna Nunan, senior publishing officer (CGAP). Invaluable insights were provided by Fod Barnes, senior advisor (FCA) and Jason Pope, technical specialist in the Strategy & Competi- tion Division (FCA). The authors would like to thank the International Organization of Securities Commissions; the World Bank Group; FSD Africa; Matthew Gamser, CEO at the SME Finance Forum; Simon C. Bell, global lead for SME finance at the World Bank; and others for their previous work on the topic as well as contributions to this working paper. The authors especially thank FCA of the United Kingdom, which supported the work on this working paper by seconding Alessandro Nava to CGAP for six months.

v Crowdfunding and Financial Inclusion

ACRONYMS AND INITIALISMS ASIC

B2P Australian Securities and Investments Commission B2B Business-to-Person BoP Business-to-Business CGAP Base of the Pyramid EMDEs Consultative Group to Assist the Poor EU Emerging and Developing Economies FCA European Union FinTech Financial Conduct Authority (United Kingdom) FSP Financial Technology GPFI Financial Service Provider IOSCO Global Partnership for Financial Inclusion IPO International Organization of Securities Commissions MSME Initial Public Offering NGO Micro, Small, Medium Enterprise/Entrepreneur OECD Nongovernmental Organization P2P Organization for Economic Co-operation and Development P2B Person-to-Person/Peer-to-Peer SME Person-to-Business SSBs Small- and Medium-Sized Enterprise

WBG Standard-Setting Bodies World Bank Group

vi EXECUTIVE SUMMARY

Crowdfunding has been touted as a financial innovation, a FinTech, the fastest growing financial industry, and the next big thing in finance. “Crowdfunding” typically describes a method of financing whereby small amounts of funds are raised from large numbers of individuals or legal entities to fund businesses, specific projects, individual consumption, or other needs. It involves bypassing traditional financial intermediaries and usingi online web-based platforms to connectii users of funds withiii retail funders. Definitions of crowdfunding vary, but they often include the following key components: ( ) raising funds in small amounts, ( ) from many to many, ( ) using digital technology. The idea of matching people who need money with the people who have money to invest is not new; what is new is the way this concept of intermediation is facilitated (and made easier) by technology. Crowdfunding has the potential to transform retail financial services as the use of technology, increasing connectivity through mobile phones and other devices, the legal and regulatory framework, and constantly changing economic conditions allow new and innovative firms to compete with incumbents. This competition could foster economic growth and entrepreneurship, especially in countries with less developed financial systems. A down side of crowdfunding is that it has the potential to be harmful to customers at the base of the pyramid. By design, a crowdfunding platform often matches consumers (funders) with a consumer (a fundraiser). This creates a peculiar regulatory challenge that requires a framework to be in place to protect funders and fundraisers. However, thus far, policy makers are predominantly focused on the risks faced by the supply side (investors, lenders, and other suppliers of funds), while neglecting the fact that the platform is often the only “professional” in the crowdfunding transaction, where both the investor and the fundraiser are equally vulnera- ble and inexperienced individuals or small businesses. In this paper we argue that crowdfunding is a phenomenon that can play an important role in financial inclusion if an enabling and safe environment is in place. Examples of how crowdfunding may potentially benefit financially excluded and underserved people include improving access to finance to unserved and underserved borrowers; creating cheaper, community-based insurance products; and facilitating access to digital investments by people who currently have limited or no options to get financial returns on their savings. There are many stories illustrating this potential, such1 as the one of Lydiah from Kenya, who has been using crowdfunding to finance her small electrical supply shop and her side business of serving M-Pesa customers. Moreover, crowdfunding first emerged in developed countries, but took off fairly recently, with some of the emerging markets and developing economies leading the peloton. This paper aims to map the crowdfunding phenomenon globally, explain its main characteristics and modalities within the framework of financial inclusion, and highlight the areas that require further attention of policy makers. It is based on a combination of secondary, desk-based research and interviews with stakeholders, including independent researchers, policy makers, regulators, supervisors, .

1 See https://www.zidisha.org/loan/zidisha-loan-to-boost-my-business-capital-1

vii Crowdfunding and Financial Inclusion

standard-setting bodies (SSBs), and development professionals. This paper is written for a broad audience because the topic requires engagement by multiple stakeholders, including SSBs responsible for the regulatory and supervisory issues relevant to crowdfunding, other global bodies, and development agencies. Section 1 of this paper defines crowdfunding, provides an overview of its evolution, and outlines a crowdfunding ecosystem; Section 2 explains in detail four basic categories of crowdfunding (donation, reward, debt, and equity), and lists their key benefits and risks; Section 3 focuses on modalities of the four categories of crowdfunding (hybrid models) with specific emphasis on the most recent trends; Section 4 highlights benefits of crowdfunding for broadening and deepening financial inclusion, while it also acknowledges risks and emphasizes the need for policy makers to keep up with the industry and intervene accordingly when necessary; in conclusion, Section 5 suggests possible directions for further research.

viii Crowdfunding and Financial Inclusion

SECTION 1. WHAT IS CROWDFUNDING? 1.1 Definition and Evolution -

Crowdfunding is part of the broader uni- for consumer and business lending, in voice trading, and third-party payment - platforms. verse of financial innovations enabled by technological advancements (Euro “Crowdfunding” describes a mechanism pean Commission 2016a) also known of sourcing capital by soliciting to a pool as FinTech. FinTech has been changing of individuals or organizations through the way the financial sector operates- an online platform or mobile phone. The (see Box 1). Crowdfunding is specifically idea is simple: a large number of people, part of FinTech’s subcategory called al- through small individual contributions,- ternative finance (AltFi). AltFi refers to- can raise big amounts to finance other- technology-enabled market-based fund individuals and projects without the in ing outside the traditional financial sys volvement of conventional financial in tem and includes online marketplaces stitutions. This is usually done through

BOX 1. Examples of the Areas Disrupted by FinTech (R)evolution

Banking and Payments. The rapid spread of digital innovations, such as Internet banking, mobile payments, and mobile wallets, is changing traditional banking for consumers and businesses. New start-ups promise to deliver traditional services in a cheaper, faster, and more transparent way than traditional banks. Providers include, for instance, Atom Bank, Mondo, TransferWise, and GoCardless.

InsureTech. As with banking, technology facilitates access to and handling of insurance policies. Sim- ple insurance policies (car, travel, home) can be purchased and managed over a smartphone. Phones are also used to optimize and tailor insurance products to reflect the risk profile of an individual customer by tracking his or her driving style, or monitoring his or her mobile money balance. Technology has been an important factor driving two products with impact on customers in emerging markets and developing economies (EMDEs): (i) index crop insurance and (ii) “freemium” life insurance bundled with mobile money products. It also helps assess property damage and moni- tor compliance with insurance policy. Providers include, for instance, Metromile, Oscar, Zhong An, and CoverFox.

RegTech. This term refers to the use of technology to address regulatory and compliance challenges efficiently and effectively (see, e.g., IOSCO 2016). RegTech is changing how companies perform identity verification (biometrics) and know-your-customer policy, protect their clients’ data (cryptography), and settle transactions (distributed ledgers). To keep pace with the industry, supervisors are now more intensely exploring ways to improve their capacity by implementing new technology solutions. Providers include, for instance, Suade, Trulioo, KYC Exchange Net, and Vizor.

Note: The examples of providers listed in this box have been selected solely to illustrate practical use of FinTech.

1 Crowdfunding and Financial Inclusion

the Internet on so-called crowdfunding from funders to fundraisers through a platforms, where projects are presented given platform (Terry, Schwartz, and and where each individual in the “crowd”- Sun 2015). of funders chooses which fundraiser to finance. Definitions of crowdfund The emergence of crowdfunding has2 ing vary as demonstratedi in Box 2, but its origins in “collaborative finance” they have theii following key components and the “crowdsourcing” idea. While iniii common: ( ) raising funds in small crowdsourcing taps into the power of- amounts, ( ) from many to many, while the crowd to increase efficiency and ( ) using digital technology. The key- realize tasks that would be impossi disruptive effect of crowdfunding is that- ble for a single individual to undertake the intermediation by traditional finan alone (Brabham 2008) (e.g., Wikipedia), cial institutions is reduced to a mini crowdfunding taps into the wallet mum as funds are channeled directly of the crowd, bringing together an

BOX 2. Examples of Crowdfunding Definitions

Global Standard-Setting Bodies and Financial Inclusion the Evolving Landscape (GPFI 2016) “In the financial inclusion context, crowdfunding refers to a market-based financing technique where funds are raised from large numbers of individuals or legal entities in small amounts, bypassing traditional financial intermediaries, and using mobile phones and online web-based platforms to connect with borrowers, whether to fund a business, a specific project, or other needs.”

Crowd-funding: An Infant Industry Growing Fast (IOSCO 2014) “Crowd-funding is an umbrella term that describes the use of small amounts of money, obtained from a large number of individuals or organizations, to raise funds for a project, business/personal loan or other financing needs through online web-based platforms. Peer-to-peer lending is a form of crowd-funding used to fund loans, which are paid back with interest. Equity crowd-funding is the raising of capital through the issuance of stock to a number of individual investors using the same method as crowd-funding.”

Crowdfunding in the EU Capital Markets Union (European Commission 2016) “Crowdfunding refers to an open call to the public to raise funds for a specific project. Crowdfunding platforms are websites that enable interaction between fundraisers and the crowd. Financial pledges can be made and collected through the platform.”

Crowdfunding’s Potential for the Developing World (World Bank 2013) “Crowdfunding is an Internet-enabled way for businesses or other organizations to raise money—typically from about US$1,000 to US$1 million—in the form of either donations or investments from multiple individuals.”

- - 2 The development of collaborative finance was made possible through digital networking and communication infrastruc tures that provided a platform for instantaneous communication and cooperation. This new form of finance is character ized by highly personalized loan transactions, providing much more flexibility for borrowers in terms of loan purpose, interest rates, collateral requirements, maturity periods, and debt rescheduling. See, e.g., https://en.wikipedia.org/wiki/ Collaborative_finance.

2 Crowdfunding and Financial Inclusion

individual or entity in need of funding to credit, especially for smaller with community members willing to loans because of cost efficiency- contribute. - concerns and for loans to clients- who do not have sufficient collat Crowdfunding that targets a mass mar eral because of prudential consid ket started in the United Kingdom in erations. This has created a new 2006, followed by the United States- demand for capital (fundraisers). in 2007, and (after the 2008 financial On the supply side (funders), crisis) other markets, including in EM the protracted low-interest rate- DEs (Kirby and Worner 2014). The environment, which diminished the global financial crisis meant a big push- returns on traditional saving prod for the crowdfunding industry because- ucts, has driven a “search for yield” it caused a fall in confidence in the fi (BIS 2012) and pushed funders and nancial system, especially in the bank retail savers to alternative forms of ing sector. Since then, crowdfunding ■■ incomeRegulatory generation. factors. Crowdfunding has grown rapidly in markets across the income spectrum, with high demand at both ends of the transaction. The fast platforms have been benefitting from growth of crowdfunding is driven by the regulatory changes that took- technological, as well as macroeconomic place after the crisis (Terry, Schwartz, ■and■ Technological regulatory, factors: factors. and Sun 2015). The more strin - gent regulatory requirements signi- Improved ficantly increased banking costs of access to the Internet via mo competing in certain markets. Be bile phones and other devices, cause crowdfunding is just starting user-generated web content, boom- to be regulated across the globe,- of online3 applications, increasing use many jurisdictions do not impose of social networks, “Big Data” ana- stringent regulations on crowd lytics, and the FinTech revolution funding just yet (IOSCO 2015a). This- made crowdfunding viable by reduc- approach gives the crowdfunding- ing operational costs and increasing industry advantage over its compet the potential reach of crowdfund itors, particularly incumbent finan ing platforms (Terry, Schwartz, and cial service providers. The question ■■ MacroeconomicSun 2015). environment. The as to whether this amounts to the level of regulatory4 arbitrage remains to be answered. financial crisis and the subsequent credit crunch presented a major Since its infancy, the crowdfunding challenge for the financial system- industry has grown tremendously (Terry, Schwartz, and Sun 2015). around the world. The volume of funds Banks and other financial inter raised grew from US$1.5 billion in mediaries have tightened access 2011 to over US$100 billion in 2015 i ii iii iv - 3 “Big Data” has been defined in various ways. Many tend to highlight the following definitional features: ( ) high-volume data, ( ) produced, collected, and processed with high speed, ( ) variety information assets, and ( ) technology-based process ing of data in a meaningful way to enhance insights and decision-making. Examples of Big Data being used in a financial services context include Ant Financial (the Alibaba financial services arm), M-Shwari, Cignifi, and Lenddo. See, e.g., Gartner IT Glossary (http://www.gartner.com/it-glossary/big-data). 4 “This development [in the crowdfunding industry] leads to questions over the extent to which loan-based crowdfunding platforms allow for regulatory arbitrage with banking business, without being subject to the same consumer protection requirements, or whether the way they describe their business models or the products on offer could be misleading to consumers” (FCA 2016, p. 14).

