From the previous decades up to the early 2000s, international development was to be <a href="https://www.vox.com/future-perfect/2019/1/15/18182167/microcredit-microfinance-poverty-grameen-bank-yunus">propelled by microloans</a>. The objective was to lend small loans to individuals in developing countries to assist them in developing and also expanding their small businesses hence kicking poverty out of their families. Profits from the returned loans would then be used to lend to more individuals aiming at a very large number of families to do away with poverty.<figure class="kg-card kg-image-card"><img src="file:///C:/Users/8460P/AppData/Local/Temp/msohtmlclip1/01/clip_image002.jpg" class="kg-image" alt loading="lazy"></figure>Many microfinance lending organizations began at those times. Very many organizations started to offer loans as potential donors and investors supplied funds to microcredit. By the end of 2013, there was a rise in the number of borrowers to more than 200 million. Accion US Network is an example of one such institution in the US. It is the largest nonprofit microfinance network in the US and works with people to help them grow their business. <h2 id="what-is-microcredit">What Is Microcredit?</h2>Microcredit is an extension of small loans to poor individuals who lack steady, verifiable, or collateral employment or credit history. In the US, it is generally for loans less than $50,000 to entrepreneurs who cannot borrow from a bank. It was designed to alleviate poverty by promoting entrepreneurship. Many of the beneficiaries of microcredits are illiterate individuals who lack the capacity and paper competence needed in the application of conventional loans.<figure class="kg-card kg-image-card"><img src="file:///C:/Users/8460P/AppData/Local/Temp/msohtmlclip1/01/clip_image004.jpg" class="kg-image" alt loading="lazy"></figure>Microfinance is deemed to be part of <a href="https://www.investopedia.com/articles/07/microfinance.asp">microfinance</a>, although many times they are used interchangeably. It provides a variety of financial services, such as savings accounts for poor individuals.<h2 id="successful-examples-">Successful Examples:</h2>In 2009, an estimated 75 million individuals benefited from microloans that totaled to around US$38 billion. The repayment success rate ranges between 95%-98%, according to the <a href="https://en.wikipedia.org/wiki/Grameen_Bank">Grameen Bank</a> in Bangladesh in the early 1980s. A study found that more than half of US loan recipients escaped poverty in 5 years.Here are some of the successful most influential and largest microfinance institutions today:<h3 id="kiva">Kiva</h3>Kiva is a non-profit microfinance institution operating in the U.S and other 85+ global countries. It is headquartered in San Francisco and was founded in 2005. It uses <a href="https://www.investopedia.com/terms/c/crowdfunding.asp">crowd-funding mechanisms</a> and peer-to-peer methods of lending.<figure class="kg-card kg-image-card"><img src="file:///C:/Users/8460P/AppData/Local/Temp/msohtmlclip1/01/clip_image008.jpg" class="kg-image" alt loading="lazy"></figure>It allows persons to directly lend to borrowers in other nations who don?t have access to the traditional financing sources. Financing for health services, education, and small businesses are interest-free.<a href="https://www.kiva.org/"> Kiva</a> has extended over $1.5 billion microloans to more than 3 billion borrowers in 2020. This platform has around 2 million borrowers and about 1.8 million lenders.<h3 id="grameen-bank">Grameen Bank</h3><a href="http://www.grameen.com/">Grameen Bank</a> is considered to be the origin of the modern microcredit then other banks introduced it despite the initial misgivings. The year 2005 was declared the International year of microcredit by the United Nations. By 2012, microcredit became very common in developing nations. It was presented as an enormous tool of poverty alleviation with a focus on feminization poverty.The bank utilized a form of peer group pressure that helped in ensuring every individual was fiscally responsible. The borrowers were supposed to be groups of fives with the other community members who also needed loans.<figure class="kg-card kg-image-card"><img src="file:///C:/Users/8460P/AppData/Local/Temp/msohtmlclip1/01/clip_image010.jpg" class="kg-image" alt loading="lazy"></figure>The groups capitalized on ideas of social capital and the notion that the communities have behavioral modes, networks, and links that would encourage individuals to repay their loans.Generally, the loans were sequentially issued and had a weekly or biweekly repayment period with very low rates as possible. In 2006, Grameen Bank and <a href="https://www.investopedia.com/terms/m/muhammad-yunus.asp">Muhammad Yunus</a>, the founder, were awarded the Nobel Peace Prize for pioneering in that microcredit work.Currently, there are more than 7000 microcredit institutions globally lend around $2.7 billion to borrowers more than 17 million.<h3 id="brac">Brac</h3>It is another Microfinance Institution founded in Bangladesh in 1972. The institution offers a variety of services in different niches including education, human rights, economic development, and health.<figure class="kg-card kg-image-card"><img src="file:///C:/Users/8460P/AppData/Local/Temp/msohtmlclip1/01/clip_image012.jpg" class="kg-image" alt loading="lazy"></figure>Micro savings services, housing assistance, grants, and small business loans are some of the services provided. <a href="http://www.brac.net/">Brac</a> is known to operate in many developing nations, from Haiti, Myanmar to the Philippines. It has more than 7 million borrowers, and in 2020 its gross portfolio profit has hit over $4 billion.<h3 id="accion-us-network">Accion US Network</h3><a href="https://www.accion.org/clients/accion-microfinance-bank">Accion</a> is an American nonprofit microfinance organization headquartered in New York. It is the largest and only national microfinance network in the US. Its mission is to give people the necessary financial tools they need to create or grow a successful business. It has made nearly 50,000 loans totaling over $450 million as of January 2014. It also lends over $3.7 million to small businesses a month. 97% of businesses remained open one year after receiving a loan from Accion despite challenging economic times.<h3 id="bank-rakyat-indonesia-bri-">Bank Rakyat Indonesia (BRI)</h3>This is the oldest Indonesian Bank founded in Jakarta in 1896. It is established to be one of the largest financial institutions in Indonesia, primarily operating in small-scale and as a microloans lender. <a href="https://bri.co.id/">This bank</a> is majorly owned by the government and has over 30 million clients doing business with the bank through its rural services posts and thousands of branches across South East Asia.