3 Crowdfunding and Financial Inclusion

FIGURE 1. Crowdfunding around the World

- - worldwide (see, e.g., Massolution 2015 supply. The demand side consists of peo and Zhang et al. 2016a). Regardless of- ple and entities seeking funds. Depend recent signs of a slowdown (European ing on the specific model, we talk about- Commission 2016a), the crowdfund beneficiaries (donations, reward-based- ing industry keeps growing fast—the crowdfunding), borrowers (debt), or is fastest in Asia, with 210 percent year- suers (equity), who can range from in on-year growth (Massolution 2015), dividuals to micro, small, and medium driven by countries such as China enterprises (MSMEs), nongovernmental (estimated between US$60 billion and organizations (NGOs), nonprofit entities US$100 billion), India (US$27.8 million), (e.g., charities), start-ups, and financial the Philippines (US$26.9 million), and- businesses. The supply side consists of- Nepal (US$25.5 million) (Allied Crowds donors (donation), backers (reward),- 2016). In Africa, crowdfunding plat lenders (debt), and investors (debt, eq forms raised US$37.2 million in 2015 in uity). Funders range from private indi- Kenya, Rwanda, Tanzania, and Uganda viduals, to angel investors and venture (Allied Crowds 2016b). Figure 1 shows capitalists, businesses, and large finan a global picture that combines numbers cial institutions. In this paper we refer 1.2.from Ecosystemvarious reports. and Categorization to the supply side as “funders” and to- the demand side as “fundraisers,” unless - otherwise specified. Besides the platform, the fundraisers, and the “crowd” A crowdfunding ecosystem can be com of funders, other entities are neces plex and may vary substantially from sary for the crowdfunding ecosystem- model to model. The central point of to work (enablers), including payment every crowdfunding ecosystem is a systems and payment service provid platform—a technologically enabled ers, technology infrastructure, and data solution used to match demand with analytics. 4 Crowdfunding and Financial Inclusion

SECTION 2. MAIN CATEGORIES OF CROWDFUNDING -

The most common classification of donation and reward-based crowdfund- crowdfunding features four main ing. While these two categories were categories—donation, reward, debt, and- crucial for the overall emergence and de equity (Kirby and Worner 2014). These velopment of the industry, and in some categories are based on what funders ex instances may even create a gateway for pect in return for their money (and their- users (funders or fundraisers) into more primary motivation to invest). While complex forms of crowdfunding, they this basic, supply-side-oriented cate typically are not considered financial gorization allows us to explain the key- activities and are less important to the variations of crowdfunding, it may not overall focus of this paper. Excluded and be fit-for-purpose as a means of under underserved people may benefit from- standing the financial inclusion issues of donations made over the platform that- crowdfunding at the base of the pyramid facilitate mobility of funds among com (BoP), where a categorization based on munities and beyond, but those cate customer use cases (e.g., crowdfunded- gories of crowdfunding are likely to be- credit, crowdfunded insurance) might less scalable and sustainable in the long be at least as important to the risk pic term to meet the ultimate objective of fi ture for the platform as a whole as are nancial inclusion and poverty elevation. expectations of suppliers of funds. It would be a mistake to exclude the two - categories or to put too much emphasis This section is further divided into four- on2.1. them. Donation-Based Crowdfunding subsections, each dedicatedi to an individ ual categoryii of crowdfunding, that are pre 2.1.1. Model Description and Use sentediii in terms of ( ) model description- and use, ( ) key benefits and risks, and ( ) regulatory approaches. Annex 1 pro vides practical examples of each model that Donations-based crowdfunding allows- illustrate how the model operates. The key individuals (donors) to send money to- benefits and risks presented in this section- people (or projects) in need (beneficia can be connected to the innovative aspects ries), with no financial (return) consid of crowdfunding platforms, particular seg eration in exchange for their money. This- ments of funders and fundraisers attracted form of crowdfunding is used primarily- by crowdfunding, regulatory framework, in the nonprofit sector to support vari and/or a mix of several factors. - ous causes (social, environmental, po litical, charitable). The platform derives This section follows the chronologi its revenue stream primarily from fees cal order in which the categories have collected from each donation (typically emerged. Therefore, it starts with 5 percent or more, see Box 3). BOX 3. Example of Charges

“All donations go through the GlobalGiving Foundation, a registered 501(c)3 nonprofit organization. There are no costs for nonprofits to join GlobalGiving, but GlobalGiving retains a 15% fee on donations. When a donor makes a $100 donation, $85 goes to the project(s) of his/her choosing, and $10 goes to fund the many programs and services we offer nonprofits. Then $3 goes to cover standard credit card or transaction fees, and the remaining $2 goes to administrative costs of running GlobalGiving” (www.globalgiving.org/aboutus/).

5 Crowdfunding and Financial Inclusion

- 2.1.2. Benefits and Risks5

Therei are two common subcategoii A. Benefits ries of donation-based crowdfunding:

( ) personal campaigns and ( ) charity fundraising (Vargas, Dasari, and Vargas The nonprofit character of donation- 2014). Personal campaigns typically based crowdfunding limits the key involve an individual beneficiary, a benefits donors enjoy to nonmonetary household, or a small community raising ■values:■ Community participation and a money for a cause of its own interest. feeling of glow. - Typical examples include campaigns to fund medical treatment, education, or- Besides “good vi personal hobbies. Charity fundraising brations,” a big attraction of donating involves a registered charity. Both per money to a crowdfunding campaign sonal campaigns and charity fundraising lies in the opportunity for donors to- can be promoted as either all-or-nothing- stay closely in touch with the projects or keep-what-you-raise campaigns. In- they support. Platforms (and benefi- case of the former, the beneficiary re ciaries) often allow donors to see how ceives the collected funds only if the ini their money is being spent, thus pro tial threshold has been met. In case of ■■ vidingVoting a with unique money. level of transparency. the latter, the beneficiary can keep the funds even if below the threshold. By supporting a certain project, cause, or individual, The largest market for donation-based donors are effectively using their crowdfunding is in North America,- money to voice their own views, ■■ Formalization of support. Donors with $210.38 million funded in preferences, and support. 2015. For the whole American con tinent, the volume generated from who contribute to the campaigns of- donation-based crowdfunding increased- their relatives and friends may find it from US$151.09 million in 2014 to beneficial to use the platform to for- US$215.56 million in 2015 (Latin Amer malize their contribution (e.g., for tax ica accounted for US$5.18 million). purposes). This can bring the addition This represents a yearly growth rate of al benefit of discouraging excessive 43 percent (Wardrop et al. 2016). In the risk-taking, because project failure Asia-Pacific region (excluding China), may also negatively impact the social donation-based crowdfunding raised relationship (Lee and Persson 2012). - almost US$25 million in 2015, up from- - US$12 million in 2014 and US$6.3 million For beneficiaries, the key benefit is ac in 2013. In China, donation crowdfund cess to cheaper funds regardless of geo ing raised US$141.69 million in 2015 graphical barriers. Beneficiaries can (Zhang et al. 2016). In Europe (excluding- leverage social networks to raise funds the United Kingdom), donation-based- in an efficient and cheap way (liquidity- crowdfunding has been growing steadi farming) (Mas and Gitau 2014). Using- ly, raising €19.91 million (approximate social networks helps to give visibili ly US$22 million) in 2014 (Wardrop- ty to the campaign and reach individu et al. 2015). In the United Kingdom als outside the beneficiary’s immediate alone, it raised £12 million (approxi social circle. Beneficiaries also benefit mately US$15 million) in 2015 (Zhang from additional services provided by et al. 2016b). platforms, including the formalization

5 Most risks and benefits in donation-based crowdfunding apply to other categories of crowdfunding as well.

6 Crowdfunding and Financial Inclusion

of donations, basic accounting, advice, any transaction; this creates currency- B.education Risks and training, and marketing. exchange risk on the beneficiary’s (and- to a lesser extent donor’s) side. Dona tions received are subject to taxes, fur - ther diminishing the total amount. Some- The most obvious risk donors face is pledged money might not be collected fraud, either in the form of fake cam because of other reasons, such as ex paigns or cyber-attack. The risk of fake pired credit card or incorrect payment campaigns is particularly relevant when information, insufficient funds, or death a campaign is not run by an institution, of the donor. The higher the number of- such as a charity, that is often registered donors, the greater the variety of risks in a public register and subject to some and the higher likelihood of the risks ma minimum requirements (e.g., financial- terializing. Thus the beneficiary may not statements disclosure). Individual-run be able to collect all the money initially campaigns can be created for any law expected, or may collect the funds later ful purpose, including for purely selfish than initially planned. - reasons initially not disclosed to donors. - When the platform does not guarantee Donors and beneficiaries may be affect enough transparency, donors may not ed by issues faced by the platform. Be be able to check whether or not their sides cyber-attack, other risks concern- donations were used for the intended failure of the platform’s technology or purpose. closure of the platform potentially re - sulting in the loss of data as well as funds.- Risks that beneficiaries face have to do Another common risk has to do with the- with the cost of the campaign. As men international character of most transac tioned earlier, platforms typically charge tions. This has implications in many ar fees. In addition, beneficiaries need to eas, including intellectual property law, spend extra money to design and run the- tax law, and contractual law. campaign, administer donations (often - in small increments), and manage rela Crowdfunding platforms may be abused tionships with donors (e.g., send regular for money laundering and terrorist fi- updates on how the donations have been- nancing purposes, particularly where spent). Academic research has shown- platforms escape the regulatory frame that while donations are positively cor work for anti-money laundering and related to charity efficiency (and argu counter terrorist financing due to a gap ably the size and brand of the charity) 2.1.3. in their Regulation regulation and oversight. because donors value the importance and likelihood of “having an impact”; they are negatively correlated with high competition (the more similar projects Given the nature of the activity, are, the less probability of raising funds) donation-based crowdfunding per se- (Meer 2013). This means that, for some is typically not regulated. The platform types of campaigns, crowdfunding is not provides administrative services to fa an optimal solution. cilitate transactions between donors- and beneficiaries, and it is not subject to Fees and the cost of the campaign- licensing or any ongoing regulatory re are only some of the reasons the final quirements, unless it provides additional amount disbursed to the beneficia- services that are regulated (e.g., payment ry may be diminished. International services). General lawsi and regulations crowdfunding platforms offer only ma would apply to parties transacting over jor global currencies as a default for the platform, typically ( ) contract law/a 7 Crowdfunding and Financial Inclusion

ii iii - -

civiliv code, ( ) tax law, ( ) a lawv regu campaign, entrepreneurs raise aware lating charities and publicvi fundraising, ness about new projects and products, ( ) consumer protection law, ( ) data and receive feedback from potential or an protection law, and ( ) criminal law customers. For instance, a start-up6 may (fraud, cyber-attack). test interest in an innovative7 idea 2.2. Reward-Based Crowdfunding established company may test potential 2.2.1. Model Description and Use uptake of a new product. The Asia-Pacific region is leading in reward-based crowdfunding numbers. Reward-based crowdfunding allows- Excluding China, the total reward-based funders (donors) to contribute to crowdfunding volume within the campaigns in exchange for a nonfinan- Asia-Pacific region in 2015 was more cial reward. Rewards often take the form than US$81 million, almost double the- of tokens of appreciation (artist’s auto- US$41.7 million raised in 2014. In China, graph, mentioning the donor’s name in the earliest reward crowdfunding plat the credits, T-shirt) or the prepurchas forms were start-ups, but a number of- ing of a product or service (the actual China’s largest e-commerce companies invention) according to the contributed- have launched reward-based crowdfund amount. Reward-based crowdfunding ing platforms since 2013. It is estimated shares many commonalities with dona that it raised US$829.52 million in 2015 tion-based crowdfunding, and sometimes (Zhang et al. 2016a). In the Americas, is included in the same category (Vargas,- the market volume of US$658.37 million Dasari, and Vargas 2014). In addition to was generated in 2015, up 22 percent the key motivations described for dona- from 2014’s US$513.96 million. This- tion-based crowdfunding, donors expect model accounted for 2 percent of the a more tangible outcome of their invest- total market in 2015. North America ac- ment. Revenues for a platform come counted for US$645.70 million (Wardrop from the fees deduced from each contri et al. 2016). Reward-based crowd fund bution (see Box i4). There are two mainii ing is the second largest sector within common subcategories of reward-based the European online alternative finance crowdfunding: ( ) all-or-nothing and ( ) market (excluding the United Kingdom)- keep-what-you-raise. with €120.33 million (approximately US$130 million) raised in 2014 (com This category of crowdfunding is pared with €63.18 million in 2013).- primarily used to fund art (movies,- In the United Kingdom, £42 million- music) and for the development of (approximately US$55 million) was fa new products and innovations. In ad cilitated through reward-based crowd dition to financing, crowdfunding can funding platforms in 2015 (Wardrop serve marketing purposes: through the et al. 2015). BOX 4. Example of Charges

“Fees are only charged on successfully funded projects. We charge 5%, in addition to any fees from our payments partners” (www.kickstarter.com/terms-of-use?ref= footer/).

6 See, e.g., www.kickstarter.com/projects/1523379957/oculus-rift-step-into-the-game. 7 See, e.g., https://www.kickstarter.com/projects/1016374822/risky-adventure.

8 Crowdfunding and Financial Inclusion

2.2.2. Benefits and Risks

A. Benefits to trade in traditional markets (e.g., nonpecuniary rewards, such as - ■■ recognition). The benefits for donors largely over Technological innovations—including- lap with the benefits mentioned for streamlined online procedure to set donation-based crowdfunding with up a campaign, social media mar ■■ Pioneer status some additional points to mention: keting, increased transparency and - - . For many donors, competition. investing on a crowdfunding plat - Entrepreneurs may also seek nonmone form is an inherently social activity, tary benefits such as customer feedback.- and part of the reason for the in - Crowdfunding campaigns may serve as vestment is to obtain preferential a particularly informative type of mar access to the inventor (e.g., for up ket research, provide feedback on the dates, direct communication) and project, and predict potential demand the invention (early-adopter status) for the product or service concerned. ■■ (SchweinbacherCrowd due diligence. and Larralde 2010). In addition, crowdfunding was found Typically, to “democratize” finance and alleviate- “crowdsourcing” of experience and some of the geographic and gender variety of perspectives due to higher biases associated with traditional ven numbers of funders who review any ture capital financing (Agrawal, Catalini, given campaign can improve the B.and Risks Goldfarb 2011). collective ability of funders to spot and assess risks. In fact, academic - studies compared the decisions of - In addition to the risks described for do venture capitalists to funders and nation-based crowdfunding, donors face found that both groups assess en the following risks (which often have to trepreneurial quality8 in similar ways ■do■ withIncompetence. funding start-ups): - (Mollick 2013). Donors and benefi Reward-based crowdfunding enables ciaries may be initially over-optimistic beneficiaries to access capital at a lower about outcomes. Entrepreneurs may cost compared to traditional sources for have little experience in building a three reasons (Agrawal, Catalini, and product and dealing with logistics and ■Goldfarb■ 2013): suppliers, which may lead to delays- Better outreach and targeting—- or subquality products. For instance, donors are not constrained by their in the technology and design catego geographical location, and cam ries on Kickstarter, estimates suggest paigns can have global reach, thus that more than 50 percent of products targeting interested crowds with no are delivered late (Mollick 2013)9 and ■■ or limited geographical barriers. 9 percent are not delivered at all. Even when a reward is delivered, it may Monetization of assets—beneficiaries not have the promised (or expected) can leverage assets that are difficult quality.

8 Similar findings are echoed by another study of artistic projects, where the investor decisions were compared to “expert” evaluators of art quality. The authors found no differences between projects selected by the crowd and those selected with involvement of experts. See Mollick (2015), pp. 1533–53. 9 www.kickstarter.com/fulfillment

9 Crowdfunding and Financial Inclusion

■■ Lack of due diligence. 2.2.3 Regulation

Relying10 on - “the wisdom of the crowd” may- discourage donors from proper due- Similar to donation-based crowdfund- diligence. In the short-term perspec ing, reward-based crowdfunding is not- tive, this appears to be a rational de subject to any particular regulatory re cision, because they typically have gime comparable to other financial in- a much smaller stake and therefore termediaries. Crowdfunding platforms less incentive to spend time and act as matchmakers that enable bene- money investigating creators. In the ficiaries to enter into agreements with long term, however, wisdom of the multiple donors, but bear limited liabil- crowd may get corrupted (also due to ity in case of violation of the contract by the adverse selection and free-rider either party. At its best, the key obliga- problem). - tion of the beneficiary is to spend the donated money on a (often vaguely) de Beneficiaries face the risk of high oppor fined purpose and deliver the promised tunity costs because running a successful- reward within a (often vaguely) defined crowdfunding campaign requires many time frame. Should either of the parties- elements and resources. In addition, ben fail to perform, the platform would likely ■eficiaries■ Compromised face risks, suchintellectual as the following: pro offer some assistance to mediate the dis perty rights. pute, but ultimately it would be up to the - aggrieved party to enforce compliance Beneficiaries disclose before a court of law. - their plans and innovations in a pub lic forum. This can create a risk of Despite recent lawsuits, case law is lack- imitation and unfair competition and ing (Grella 2015), and there are reasons have repercussions on intellectual why donors may hesitate to sue a bene property protection as illustrated ficiary. The monetary value concerned is by the following quote from the often too small and, unless class action is terms of use of one of the largest available, the aggrieved donors may find reward-based platforms: “[w]hen it too costly to sue. Some rewards may be you [. . .] launch a project, you [. . .] difficult to obtain, even with assistance grant to us, and others acting on our of courts, and instead another form of behalf, the worldwide, non-exclusive, compensation would need to be sought. perpetual, irrevocable, royalty-free, The international nature of transactions, sub-licensable, transferable right where different legal regimes may apply to use, exercise, commercialize, regardless of a (common) arbitration and exploit the copyright, publicity, clause used by platforms, can also be a trademark, and database rights with big2.3. hurdle. Debt Crowdfunding ■■ respectCrowding to yourout [c]ontent.”professional inves tors. 2.3.1. Model Description and Use

Angel investors and venture - capitalists, who often bring additional value to the company, such as industry Debt crowdfunding allows funders (lend- knowledge, professional networks, ers) to directly lend to fundraisers or invest and status, may be crowded out by in debt obligations issued through a plat nonprofessional donors. form. Debt crowdfunding is also known

10 The term “wisdom of the crowd” has been used in a study focused on accuracy of the collective decision-making process. See Surowiecki (2004).

10 Crowdfunding and Financial Inclusion

- as lending-based crowdfunding, market loans. There are different subcategories place lending, or person-to-person (P2P) of debt crowdfunding distinguished by lending—terms that are not as broad as who■■ P2P the funderslending and fundraisers are: debt crowdfunding. Debt crowdfunding - is best thought of as a new approach to- where individual lending rather than a completely new funders lend to individual fund financial product. By leveraging the In raisers and entrepreneurs. In many ternet’s interconnectivity, this form of cases, the loan is unsecured. Based- crowdfunding builds a direct relationship on the information disclosed by the- between the funder and the fundraiser. fundraiser, funders decide to cov er all or a certain amount of the re Basedi on the key objectiveii promoted quested loan sum (Savarese 2015). by the platform, we caniii distinguish andIf the later campaign repaid with is successful,interest to the ( ) nonprofit lending, ( ) socially loan is disbursed to the fundraiser, oriented lending, and ( ) commercial lending. Funders on nonprofit platforms- funder(s). To mitigate the default- actively seek to reach communities with risk, some P2P platforms pool, slice, limited access to formal lenders with- and sell packaged loans correspond out expectations of a financial return. ing to the risk appetite indicated by Many of these platforms rely on volun ■■ thePeer funder.-to-business (P2B) lending teer work, donations, and/or grants to operate.11 The most prominent example- is Kiva, which lends money collected where individual funders lend to from lenders leveraging local microfi SMEs. The loans are not secured. nance infrastructures in the hardest to Speed, flexibility, and cost (Savarese that is reach places. Zidisha, another example- 2015) make P2B lending a13 viable of nonprofit lending, describes itself as- business funding alternative the first direct philanthropic12 microlend attractive mostly for start-ups, small ing community. Socially oriented lend- enterprises with growth potential, ing is driven by the opportunity to earn and medium-sized enterprises with profits and support specific communi specific plans for diversification and ties or geographic regions. For instance, ■■ Businessexpansion- toto- newbusiness markets. (B2B) lend MYC4 enables funders to lend money to- ing SMEs in developing countries in Africa- for a small yield. Platforms for commer where the funder is made up of cial lending usually do not target specif different businesses—often very ic groups of fundraisers or social causes. small companies—that want to Examples of these include CreditEase in lend money for good rates of return. China, RainFin in South Africa, Crowdo Lending to businesses (both P2B and in Malaysia, Zopa in the United Kingdom, B2B) may also involve funding of and LendingClub in the United States. pooled investment vehicles instead of individual businesses. We can Debt crowdfunding is used to raise funds also argue that there is a business- for all sorts of purposes ranging from to-peer subcategory where large individual consumption to business institutional funders provide funds

11 www.kiva.org/about/where-kiva-works 12 www.zidisha.org/why-zidisha 13 For instance in the United Kingdom there is a product called “mini-bonds.” Similar to traditional bonds, mini-bonds allow issuing companies to crowdfund unsecured debt at competitive rates; however, the regulatory requirements are much less stringent for mini-bonds than for regular bonds (see, e.g., https://www.syndicateroom.com/crowd-investing/mini-bonds).

11 Crowdfunding and Financial Inclusion

to lend to individual fundraisers as lenders increasingly rely on a range of described in the following. - capital sources, including credit facilities, whole loan sales, and securitizations to Debt crowdfunding platforms are di fund origination. verse in their operational models, which- largely depend on the legal and regulatory In the notary model, loans are originated framework. Based on categorization in by a partner bank and distributed troduced by IOSCO and other researchers- through the platform. This model reflects- (Kirby andi Worner 2014), there are five the regulatory requirement that lenders majorii operational models of debtiii crowd need to be authorized (e.g., hold a li funding:iv ( ) client-segregatedv account, cense). The loans issued by the partner ( ) balance sheet lending, ( ) notary, bank are held on its balance sheet for one ( ) “guaranteed” return, and ( ) offline. to two days before they are purchased and resold by the platform to the crowd- In the client-segregated account model,- (funders) in the form of notes (which, in an individual funder is matched to an many jurisdictions, are regulated as se individual fundraiser through the plat curities). Funders receive repayments- form, and a contract is set up between directly linked to the performance of the them. The platform is not a contractual underlying loan proportional to their ini party to the loan agreement between the tial investment (Figure 3). This shifts the funder and the fundraiser, and all funds risk of default to the crowd away from from the funder and the fundraiser are- both the issuing bank and the platform. separated from the platform’s balance sheet through a legally segregated ac The “guaranteed” return model and off- count (Figure 2). The platform derives its- line model are both related (although revenues and covers expenses, including not exclusively) to the Chinese crowd- debt collection and fundraiser screen funding market. In the guaranteed ing, from fees and other costs charged model, the platform guarantees a cer to either or both the fundraiser (e.g., an tain return agreed on with the funder. origination fee, administration fee) and A third-party provider, who effectively the funder (e.g., an administration fee). insures the investment, guarantees the return. This model may resemble the- In the balance sheet lending model, the- model in which the platform creates platform lends directly to fundraisers and a provision fund from which nonper holds the loan on its balance sheet. Plat- forming loans are covered. However, in forms generate their revenue through that case, the provision fund is funded interest rate spread (the difference be- from mandatory contributions charged tween the platform cost of borrowing- to fundraisers (or funders). Until its and the interest rate it charges to fund recent ban, guaranteed return model raisers). The platform also charges addi was prevalent in China. Also operating tional fees as in other models, including in China was the “offline” model, where fees for servicing loans sold to the crowd. FIGUREfundraisers 3. Notary were Model typically recruited As the industry evolves, balance sheet

FIGURE 2. Segregated Account Model

Plaorm Plaorm

Account

12 Crowdfunding and Financial Inclusion

offline through direct channels and- offers more tangible benefits to funders in-person sales techniques, including (investors):■■ Access to a new asset class. the process of creditworthiness assessment. Once the loan was funded and Kirby- disbursed, the platform collected repay and Worner (2014, p. 21) argue- ments in person on behalf of funders that “[p]eer-to-peer lending plat (Aveni et al. 2015). forms have in effect provided in vestors with a brand new asset in- Debt dominates crowdfunding markets the form of un-collateralised debt.”- around the world, with the Asia-Pacific- They further argue that this may al region ranking at the top. In China, P2P- low for better portfolio diversifica lending is the largest category of Inter tion, ultimately leading to reduced net finance, with reported market vol systemic risk as funders invest ume of US$52.44 billion in 2015 (Zhang small amounts in diversified assets et al. 2016a) compared to US$36.16- instead of over-relying on a single- billion in North America (Wardrop et asset. Whether or not crowdfunded al. 2016). In Latin America and the Ca loans would be treated as a new as- ribbean, between 2013 and 2015, P2P- set class ultimately depends on the platforms raised US$19.43 million in relevant regulatory regime. Regard 2015 (Wardrop et al. 2016). In Eu- less, debt crowdfunding widens rope, debt crowdfunding is estimated- access to an investment class not to have raised €3.21 billion (approxi easily available to retail investors in mately US$3.60 billion) in 2015 (Euro the past. Putting aside institutional pean Commission 2016a). P2P lending investors and professional lenders, reached £909 million (approximately- some of the funders lending money US$1.2 billion) in the United Kingdom over the platform to individuals, alone in 2015, compared with £547 mil MSMEs did not previously have lion (approximately US$700 million) in this option and would instead place 20142.3.2. (Zhang Benefits et al. and 2016b). Risks their savings in savings accounts, in collective investment schemes, or- A. Benefits the like (although the risk inherent in such savings/investment prod - ucts is likely to be different from that of investment in crowdfunded The major benefits of debt crowdfund ■■ assets).Higher financial return - ing are convenience, efficiencies, and potential to improve access to credit . Crowd by excluded and underserved groups. funding offers a thigher return for- Application for a loan typically takes funders than savings (corresponding- only a couple of minutes, can be done- to a higher risk). This is particular from a distant location, does not require ly important in the current low-in credit history, and may concern per terest environment where many sonal loans and business-development investors and savers search for yield. loans. The same convenience benefits In particular, crowdfunding can help funders. In addition, debt crowdfunding- satisfy a demand from funders who preserves the advantages described for want the higher average return and- the previous two categories of crowd are prepared to accept the high funding (donation and reward-based), volatility of that return and/or low- including community participation and er levels of consumer protection philanthropy, formalization of contracts, and funders who are willing to com and wisdom of the crowd. In addition, it promise on services traditionally 13 Crowdfunding and Financial Inclusion

■■ Provides convenience - - offered by intermediaries, such as . As men banks, to increase their average tioned, online platforms are acces- (gross) return. - sible to a fundraiser 24/7 from the comfort of his or her home. Technol- For fundraisers, the key advantag ogy allows for less documentation, es overlap with donation and reward making application and disburse crowdfunding; the most important one B. Risksment processes quicker. being improved access to finance. In particular, debt crowdfunding may offer - ■the■ Enablesfollowing access benefits: to capital at a lower cost than traditional sources. - In addition to common dangers associ ated with crowdfunding and investment On products, there are risks specific to debt line platforms, unlike banks, have- crowdfunding. The risks simultaneously little need for a physical presence. affect funders and fundraisers, raising This, coupled with the use of in consumer protection concerns for both novative algorithms to determine sides of the crowdfunding transaction, the creditworthiness of applicants, because the platform is often the only streamlined application and approval- professional involved. processes, and specialization in a limited number of products and ser Funders face many risks, and to a large vices allow platforms to operate with extent, these risks stem from the very a relatively low infrastructure cost, nature of the 14 underlying asset—the which reduces the cost of the loan to ■unsecured■ Risk of loan:financial loss. the fundraiser, although this may not necessarily be true for all platforms. Funders may Platforms may also create incentives lose their money if the fundraiser for traditional financial institutions defaults. The risk of default is higher to innovate (European Commission due to the nature of unsecured loans ■■ 2016a).Fills a gap left by banks to individual consumers, SMEs, and- restrictions on traditional lenders start-ups. Regulatory safeguards, . The tighter such as deposit insurance or investor protection schemes, do not- introduced post-crisis have reduced protect these investments (Euro their appetite for lending (see, e.g., pean Commission 2016a). In ad IMF 2016), particularly to the least dition, credit assessment methods profitable and the riskiest segments, used by platforms are largely new including uncollateralized personal and untested15 through the credit- loans or SME loans (see, e.g., EBA- cycle. To mitigate this risk, some 2016, OECD 2014, OECD 2009).- platforms have established a pro Particularly in some markets, crowd vision fund (a contingency/reserve funding has stepped in as an alterna fund) or introduced third-party tive to traditional lending. guarantees.

14 Some platforms require or allow borrowers to provide collateral (see, e.g., www.crowdo.com, where borrowers often offer - jewelry or gold as collateral). 15 Debt crowdfunding has grown mainly during a period of relatively stable economic recovery, but the platforms that experi enced the global financial crisis saw greater loan losses. For instance, Zopa claims to have one of the best loan performances among all P2P lenders with post-crisis (since 2010) bad debt at only 0.25 percent (see www.zopa.com/lending/risk- management); however, Zopa’s default rate in 2008 was 4.33 percent (see www.zopa.com/lending/risk-data). For Prosper, currently the second biggest P2P platform in the United States, the 2008–2010 loan portfolio in 1–14 day arrears was nearly 30 percent, according to Lendstats (see lendstats.com/wordpress/?p=218).

14 Crowdfunding and Financial Inclusion

■■ Lack of transparency. -

When dis focus on volume, rather than on the closure is not standardized across ■■ Costs.quality of loans. the market and emphasizes benefits- rather than risks, funders may not be Crowdfunding can be more in a position to make informed deci difficult and costly than most- sions (EBA 2015). Moreover, funders fundraisers anticipate. Running a may wrongly assume that offerings successful campaign requires signif- are endorsed by the platform or are icant human and financial resources. subject to an approved credit scoring Fundraisers should also consider op- ■■ Illiquidity.methodology. - portunity costs when other sources of financing may be available. In ad Investment in a crowd dition, and specifically with regard to funded loan is locked until the loan entrepreneurs, crowdfunding works matures. Funders are paid back in- well for a one-off injection of capital, regular installments or as a lump not necessarily for longer-term or ■■ sum. They cannot withdraw the in- ongoingWeak protection. support. - vested amount, unless the platform - Safeguards com allows funders to do so (typical- mon to consumer loans (standard ly for a fee). A platform that offers- early withdrawals (and thus effec ized disclosure, a cooling-off period, tively engages in maturity transfor the early repayment right, the right- mation) can pay funders either to access an effective complaints- from its own balance sheet, build a handling process, 16ban on unfair col liquidity-improvement fund, or use lection practices) may not neces money from other funders. - sarily apply to debt crowdfunding (see Section 2.3.3). - Risks faced by fundraisers often re late to the key benefits mentioned, There are also more general risks asso most importantly the convenience and ciated with platforms and the way they the ease of credit access. These risks operate. As mentioned for the other- should not be underestimated given that categories of crowdfunding, there is a over-indebtedness, one of the key risks, risk of failure of the platform’s technol has become a serious economic, social, ogy or closure of the platform, which and political issue in many countries. may lead to loss of data and funds.- ■Key■ Mis risks-selling include theand following: over-indebted Platforms that hold the loans on their- ness. - balance sheets are exposed to a high er risk of failure should the underly In many jurisdictions, plat ing loans prove to be of bad quality- forms are not obligated to assess or funders’ appetite for buying drop. whether the fundraiser can afford- Even failure of a platform that only in the loan. To the contrary, platforms termediates contracts between the have incentives to make loan appli- funder and the fundraiser may have cation as easy as possible because significant impact on them. Although they derive their income from origi the funder-fundraiser contract would nation fees, which are not contingent naturally outlive the failure, it might be on successful repayment. In other difficult to restore information about words, platforms face a conflict of the disbursed amounts, repayments, interest because their incentive is to interest rates, etc.

16 See, e.g., OECD/G20 (2011).

15 Crowdfunding and Financial Inclusion

Platforms have limited access to credit- specifically prohibited (until recent history in many jurisdictions and need ly, this was the case in Israel and to rely on innovative, yet unproven, al ■■ Japan).Regulated as an intermediary. ternative ways of credit scoring (Miller - and Jenik 2016). As long as access to bank-generated data on credit and credit Crowdfunding platforms are clas bureaus is limited to the banking sector, sified as intermediaries or brokers, crowdfunding platforms have no option and are required to register or even but to rely on alternative credit scoring to obtain a license. Obligations and methods. This may lead to inaccurate- requirements for intermediaries assessment of the default risk, but also vary by jurisdiction. Generally, there to discrimination where a bias is em are rules regulating access to the bedded in the underlying algorithm. market (regulation/licensing) and- Access to credit history is now available conduct of business. In the United to crowdfunding platforms in the United States, at the federal level, each plat States and China, for instance, with more form is required to be registered 2.3.3. countries Regulation likely to follow. with the Securities and Exchange- Commission (SEC) and is treated as a - public company that has to fully dis - close its finances, loan origination, Approaches to regulation of debt crowd and practices. In addition, each state funding vary by business model and ju- ■■ Regulatedhas its own regulations.as banking - risdiction. The great variety of business- models, together with dynamic evolu . Crowd tion of the industry, makes the develop funding platforms are classified and ment of a single regulatory regime for- regulated as banks because of their debt crowdfunding difficult. IOSCO has credit intermediation function; all- identified the following regulatory ap platforms must obtain a banking- ■proaches■ Exempted (Kirby or and unregulated. Worner 2014): license and meet (modified) pruden tial and business conduct require Some ments. Examples include France, countries have opted for a “wait- Germany, and Italy. and-see” approach and require- lending platforms to comply only- In addition to regulatory frameworks- with existing general rules govern put in place by governments, in some ing lending, such as financial con countries, several industry associa sumer protection rules, usury laws, tions have introduced self-regulation and laws against misleading and (European Commission 2016a). For- aggressive sales practices. However, example, in the United Kingdom, the since platforms do not issue loans Peer2Peer Finance Association (repre (with the exception of the balance senting 90 percent of the market) asks sheet lending model), they may not its members to apply the operating be subject to rules that bind direct principles setting out the standards of lenders. Examples include Ecuador, business conduct, such as transparency,17 ■■ Egypt,Prohibited. South Korea, and Tunisia. risk management, and reporting. - These align with, and in some areas The practice of debt supplement, requirements of the Finan crowdfunding (P2P lending) is cial Conduct Authority (FCA).

17 http://p2pfa.info/wp-content/uploads/2015/09/Operating-Principals-vfinal.pdf

16 Crowdfunding and Financial Inclusion

2.4. Equity Crowdfunding

2.4.1. Model Description and Use online private placements, this region raised over US$64 million in 2015 (excluding China) (Zhang et al. 2016a). - Equity crowdfunding allows individual As equity crowdfunding platforms con and institutional investors to invest in tinue innovating,i different business unlisted entities (issuers) in exchange for- models have emerged (Gabison 2015), shares in the entity. By definition, equity such as ( ) a club model where platforms- crowdfunding serves funding of legal en recruit potential funders as members of tities that can raise funds by selling their a closed “investment club” to avoid reg- equity. It is suitable for start-ups and ulation of public offeringsii and investor SMEs, in particular. If an investment target- protection typically enjoyed by “non is reached, the deal is closed between the qualified” investors; ( ) a cooperative- pool of funders, the issuer, and the plat model (also known as a holding model- form. The platform charges a commission or vehicle model) where platforms cre based on the amount raised and, in some ate a special-purposeiii cooperative vehi cases, on the basis of future profit. cle to pool moneyiv 19 to be invested in an ( ) an investor-led Equity crowdfunding is relatively small, individual project; model; and ( ) a coinvestment model. but it has experienced dramatic growth- in recent years. In 2015, it made up In the investor-led model (also known merely 11 percent of the total crowd- as syndicate funding), an accredited funded amount; however, in terms of lead investor carries out due diligence, year-on-year growth, it has been outpac negotiates the investment terms directly ing the growth of the wider crowdfunding with the company raising finance, and industry by 60 percent versus 53 percent invests its (or if an individual, his or her) (AlliedCrowds 2016). On the American own money. The crowd is then invited continent, US$598.05 million in equity to co-invest alongside the lead investor.- was sold over crowdfunding platforms This gives other funders peace of mind in 2015 (120 percent more than in by investing alongside professional in 2014), mostly in the United States and vestors, as equity crowdfunding can be Canada (Wardrop et al. 2016). In Europe,- very complex for inexperienced funders. equity crowdfunding was estimated Platforms benefit by taking a slice of the to reach €422 million (approximate- carry on deal. For example, AngelList ly US$467 million) in 2015 (European allows funders to form “syndicates,” Commission 2016a). In the United King which are similar to investment funds dom alone, equity-based crowdfunding for potential contributors20 to invest (excluding real estate crowdfunding)- together in a project. (See Figure 4.) - increased on a year-to-year basis by 295 percent to £245 million (approxi Similarly, the co-investment model al mately US$325 million) in 2015 (Zhang- lows funders to co-invest alongside- et al. 2016b). Although many countries established venture capitalists. The in the Asia-Pacific18 region lack a regu platform looks for deals and is respon latory framework and equity-based sible for due diligence and investment crowdfunding typically consists of small management; it usually sources, vets,

18 Exceptions include Indonesia, Korea, Malaysia, and Taiwan, which have passed a special tailored regime to allow equity

crowdfunding, while Indonesia, Thailand, and Vietnam are working toward it. 19 See, e.g., Symbid investment, which is done through a cooperative vehicle established in the Netherlands (http://symbid .com/pages/model). 20 https://angel.co/syndicates

17 Crowdfunding and Financial Inclusion

FIGURE 4. Investor-led Model

Plaorm

- and organizes investments and presents- financial intermediaries and venture them to potential “backers,” as well as in capitalists. Equity crowdfunding vests its own funds. Some of these plat opens these opportunities to a much forms also retain preemptive rights and ■■ broaderUnlimited funder potential group (Gublerfor financial 2013). provide a framework to help funders gain raise and investors invest additional21 funds in future rounds and follow-ons. . Unlike in debt crowdfunding,- 2.4.2. (See Figure Benefits 5.) and Risks funders have (at least theoretically) the possibility to unlimitedly multi - ply their investment if they bet on a new start-up that becomes the next The key benefit lies in efficient and ef ■■ marketAligned leader. incentives between fun fective intermediation of funds allowing- ders and fundraisers. funders to invest in a new asset class for higher yield and entrepreneurs to ac More than in cess funding (Kirby and Worner 2014). any other category of crowdfunding, In that regard, equity crowdfunding is interests of funders and fundraisers- similar to debt crowdfunding, and it also- are aligned because they share the retains the benefits (and risks) of the same risks (including the risk of di- donation and reward-based crowdfund lution and financial loss) and have ing, such as community participation similar options to exit the invest and voting with the money. In addition, ment (a sale, merger, or initial public there(i) Benefits are more for specific funders benefits: offering [IPO]). This reduces conflict (ii)ofAdvantages interest between for fundraisers the two parties. ■■ Access to investment opportuni ties - ■■ Limited liability. . Access to investment opportu In case of default, nities concerning start-ups and SMEs the fundraiser is not burdened with used to be restricted to traditional unlimited liability for unpaid debts, FIGURE 5. Co-investment Model

Funds

Plaorm

21 For instance, OurCrowd has a due diligence team that vets deals before they are presented to investors and is an active investor in the deal; it retains preemptive rights, thus providing the companies and investors a framework to raise and invest additional funds in future rounds and follow-ons (www.ourcrowd.com/how_it_works/an_introduction).

18 Crowdfunding and Financial Inclusion

- and instead, funders take the hit enough evidence yet regarding whether- ■■ alongsideGlobal reach. the fundraiser. and how likely these scenarios are. Un til they exit, funders are unlikely to re Equity crowdfunding- ceive any payment because early-stage allows access to funders all around- and growth-focused businesses rarely the world. This is particularly rele pay dividends. Should a funder realize vant in countries with underdevel a profit, complex tax obligations may be ■■ Improved investment attractive oped capital markets. triggered as a result of the international ness nature of crowdfunding. - . A successful campaign may- Issues surrounding the gap in protection- act as a signal to established in of fundraisers in debt crowdfunding are- vestors (including venture capital even more relevant in equity crowd ists), showing potential consumer funding. Equity crowdfunding is mar- demand, thus attracting additional keted to fundraisers as a simpler and sources of funding. cheaper way to fund business develop Equity crowdfunding is highly risky- ment (as compared to more traditional and illiquid. A recent study shows that sources of capital). Fundraisers may of the 367 businesses that attracted in- then underestimate actual campaign vestment through the United Kingdom’s costs, compliance costs (e.g., of regular five major equity crowdfunding plat reporting), investor management costs forms between 2011 and 2013, only (e.g., communication with hundreds and- 22 percent have gone on to raise funds thousands of funders), and opportunity at a higher valuation or have realized a costs in terms of foregone expertise be return for their funders through a sale cause venture capitalists often bring- or other form of exit (Altfi 2015). and This the is industry knowledge and networking most likely because early-stage22 ventures opportunities. Traditional equity inves and SMEs are inherently risky, - tors may even be able to offer capital at risk is further exacerbated by the lack of a lower price than equity crowdfunding incentives for individual funders to con because of their capacity to assess and duct due diligence given typically small price risks better. equity stakes. - The regulatory requirements, with Investments made through crowdfund which fundraisers need to comply,- ing are likely to be subject to dilution may expose fundraisers to unwanted when the business raises additional- public scrutiny. Other sources of fund capital at a later date and issues new- ing, including nonequity private debt,- shares to the new investors. Illiquidi home-equity loans, and loans from ty poses another major risk to crowd- friends and family members, allow fund- funding and available options for exit raisers to keep their business know-how are limited. In the absence of a sec and innovation hidden from the gener ondary market, funders may either al public, while crowdfunding requires- sell their position over the counter to- a higher level of disclosure. In addition any interested party or wait until the to the risk of disclosing too much infor company is acquired by a strategic in mation to competitors, this may have vestor, merges with another company, negative repercussions on intellectual or issues an IPO. However, there is not property protection (patentability).

22 See, e.g., www.statisticbrain.com/startup-failure-by-industry.

19 Crowdfunding and Financial Inclusion

TABLE 1. Special Regime for Equity Crowdfunding Special Regime in Place Special Regime under Way Canada Japan Spain Australia Mexico China Korea Taiwan Brazil Thailand France Malaysia United Kingdom India Vietnam Germany The Netherlands United States Indonesia New Zealand Israel Portugal Italy Singapore

2.4.3. Regulation - include Title III of the Jumpstart Our- Business Startups Act in the United In the jurisdictions where equity crowd - States and the new Capital Market Ser funding is not prohibited, it is either vices Act in Malaysia (see Table 1). Light subject to general securities law or to - er entry requirements, special conduct a specific regime (Kirby and Worner - of business provisions for the platforms, 2014). A clear disadvantage of the for and limited reporting requirements for mer is that general securities law is of - - fundraisers (issuers) typical of tailored ten cumbersome to comply with and regimes are counterbalanced by sever is often at odds with the innovative as - al limits on the services and activities pects of crowdfunding, thus increasing - - a platform is permitted to perform, the barriers to entry by imposing strict lim - duty to appoint a third-party custodi its on who can intermediate the invest - an to hold funder’s assets, investment ment (the platform), who can issue se limits, and the imposition of risk ac curities and under what circumstances knowledgement and funder education (the fundraiser), and who can invest in regimes. Moreover, to address most this form of equity (qualified investors). - - common risks of equity crowdfunding, Lack of clear rules also makes for an additional requirements are often im environment that23 platforms find diffi posed, such as requiring the platform cult to navigate. to conduct due diligence on the issuer To promote equity crowdfunding as a- and/or the crowdfunding offerings and viable alternative to capital markets, to have “a living will,” as well as a limit some jurisdictions have recently adopt on the amount nonqualified funders can ed a special tailored regime. Examples invest (IOSCO 2015).

23 A World Bank study of the Kenyan securities regulatory environment determined that various pieces of secu rities legislation allow for crowdfunding, but they are subject to interpretation, making it hard for businesses to set up a crowdfunding platform (Raymond 2014).

20 Crowdfunding and Financial Inclusion

SECTION 3. EVOLVING FRONTIERS As crowdfunding has grown in scale and expanded globally in its geograph- business (e.g., Startwise, Quirky). of future revenue (or profits) of the in different ways, sometimes departing Another innovation that has been par- quiteic reach, decisively it has evolvedfrom its and original diversified con- ticularly successful in Asia is the use cept. In this section we focus on the most of debt and equity crowdfunding for recent trends of (i) hybridization, (ii) in- real estate projects. As a variation of stitutionalization and complexity, and debt crowdfunding, real estate lending (iii) consolidation and how these trends funders provide a loan to property de- may affect excluded and underserved velopers secured against property of a customers. consumer or business fundraiser. In equity real estate crowdfunding, funders A. Hybridization invest in a property through the pur- chase of an equity instrument issued by Platforms combine features of different a special purpose vehicle established to crowdfunding categories, but also ca- - (e.g., , RealtyShares, Real- cus on transactions in real estate, art, or tyMogul.comfacilitate financing, and Lendinghome for a single project). Real ter to niche markets with a specific fo estate Patchoflandmay also open equity crowdfund- (i) invoice trading, (ii) royalty crowd- ing to individual fundraisers by allowing funding,video game (iii )financing. revenue Examplessharing, ( ivinclude) real them to sell stakes in their home equity.25 estate crowdfunding, and (v) P2P in- In P2P insurance, a group of individuals surance. Invoice trading is another way pools its members’ premiums and pays for businesses to raise capital by using out some or all of the claims made by the their invoices or receivables, usually group. Advantages include less fraud, selling those at a discount to a pool of lower acquisition costs (through refer- primarily high net worth individuals or rals/social networks), greater loyalty, institutional investors (e.g., Invoicefair, and better pricing over time. Some ex- Invoiceinterchange). amples are Guevara in the United King- dom and Friendsurance in Germany. In the royalty crowdfunding model, funders receive a share in a unit trust, The trend of hybridization demon- which acquires a royalty interest in the intellectual property of the fundraising and different use cases on the demand company. A percentage of revenue is side.strates Most the of flexibility the hybrid of examples crowdfunding cited paid out over time, and the payout var- ies depending on the periodic revenue. but concepts such as P2P insurance Royalty crowdfunding platforms typ- mayearlier have could a large benefit impact primarily on individu MSMEs,- ically invest in art and entertainment als as well. For instance, the concept (e.g., Tubestart of P2P insurance better adapts to the AppsFunder for mobile apps, and Gideen system of Takaful,26 an equivalent of for music) and natural for videos resources. and 24 films, The idea of revenue sharing is similar, where based on the idea of risk-sharing rather funders fund a business, and repay- thaninsurance risk-shifting. in Islamic Crowdfunded finance, which insur is- ments are determined by a percentage ance may, therefore, become a driving

24 www.energyfunders.com 25 See, e.g., Foley (2016). 26 See, e.g., Gönülal (2013).

21 Crowdfunding and Financial Inclusion

force to increase coverage in many 10 percent of all loans originated by the under-insured regions. crowdfunding sector in the United States. During the last quarter of 2014, almost Another example where a hybrid model 60 percent of the US$1.1 billion in loans originated by Lending Club were bought regions is remittances. Crowdfunding by institutional investors (Aquilina and platformsmay benefit could unserved potentially and underserved facilitate Kraus 2016). the use of remittances as collateral by applying alternative credit scoring mod- The involvement of institutional investors raises concerns that platforms remittances and carrying securitization may ramp up origination before the els to reflect the estimated inflow from strengths and weaknesses of their mod- the fundraiser. els are properly tested (Aquilina and of the remittance inflows on behalf of Kraus 2016). This is because of the pres- B. Institutionalization and sure they face from institutional inves- Complexity tors, who are attracted by higher yields, but their increasing demand may soon Some crowdfunding models evolved outpace the capacity of the industry, from relying on “the crowd” to more thus putting stress on the technology, complex models involving hedge funds operations, infrastructure, and under- and banks feeding in institutional mon- writing capabilities of platforms. More ey (institutional investors not only in- importantly, crowdfunding platforms vest in crowdfunded assets, but also may become more aggressive in seeking take stakes in platforms27). The involve- new customers and adopt mis-selling ment of institutional investors is likely practices used by some consumer credit to become more prominent in the fu- providers, for instance. If the business ture, according to recent evidence. For model shifts toward push sales, it may example, in 2015, 45 percent of debt - crowdfunding platforms in the United ers as in many countries the regulatory Kingdom reported institutional involve- frameworkhave a significant for crowdfunding impact on does custom not ment as compared to 28 percent in 2014 provide enough protection to fund us- and just 11 percent in 2013 (Zhang et al. ers. This is a particularly serious risk 2016b); 26 percent of business loans given the changes in the underwriting and 32 percent of consumer loans were process enabled by the technology and funded by institutions (FCA 2016, p. 14). the speed with which thousands of cus- One of the risks potentially affecting tomers can be offered and instantly ap- nonprofessional users of crowdfunding proved for a loan, including over their is the risk that professional investors feature or smart phone. will keep the best projects, leaving only the worst for the crowd. The increased demand from institutional investors has provided a pow- The most active institutional players erful incentive for securitization of are hedge funds: San Francisco-based fund Colchis Capital Management had deal occurred in October 2013, when US$663 million of P2P loan investments crowdfunded assets. The first large at the end of 2014, which represented closed on a US$53 million securitization hedge fund manager Eaglewood Capital

27 For instance, Australian Westpac has acquired a stake in SocietyOne, Australia’s leading P2P lending platform. Barclays Africa has acquired a stake in RainFin, the leading South African P2P lending platform. See, e.g., Renton (2014).

22 Crowdfunding and Financial Inclusion

deal involving loans originated by use cases to sustain growth at current Lending Club (see, e.g., Renton 2013). rates. Compliance cost could be another The recent launches of several funds in- reason because costs increase as new vesting in loans originated on P2P lend- regulation is put in place. Finally, the ing platforms underscore the growing growing complexity of crowdfunding interest from institutional investors in business models may also discourage this sector. This may potentially create a new entrants. While setting up a plat- situation with important similarities to form is fairly easy and cheap, coping the origination of subprime mortgages with the dynamic and often uncertain - regulatory environment and strong sis. On the other hand, so far the num- competition can be daunting. berthat of preceded new securitizations the global financialof P2P loans cri has been lower than expected because Although it is not a trend yet, the devel- of a combination of rising defaults, mar- opment of secondary markets for crowd- ket volatility, and corporate governance funding related securities is noteworthy. issues. For example, two major Wall The emergence of functional and trans- Street investment banks, Goldman Sachs parent secondary markets, particularly Group Inc. and Jefferies LLC, decided to for equities and loans, may substantially stop buying Lending Club’s loans after boost interest of retail funders. Second- - ary markets can take different forms. One signed (Rudegeair and Baer 2016). model entails the direct involvement of the company’s CEO Renaud Laplace re the crowdfunding platform, which may C. Consolidation provide an online bulletin board that connects funders who intend to sell their Another trend is consolidation of the investments to potential buyers who are crowdfunding sector. After years of looking to invest in previously funded platform proliferation, a recent study in projects. In this case, funders can offer the United Kingdom shows that sever- or bid on equity shares and directly ne- al crowdfunding platforms have either gotiate a price. Another model involves a “gone quiet” or disappeared altogeth- crowdfunding platform or a third party er, and the year-on-year growth rate that is running a marketplace for crowd- is slowing, from 161 percent between funding-based securities as an online 2013 and 2014 to 84 percent between trading venue. This type of secondary - - sion 2016a). This is also happening lated rules can bring together multiple across2014 andborders. 2015 One (European reason Commisfor this buyersmarket andthat sellers.has well-defined Finally, crowdfund and regu- slowdown could be that, after the ini- ing platforms may team up with existing marketplaces for unlisted companies tial boom, it is now difficult for existing platforms to find new projects or other (European Commission 2016a).

23 Crowdfunding and Financial Inclusion

SECTION 4. CROWDFUNDING AND FINANCIAL INCLUSION 4.1. Opportunities - Crowdfunding has the potential to con- providing benefits to a broader group of customers excluded from certain seg providing improved access to funds and ments of the financial system because tribute to financial inclusion efforts by of limited financial sector development. - In the following we further explain our- financial assets. A GPFI White Paper key hypotheses and how they are likely (2016, p. xix) notes that crowdfund to play out with regard to different cus ing may support financial inclusion tomerA. Improved segments. Access to Finance as it “. . . can be a quick way to raise andfunds can with produce potentially a good few return regulatory for the requirements; it can be cost-efficient the categories of crowdfunding is im- The most immediate benefit of all lender; and its potential market reach is limited only by access barriers to the proved access to finance by traditionally platform and regulatory restrictions excluded and underserved groups of where applicable.” The hypothesis is individuals and legal entities. A 2013 (thati crowdfunding can benefit financial- peopleWorld Bankin developing study indicates economies that to there par- cludedinclusion and efforts underserved in the following individuals ways: and is an opportunity for up to 344 million ) it improvesii access to finance by ex debt crowdfunding, as a form of digi- ticipate in crowdfunding. In particular, MSMEs; ( ) it allows for innovations of- their alternative scoring feature, crowd- existing models to serveiii BoP customers, tal credit, is highly relevant. Because of such as microfinance and mobile finan to serve MSMEs, start-ups, and individ- cial services; and ( ) it opens access to funding platforms may be positioned more complex investment products for resilience and asset building. - uals with limited or no credit history. Crowdfunded loans then may become a toExisting be in place crowdfunding for them to platforms operate (see re gateway to traditional lenders, because quire some minimum infrastructure- they will allow fundraisers to build their creditCrowdfunding history over platforms time. could also Section 1.2), and therefore, this inno out-compete traditional lenders as vation will more likely benefit different customer segments disproportionately.- - Access to a crowdfunding platform ingtransactions can help poor can people take placewith limited more requires the ability to send and re quickly and cheaply. Thus, crowdfund ceive money electronically over a to smooth their consumption and face transactional account, such as a bank access to formal financial institutions crowdfundingaccount or a mobileare customers money account.who al- - Therefore, the most likely users of financial shocks (e.g., unemployment, illness, conflict, crop failures, natural di- ready own or have access to such an ducingsasters, food or accidents) consumption without or selling the need pro- account. These customers, however, to take extreme measures such as re andmay services, still be underservedsuch as credit, or insurance, excluded of crowdfunding transactions and the with regard to other financial products ductive assets (DFID 2012). The velocity savings, and investment products; this agility of crowdfunding to accommodate would be particularly the case for BoP various use cases play an important role customers. Crowdfunding may also in emergency situations more broadly help deepen the financial market, thus (UNOCHA 2015). 24 Crowdfunding and Financial Inclusion

- from developed to developing econ- portant mechanism MSMEs can use Equity crowdfunding may be an im - Kivaomies., which The has most helped prominent facilitate instance more to bridge the funding gap that exists thanis the 1 work million done loans by platformsfrom funders such asin in many countries. The issues of lim- developed economies to low-income ited access to finance and shortage of- market-based financing are particu larly pressing in countries with un entrepreneurs in developing countries. derdeveloped capital markets and lack- platformAn example called of EmergingCrowd a commercial lending, which of venture capital offerings (IFC and platform is an equity crowdfunding traditionalMcKinsey 2010).investors Equity in businesses crowdfund or projectsing provides (including an opportunity angel investors for more and offers retail investors the opportunity - Homestringsto directly buy provides shares investment and bonds op in- - companies based in emerging markets.- venture capitalists), by reducing trans action costs and information asym- portunities in real estate, financial ser metries, and it may pave the way for vices, telecoms, and SMEs in 13 African other market-based funding opportu countries. - nities to grow over time, particularly if ant role in promoting government an adequate regulatory framework is Crowdfunding can play an import- implemented.B. Innovative Models for Financial Inclusion canschemes facilitate to effectively the outreach channel to diaspora remit tance and investment flows. Platforms - opportunities in their respective home communities by offering investment Crowdfunding may facilitate digitiza - tion of traditional forms of finance. New ingcountries. fund transfers The Syrian from refugeedeveloped crisis to technologies have already disrupted the EMDEs,provides while another lowering example transaction of mobiliz business’ landscape with mobile money, Crowdfunding platforms can follow the costs and engaging retail consumers digital credit, and digital microinsurance. - as well as diaspora ( nancial products and services and/or com/aidrefugees adaptingsame trend new driving technologies the use to of substitute basic fi www.kickstarter. - ). that target EMDEs, unserved and under- isor M-Changa complement, a crowdfunding traditional financial platform in Annex 2 provides examples of platforms stitutions. An example of this potential servedC. Access customers, to New and Asset BoP Class consumers. in Kenya that “digitizes” the practice of- “Harambee”—community fundraising— Crowdfunding opens access to invest- by allowing people in the same commu nity to use their mobile money to make donations to individuals (e.g., to support ment opportunities that are currently ofa relative’s the rotating education) savings orand to creditcommunity asso- widely unavailable to customers at the ciationscauses. Anotherpractice, example such as is digitization, BoP. A new theory of change for the householdsmicrofinance helps industry them suggests anticipate, that and eMoneyPool adaptthe use to, ofand/or financial recover services from by the poor ef- Monk (an app-based crowdfunding), - Puddle. See Section 3.A for examples tects their livelihoods, reduces chronic of P2P insurance and Takaful. - fects of shocks in a manner that pro More generally, crowdfunding can facil vulnerability, and facilitates growth itate more and new types of investment (resiliency) (Gash and Gray 2016). 25 Crowdfunding and Financial Inclusion

A. Inadequate Legal and Regulatory and insurance, can also be achieved Framework throughThis higher asset resiliency, building (saving, besides invest credit- - ment). In the future, crowdfunding can The lack of clear rules hinders the in- offer such an investment opportunity dustry, fundraisers, and funders. An as currently excluded and underserved noinadequate rules on legal crowdfunding and regulatory whatsoever, frame customers have very limited access to butwork also exists where not different only where crowdfunding there are formal financial products designed for resilience and asset building. - models fall under different regulatory The lack of available options exposes based(and supervisory)on the nature regimes,of parties or involved where them to a variety of risks, includ the applicable regulatory regimes vary haveing the fallen risk victim of fraud. to fraudulent In recent invest years,- many people, including the very poor, in the transaction (e.g., an institutional investor versus a consumer) without ment schemes such as Ezubao in China any specific guidance on how such a- (900,000 investors lost US$7.6 billion), situation should be addressed. In the- Sardaha in India (1.7 million investors- developedabsence of regulatoryor not develop clarity, at the all, crowd while lost US$4 billion) (see, e.g., Karnik and funding industry may remain under Balachandran 2016), and Clip Invest to unfair practices from unregulated or ment Sacco, Ltd., in Kenya (more than under-regulatedfunders and fundraisers and unsupervised may be exposed or 5,000 investors lost US$18.7 million) (see,4.2. Riskse.g., Kamau and Challenges 2016). under-supervised platforms. - crowdfunding regulation concerns pro- - tectionAcross jurisdictions,of participants a frequenton the demand gap in Despite the potential benefits men - tioned, a significant impact of crowdfunding on financial inclusion is yet to side—fundraisers. Thus far, policy mak be seen. From a development perspec ers have focused predominantly on risks- tive, the key test of crowdfunding lies in ingfaced the by fact the that supply the platform side (investors, is often inclusionthe extent and to which economic this formgrowth of finance rather lenders, and other funders), neglect- is used to promote and support financial funding game, while both the funder - the only “professional” in the crowd- than generate funds rapidly and cheaply to finance risky and unsustainable in and the fundraiser are equally vulner vestment opportunities. In contrast to- crowdfundingable and inexperienced falls under individuals capital mar or- microfinance, which emerged with a small businesses. In jurisdictions where fractionspecific purposeof crowdfunding to reach the platforms poor, finan to datecially haveexcluded, been anddesigned underserved, to target only this a kets regulation, the focus on investor i - protection is nearly exclusive, with rules prescribing disclosure requirements, the (segment.ii Challenges include ( ) inade suitability test, the access to a dispute (quateiii legal and regulatory frameworks, underestimateresolution mechanism, the rules and withthe like. which Yet, (iv) untested credit scoring models, inexperienced fundraisers/issuers may ) limited access to technology, and - to )crowdfunding lack of awareness and, inand some trust. jurisdic These- they need to comply (e.g., disclosure and challenges are not necessarily unique distributionreporting), andand they future may repercussions not fully ap preciate the legal implications of equity tions, may concern broader areas.

26 Crowdfunding and Financial Inclusion

time, its value for credit assessment of of “managing the crowd” of creditors or shown to work for individuals over stockholders. - complex business fundraisers remains- Debt crowdfunding exposes fundrais unclear. In addition, platforms hesitate ers to the same risks as any other form to fully disclose their proprietary algo of (digital) credit. Fundraisers may be rithms, which they consider a part of steered into borrowing beyond their- their know-how and thus commercially financial means without appreciating protectionsensitive. However, concerns, behind including this secrecy, trans- the risk of over-indebtedness, credit bu there are a number of privacy and data jurisdictionsreau blacklisting, have and adopted a range rules of possible to pro- penalties. To address those risks, some- parency (what data are being used and where did they originate), consent (was tect individual fundraisers (e.g., Austra permission provided), and access (can- lia, Malaysia, the United Kingdom, the the consumer see their own data) (Miller whenUnited the States). funder However, is another even individual in those and Jenik 2016), as well as the risk of dis jurisdictions, the rules may not apply crimination and bias (U.S. Department - C.of TreasuryLimited 2016). Access to Technology and not a financial institution (FCA 2016,- p. 12). This obvious gap in consum scaleer protection in lower income may become countries particular and be- - ly dangerous as crowdfunding reaches While some countries have fairly high accessInternet to penetrationthe web ( rates,internetworld the majori gins reaching poorer market segments. statsty of Africa’s population does not have www. Another important regulatory challenge harder for entrepreneurs to reach potential.com/stats.htm international). funders This makes and to it platformsis the inherent have incentives conflict built of interest into their in most platforms’ business model. Many some of the main advantages and oppor- build a global network, thus foregoing business model to prioritize volume over- quality, thus reducing their motivation tunities of crowdfunding. This situation to properly screen prospective fund- will improve as technology becomes raisers and their projects. This type of to one report, over half of the urban res- more affordable, for example, according the conflict of interest affects fundrais ers (the risk of over-indebtedness) and of basic smartphones has fallen below idents in Africa are online, and the price funders (the risk of financial loss) andmay translate into a conflict of interest US$100, making them accessible to the between them, too (e.g., leveraging in growing middle class (Manyika 2013). - formation asymmetry to borrow more). B. Untested Credit Scoring Models A specific problem for developing coun One true innovation of crowdfunding tries is represented by the fact that- - ingpayment platforms systems offer impact a limited the number choice of platform. Most international crowdfund- platforms—innovative credit scor ing techniques—may extend access to- payment options (e.g., a credit card, Pay credit, but it may also exacerbate the- Pal), hence excluding funders without risk of over-indebtedness and discrim access to these payment methods ination. The real predictive value of al (World Bank 2015). Locally based ternative scoring models is yet to be platforms are likely to be better suited to tested through the credit cycle. While engage in EMDEs, but they have a much Big Data-driven credit scoring may be smaller pool of potential contributors.

27 Crowdfunding and Financial Inclusion

D. Lack of Awareness and Trust -

- GeoPoll, GES, and the U.S. State Depart mentionedment African crowdfunding Entrepreneurship as a source Survey of Finally, another challenge for crowd 2015 found that 13 percent of respondents crowdfundingfunding in developing is a recent markets phenomenon, is a lack in of general awareness and trust. Because- online funding (Mobile Accord 2015). ness among potential users (funders crowdfunding, while highlighting im- many markets there is little overall aware portantTable 2 summarizesmeasures to theput keyin place benefits to ad of- and fundraisers) of this innovation. This is changing, however. For example, the dress key challenges. TABLE 2. Benefits of Crowdfunding in Financial Inclusion, Safeguards & Enabling Factors Benefits Specific Conditions • Asset building, resilience enhancing • Liability of the platform defined • Portfolio diversification 1 skin in the game • Formalization of agreements • Standardized due diligence (access • Digitization of existing schemes to credit bureaus) (collaborative financing) • Standardized disclosure • Resolution regime (living will) Debt • Funder education • Liquidity enhancement

SUPPLY • Restrictions—profile, stakes • Guarantee mechanisms/diversification/portfolio management rules • Access to a new class of assets [Note: Equity crowdfunding does not seem to be particularly appropriate

Equity for BoP funders.] Benefits Specific Conditions • Fast access to loans • Rules to prevent over-indebtedness • Access to cheaper loans • Regulation of collection practices • Ability to leverage social capital • Liability of the platform defined • Improving access to formal finance and skin in the game

Debt (creating credit history) • Standardized scoring in place • Democratization of finance • Standardized disclosure in place • Resolution regime (living will) • Fundraisers education DEMAND • Access to capital markets Restrictions—legal form, type of • Access to cheaper capital business • Wisdom of the crowd [Note: Equity crowdfunding does not

Equity • Access to professional investors seem to be particularly appropriate • Democratization of finance for BoP entrepreneurs.]

28 Crowdfunding and Financial Inclusion

SECTION 5. NEXT STEPS This paper summarizes the results of our initial mapping exercise aimed at shed- areas where crowdfunding intersects ding light on the crowdfunding phenom- Committee for Banking Supervision for

Crowdfunding can potentially play an crowdfundedwith the banking insurance, industry, and International Financial enon from the financial inclusion angle. ActionAssociation Task ofForce Insurance for issues Supervisors relevant forto - important role in financial inclusion by improving access to (digital) credit by- money laundering and terrorist financ unserved and underserved borrowers; oning, Financial to name Consumera few examples. Protection Other and global the creating cheaper, community-based in bodies such as the G20/OECD Task Force- currentlysurance products; have limited or facilitating or no options access to to digital investments by people who International Financial Consumer Protec- sumertion Organization protection expertise, should contribute particularly to get financial return on their savings, not regardingthis work consumer and share (digital) their financial credit conand to mention current barriers to access investmentThe crowdfunding products. industry will deliver - protection of fundraisers. - further work, which should explore in on its promise to promote financial inclu moreWe hope detail this areas paper where provides crowdfunding a basis for sion only when a sound and enabling le- ulategal and crowdfunding regulatory framework so that it can is in achieve place. Policy makers need to find a way to reg- may be of the highest relevance to financial propriately managing the risks that come overviewinclusion. Thisof its paper evolution provides and background ecosystem, its market-building potential, while ap by defining crowdfunding, providing an an appropriate regulatory regime that iswith adequately it. Platforms tailored need to to crowdfunding be subject to explaining in detail the basic categories of crowdfunding, listing their key benefits and associated risks, describing the most- aand framework, adequately there protects is a risk both that funderscrowd- recent trends, and highlighting benefits of fundingand fundraisers. may worsen In the consumer absence trust of such in crowdfunding for broadening and deep onening the following of financial issues: inclusion. Follow-up work, for instance, could focus specifically ■■ A more in-depth economic analysis of the very financial sector it was born to what the true competitive advantage “revolutionize.” The recent issues faced of crowdfunding platforms is, how it coordinatedby the industry approaches (Ezubao in China,toward Lending regu- plays out in different (economic and Club in the United States) call for more regulatory) contexts, and what implications it has on the potential of lating and monitoring of crowdfunding. crowdfunding to serve excluded and Several countries have already adopted a specific regulatory regime, but their approaches vary widely (IOSCO 2015a). ■■ underservedThe impact of customers. crowdfunding on improved access of unserved and un- This paper addresses a broad audience derserved customers to credit and because the topic requires engagement by continuemultiple or stakeholders. start looking Standard-setting into regulatory andbodies supervisory in their respective issues relevant domains to crowdshould- ■■ otherThe potential financial of products. crowdfunding to sup- - funding: Financial Stability Board from plement or substitute underdevel the perspective of shadow banking, Basel oped market-based finance in EMDEs. 29 Crowdfunding and Financial Inclusion

■■ The adequacy of the legal and regula- ■■ tory framework to address the risks particularly in the light of the re- centThe trend risk of or institutionalization regulatory arbitrage, and

■■ faced by fundraisers and funders. the industry and supervisory guid- ■■ hybridization.The level of customer awareness Minimum regulatory standards for

ance for the responsible supervisory concerning the risks and benefits of authorities. crowdfunding.

30 Crowdfunding and Financial Inclusion

ANNEX 1. EXAMPLES OF CROWDFUNDING PLATFORMS 1. Donation-Based Crowdfunding

Legend: 1. The campaign objective 2. The certification indicating that the fundraiser has been subject to due diligence by the platform 3. Indication of the threshold, amount raised and time remaining 4. Payment methods available to donors 5. Information about the campaign, fundraiser and other disclosure 6. Indication of the threshold, amount raised and time remaining

Source: Kiva

31 Crowdfunding and Financial Inclusion

2. Reward-Based Crowdfunding

Legend: 1. Three steps to set up a campaign 2. Key features of the campaign 3. Beneficiary’s profile 4. Information about the project

Source: IdeaMe

32 Crowdfunding and Financial Inclusion

3. Debt Crowdfunding

Legend: 1. The funder’s main dashboard 2. The list of loan asks 3. The borrowers’ credit rating provided by the platform 4. Detail of the loan ask, including the downloadable fact sheet with more details about the borrower

Source: Crowdo

33 Crowdfunding and Financial Inclusion

4. Equity Crowdfunding

Legend: 1. The summary offer 2. The detailed information about the offer 3. Disclosure

Source: Seedrs

34 Crowdfunding and Financial Inclusion

ANNEX 2. EXAMPLES OF CROWDFUNDING PLATFORMS SERVING EMDES

BOX A2-1. Examples of Platforms Targeting EMDEs

Babyloan—a French platform aimed at small entrepreneurs without access to the banking system and committed in the fight against poverty. It has recently partnered with Total to develop the first crowdfunding platform dedicated to access to energy. The collaboration aims to support the creation of local microbusinesses that will develop distribution networks to cover the last mile to reach isolated communities in Africa, Asia, and Latin America.

Cheetah Fund—was a €400,000 fund that partnered with the 1 percent Club Netherlands (a crowdfunding platform) aimed at supporting African start-ups to kick-start or boost their projects. If borrowers managed to crowdfund at least 30 percent of their target amount via 1 percent Club within 30 days, the Cheetah Fund then granted them the remaining amount.

Farmable.me—a Ghanaian crowdfunding platform that aims to provide money to solve the country’s dependency on imported beef. By investing in a cow through the Farmable website, online investors become “CowBackers,” and they are connected to their own cow on a real farm in Ghana. Every cow costs US$500 and is made up of “cowshares.” CowBackers can choose to fund a full cow or invite friends and family to share a cow, also known as “CowSharing.”

Homestrings—a platform that allows overseas diaspora to invest in their home countries in market projects, including commercial real estate, telecoms, and SMEs. Homestrings recently started to offer development impact bonds, which provide upfront funding for development programs by way of private investors, who earn a return when specific preagreed outcomes are achieved.

Ketto—an Indian platform, where each borrower is assigned a manager who helps the borrower raise money. Moreover, to facilitate investor donation, it partners with a courier service to offer cash pick-up, tapping into India’s cash culture.

Kiva—a nonprofit platform for P2P lending to underbanked microentrepreneurs. It operates in 80 countries with 300 “field partners,” mostly MFIs. Lenders choose from borrowers’ online profiles and lend for zero financial return. The pooled funds are disbursed to borrowers through local MFIs.

M-Changa—a Kenyan platform designed to resemble “Harambee,” a tradition of funding friends’ and family members’ ventures to enhance this tradition by providing secure communication and record keeping capabilities for unprecedented end-to-end transparency. M-Changa has integrated mobile money and credit card payments, SMS, email, social networks, and geo location.

MYC4—a platform that allows investors to invest in SMEs in Africa. Once the project is approved by MYC4’s local partners, prospective investors participate in an online auction where they bid the amount they wish to lend and at what interest rate. The investor offering the lowest interest rate ends up lending money to the business when the auction is over.

35 Crowdfunding and Financial Inclusion

Orange Collecte—a mobile crowdfunding platform in Côte d’Ivoire launched by mobile network operator Orange. With this platform, private individuals and charities can finance their personal (weddings, birthdays, etc.) and charitable projects by making an appeal through their mobile network. Investors can then use their Orange Money electronic wallet to donate money.

United Prosperity—a nonprofit platform operating in Sri Lanka that partners with MFIs to offer funding solutions and reaches more unserved clients. The 0 percent interest capital raised on the platform is used by borrowers as cash collateral at local banks, and is not an actual loan, thus incentivizing banks to make loans to MFIs. Between 2009 and 2013, the platform has facilitated more than US$280,000 in loans to 1,300 families (Aveni 2015).

Zidisha—a P2P lending platform, performing basic underwriting and sourcing borrowers through volunteers. Typical loans are charged 0–15 percent of the prin- cipal amount, but borrowers are able to decide specific conditions (such as loan terms and repayment frequency).

36 Crowdfunding and Financial Inclusion

BIBLIOGRAPHY Agrawal, A. K., C. Catalini, and A. Goldfarb. 2011. “The Geography of Crowdfunding.” publications1/cash-transfers-evidence- No. w16820. Cambridge, Mass.: National paper.pdf.uk/+/http:/www.dfid.gov.uk/Documents/ Bureau of Economic Research. ———. 2013. “Some Simple Economics of Opinion of the European Banking Authority on Crowdfunding.” No. w19133. Cambridge, Lending-BasedEBA (European Crowdfunding Banking Authority).. London: 2015. EBA. Mass.: National Bureau of Economic Re- www.eba.europa.eu/documents/10180/ search. Allied Crowds. 2016a. Developing World 983359/EBA-Op-2015-03+(EBA+Opinion+ Crowdfunding: Annual Report 2016. London: on+lending+based+Crowdfunding).pdf———. 2016. Report on SMEs and SME Allied Crowds. Supporting Factor. London: EBA. www.eba.

https://cdn.filestackcontent Report ———. 2016b. Funding the Frontier: The .com/kNfFQ9IgT2ObxzjhGqUU europa.eu/documents/10180/1359456/ Crowdfunding Landscape in East Africa. Lon- EBA-Op-2016-04++ +on+SMEs+and don: Allied Crowds. http://www.fsdafrica.org/ +SME+supporting+factor.pdfEuropean Commission. 2016a. Crowdfund- wp-content/uploads/2016/10/16-10-17- ing in the EU Capital Markets Union. Brussels: European Commission. https://ec.europa .eu/info/publications/crowdfunding-eu- Crowdfunding_Report-final.pdfWhere are they now? A report into the status of companies that have raisedAlfi. 2015. finance using Equity Crowdfunding capital-markets-union_en———. 2016b. Capital Markets Union: Com- in the UK mission Supports Crowdfunding as Alterna- .com/downloads/WhereAreTheyNow.pdf tive Source of Finance for Europe’s Start-Ups. . London: Alfi. http://www.altfi Brussels: European Commission. http:// europa.eu/rapid/press- -16- Market-Based Finance: Its Contributions andAquilina, Emerging M., Issues and W. Kraus. 2016. release_IP Conduct Authority. https://www.fca.org 1647_en.htm?locale=en . London: Financial FCA (Financial Conduct Authority). 2016. -finance-its-contributions-and.uk/publications/occasional-papers/ Call for Input to the Post-Implementation occasional-paper-no-18-market-based Review of the FCA’s Crowdfunding Rules. London: FCA. New Insights into an Evolving The Fi- P2PAveni, Lending T., C. Qu, Industry: K. Hsu, How A. Zhang, Shifts X. in Lei, Roles and and L. Foley,nancial S. Times, 2016. “FinTech13 September. Start-Up Point Adds RiskHemrika. Are Shaping 2015. the Industry. Airbnb CFO Laurence Tosi as Backer.” Positive Planet. http://positiveplanetchina G20. 2016. G20 High-Level Principles for Beijing, China: Digital Financial Inclusion

.org/wp-content/uploads/2015/08/New- . Switzerland: G20. Insights-Into-An-Evolving-P2P-Lending- http://www.gpfi.org/sites/default/files/ Industry_PositivePlanet2015.pdf documents/G20%20High%20Level%2020version- .pdfPrinciples%20for%20Digital%20Financial BIS Quarterly (Bank for Review international, September. Settlements). http:// %20Inclusion%20-%20Full% 2012. “Search for Yield as Rates Drop Further.” Understanding Crowd- funding and Its Regulations. Brussels: Euro- www.bis.org/publ/qtrpdf/r_qt1209a.pdfBrabham, D. C. 2008. “Crowdsourcing as a peanGabison, Commission. G. A. 2015. .europa.eu/repository/bitstream/ and Cases.” Convergence. http://publications.jrc.ec Model for Problem Solving: An Introduction - JRC92482/lbna26992enn.pdfGash, M., and B. Gray. 2016. “The Role Cash Transfers - http://webarchive.nationalarchives.govDFID (Department for International Devel hold Resilience.” Washington, D.C.: CGAP. opment). 2011. . London: DFID of Financial Services in Building House

37 Crowdfunding and Financial Inclusion

http://www.iosco.org/ services-building-household-resilience - www.cgap.org/publications/role-financial- Madrid: IOSCO, research/pdf/swp/Crowd-funding-An-In - fant-Industry-Growing-Fast.pdfLee, S., and P. Persson. 2012. Financing from Gönülal, S. O. 2013. “Takaful and Mutual Family and Friends. Insurance: Alternative Approaches to Man aging Risks.” Washington, D.C.: World Bank. 23362/Lee_03302012.pdf New York: New York mutual-insurance-alternative-approaches-http://documents.worldbank.org/curated/ University. http://econ.as.nyu.edu/docs/IO/ en/978831468321853261/Takaful-and- - Manyika, J., A. Cabral, L. Moodley, S. Mora to-managing-risks Lions Go Digital: The Global Standard-Setting Internet’sje, A. Yeboah-Amankwah, Transformative Potential M. Chui, in Africa and J.. BodiesGPFI (Globaland Financial Partnership Inclusion: for The Financial Evolv- Johannesburg,Anthonyrajah. 2013.South Africa: The McKinsey ingInclusion). Landscape. 2016. - Mar2016.pdf www.gpfi.org/sites/default/ Global Institute. files/documents/GPFI_WhitePaper_ Fraudulent Crowdfunding Mas, I., and J. Gitau. 2014. “LiquidityNextbillion Farm. Campaign Sets Precedent. - ing: How the Poor Cultivate Relationships to Grella, S. 2015. Create Sources of Future Cash.” (Observer Septem http://nextbillion.net/liquidity-farming/Crowdfunding Industry ber 2015). http://observer.com/2015/09/ Report. Los Angeles: Massolution. http:// - kickstarter/ Massolution. 2015. serves Creative Regulation.” The Wall Street Journal,Gubler, Z.31 J.January. 2013. “Inventive Funding De reports.crowdsourcing.org/index .php?route=product/product&product_id=54 McKinsey. 2010. Two Trillion and Counting. CreditMiller, M.,Evaluation, and I. Jenik. the Logical2016. “Big Evolution Data and of IFC (International Finance Corporation) and Crowdfunding—Is This the Wild Westhttps:// for

Washington, D.C.: IFC and McKinsey. Post-crisis International Banking: An Analy- Credit Scoring or Both?” Blog post. responsiblefinanceforum.org/5482-2/ sisIMF with (International New Regulatory Monetary Survey Fund). Data. Wash 2016.- State Department African Entrepreneur- shipMobile Survey.” Accor. 2015. “GeoPoll, GES & US pubs/ft/wp/2016/wp1688.pdf ington, D.C.: IMF. www.imf.org/external/ - documents/GeoPollGES-Entrepreneur-http://africanbrandlink.com Crowdfunding 2015 Survey.pdf.dedi295.flk1.host-h.net/sites/default/files/ SurveyIOSCO (InternationalResponses Report Organization of Securi www.iosco.org/library/pubdocs/pdf/ties Commissions). 2015. . Madrid: IOSCO. theMollick, Selection E. R. of 2013. Entrepreneurs.” “Swept Away Philadel by the- Crowd? Crowdfunding, Venture Capital, and- IOSCOPD520.pdf Services: Technology Solutions for Compli- sylvania - Wharton School. https://papers ———. 2016. “RegTech in Financial phia, the United States: University of Penn ance and Reporting.” Madrid: IOSCO .ssrn.com/sol3/papers2.cfm?abstract_ Money Vanished Through Shell Companies id=2239204 Wisdom or inKamau, Panama.” J. 2016. All “Kenya: Africa How Pyramid Schemehttp:// Madness? Mollick, E., and R. Nanda. 2015. allafrica , 4 April. Boston: Harvard Business School. The .com/stories/201604050193.html ImpactOECD of (Organisation the Global Crisis for on EconomicSME and Entre Co-- Karnik, M.,Quartz and M. India Balachandran., 12 January. 2016. http:// “Yet preneurshipoperation and Financing Development). and Policy 2009.Responses . Another Massive Ponzi Scheme Goes Pop https://www.oecd.org/cfe/ in India.” qz.com/590563/yet-another-massive- France: OECD. Crowd- ———. 2011. OECD/G20 High-Level Principles ponzi-scheme-goes-pop-in-india/ smes/43183090.pdf Funding: An Infant Industry Growing Fast. on Financial Consumer Protection Kirby, E., and S. Worner. 2014. . France: 38 Crowdfunding and Financial Inclusion

https://www.oecd.org/g20/topics/ The Wisdom of Crowds: Why the Many Are Smarter Than the OECD. FewSurowiecki, and How J. 2004. Collective Wisdom Shapes SMEs and the Credit Crunch: Cur- financial-sector-reform/48892010.pdf Business, Economies and Nations rent Financing Difficulties, Policy Measures and ———. 2014. Doubleday. a Review of Literature http:// . New York: The . France: OECD. Future of Finance Part 3: The Socialization of www.oecd.org/finance/financial-markets/ FinanceTerry, H., D. Schwartz, and T. Sun. 2015. SMEs-Credit-Crunch-Financing-Difficulties.pdfNew Approaches to SME and Entrepreneurship Financing . New York: Goldman Sachs. www.oecd.org/cfe/smes/New-Approaches-———. 2015. - SME-full-report.pdf . France: OECD. lionThorpe, for Nepal D. 2015. Relief.” “In Blog Under post. 6012 days,June. Crowdfunding Sites Raise Over $20 Mil - http://goodcrowd.info/in-under-60-days- opment: Recommendations Vs. Reality.” Blog crowdfunding-sites-raise-over-20-million- Raymond, S. 2014. “Crowdfunding for Devel for-nepal-relief/ .org/psd/crowdfunding-development- post.recommendations-vs-reality 15 October. http://blogs.worldbank Opportunities and Challenges in Online Mar- U.S. Department of the Treasury. 2016. Renton, P. 2013. “Eaglewood Capital Clos- ketplace Lending - partment of Treasury. . Washington, D.C.: U.S. De http://www .lendacademy.com/eaglewood-capital-es the First Securitization of Lending Club Loans.” Blog post. 1 October. UNOCHACrowdfunding (United Nations for Emergencies Office for. New the club-loans/ Coordination of https://docs.unocha.org/ Humanitarian Affairs). closes-the-first-securitization-of-lending- - 2015. ternational P2P Lending Scene.” Blog post, York:Crowdfunding_for_Emergencies_online.pdf UNOCHA. . sites/dms/Documents/OCHA_TB16_ 11———. March. 2014. www.lendacademy.com/two-big- “Two Big Banks Enter the In Un- derstanding Crowdfunding: The SEC’s New scene/ CrowdfundingVargas F., J. Dasari, Rules and and M. the Vargas. Universe 2014. of Pub - banks-enter-the-international-p2p-lending- Rudegeair, P., and J. Baer. 2016. “Goldman, lic Fund-Raising. Washington, D.C.: Amer- ican Bar Association. www.americanbar The Wall Street Journal, 10 May. Jefferies Put Lending Club Deals on Hold.” .html .org/publications/blt/2015/12/03_vargas

Salazar, J., R. Moore, and A. Verity. 2015. Break- “Crowdfunding for Emergencies.”https://docs.unocha New York: ingWardrop, New Ground R., R. .Rosenberg, Cambridge: B. Cambridge Zhang, T. United Nations Office for the Coordination of Ziegler, R. Squire, and J. Burton. 2016. HumanitarianCrowdfunding_for_Emergencies_online.pdf Affairs. .org/sites/dms/Documents/OCHA_TB16_ Centre for Alternative Finance. www.kpmg ground.pdf.com/US/en/IssuesAndInsights/Articles - Publications/Documents/breaking-new- Savarese, C. 2015. “Crowdfunding and P2P lending: Which Opportunities for Microfi Moving Mainstream. The European nance?”Schwienbacher, European A., Microfinance and B. Larralde. Network. 2010. AlternativeWardrop, R., Finance B. Zhang, Benchmarking R. Rau, and M.Report Gray.. Crowdfunding of Small Entrepreneurial Ven- 2015. tures. Handbook of Entrepreneurial Finance. Cambridge: UniversityCrowdfunding’s of Cambridge. Potential for the Developing World. Washington, D.C.: Oxford:Stein, P., Oxford T. Goland, University and Press.R. Schiff. 2010. World Bank. 2013. Two Trillion and Counting. Washington, wb_crowdfundingreport-v12.pdf World Bank. www.infodev.org/infodev-files/ Crowdfunding in Emerg- D.C.: International Finance Corporation. ing Markets: Lessons from East African Start- http://documents.worldbank.org/curated/ upsWorld Bank. 2015. en/386141468331458415/pdf/713150 WP0Box370rillion0and0counting.pdf . Washington, D.C.: World Bank.

39 Crowdfunding and Financial Inclusion

insights/2016/03/harnessing-potential-

Zhang, B., L. Deer, R. Wardrop, A. Grant, Lui,K. Garvey, and Y. S. Gray. Thorp, 2016a. T. Ziegler, Harnessing K. Ying, Po Z- asia-pacific-alternative-finance- tential:Xinwei, E. The Huang, Asia-Pacific J. Burton, Alternative H. Chen, Fi A.- benchmarking-report.html nance Benchmarking Report. Cambridge: Garvey. 2016b. Pushing Boundaries: The 2015 UKZhang, Alternative B., P. Baeck, Finance T. Ziegler, Industry J. Report.Bone, and Cam K.-

Cambridge Centre for Alternative Finance. https://home.kpmg.com/au/en/home/ bridge: University of Cambridge and Nesta.