<figure class="kg-card kg-image-card"><img src="file:///C:/Users/8460P/AppData/Local/Temp/msohtmlclip1/01/clip_image014.jpg" class="kg-image" alt loading="lazy"></figure><h2 id="challenges-despite-success">Challenges Despite Success</h2>Microfinance faces operational, strategic, compliance, and operational risks, just like any other industry. There?re risks such as over-indebtedness according to the nature of the markets in which these micro-finance institutions operate that are very inherent and more prevalent to microfinance.<figure class="kg-card kg-image-card"><img src="file:///C:/Users/8460P/AppData/Local/Temp/msohtmlclip1/01/clip_image016.jpg" class="kg-image" alt loading="lazy"></figure>Despite the way microfinance is excessively hyped, it does not provide a cure to poverty, but stable job opportunities do. In the journey to help the poor, the focus should not be investing in microfinance but supporting the labor-intensive large industries.A comprehensive study concluded that microloan tends to be more beneficial to the individuals above the poverty line because they are more willing to invest in new technologies that will generate income as compared to the individuals below the poverty line. These individuals only tend to secure a conservative loan that protects their subsistence, and they don't invest in fixed capital, new technologies, or hiring of the labor force.Another study in India about the limitation of entrepreneurship by credit constraints found that there are significant benefits among the ?gung-ho entrepreneurs? (individuals who established businesses before microfinance wave). The effects are unsatisfying to those who had no previous businesses (reluctant entrepreneurs).Model technology choices can generate dynamics matching the ones observed in the data in which the reluctant entrepreneurs only access a diminishing returns technology. In contrast, the gung-ho entrepreneurs can access to high fixed costs technology but with high returns.The chief executive of Basix, Vijay Mahajan, observed that microloans reduce the flow of cash to the poor, and even they do more harm than good due to the high-interest rates charged by some microcredit institutions. If the clients don?t earn higher returns on their investments than the set interests to be paid, then they will just become poor, not wealthier due to microcredit.<h2 id="failure-of-microcredit-in-south-africa">Failure of Microcredit in South Africa</h2>The international development community rushed to South Africa immediately after the end of the apartheid in 1994 to promote the microfinance model. They proclaimed that it would bring new dignity, incomes, jobs, and empowerment to the impoverished South Africans with high expectations of rapid progress.<figure class="kg-card kg-image-card"><img src="file:///C:/Users/8460P/AppData/Local/Temp/msohtmlclip1/01/clip_image018.jpg" class="kg-image" alt loading="lazy"></figure>http://ignatianeconomics.blogspot.com/The result of this market-driven microcredit introduced to post-apartheid South Africa was destructive. It has caused severe damage to the South African society and the economy at large despite being lauded too much.Many investors have left that bloated microfinance sector as it is about to collapse, as argued by many users. The problems induced in the microcredit sector in South Africa were of two forms:First, it is an anti-developmental intervention, meaning that it supports the small scale income generating ideas, but in practice, it supports consumption spending. Its impact on South Africa is that it created a costly and risky way in support of the immediate consumption needs of the poor. There are very few poor people who can repay the microloans using their secure income streams, resulting in very high unemployment rates than it was before the apartheid period.The other major problem with the South African microcredit is the aspect of extensive commercialization. It was introduced in the microcredit sector globally to boost its financial sustainability. It?s estimated that about 40% of the workforce in South Africa is spent on debt repayments.The impoverished South Africans are now trapped in micro debts of unimaginable proportions. The individuals now realize that the objective of these private microfinance institutions wasn?t to help them uplift their lives out of poverty but to reap as much value from them within a short period before getting lost to other business fields.The South African microcredit models and supports have been discredited widely just like their counterparts in other parts of the world. It will be a very difficult task to alleviate the poor from the microcredit sector owing that the country even with the post-apartheid government, has official sanctions of exploiting the most bankrupt black communities.<h2 id="there-is-no-one-size-fits-all-solution">There is No One Size Fits All Solution</h2>In the microfinance sector, there is no one size fits all approaches in the promotion of poverty reduction, empowerment, and development. Practitioners of microfinance need to develop structured approaches on how their target beneficiaries may utilize the services designed to the demographic of the society.<figure class="kg-card kg-image-card"><img src="file:///C:/Users/8460P/AppData/Local/Temp/msohtmlclip1/01/clip_image020.jpg" class="kg-image" alt loading="lazy"></figure>A creative approach should be adopted that meets the financial service needs of the low-income community segments and the poor. Policies that provide the freedom to set payment conditions and terms for various borrowers are more beneficial to income-generating activities and businesses.The borrowers may be more financially empowered and disciplined by tailor fitting the repayment schemes to specific situations. It also reduces the risks of a borrower defaulting on their loan.Communities and practitioners should possess the virtue of saying no, particularly on conditions and terms that will negatively affect a person's ability to repay their loan, whether long or short-term.Erase the misunderstanding, learn the trade! According to Youngquist, a world vision official, addressing the misconceptions in such a manner that microfinance is perceived as an integrated social-developmental tool as it's supposed to be is a very good starting step. Microfinance implementation isn?t for all. The best avenue for success and real opportunities are offered by the development practitioners who have partnered with established microfinance service providers.Microcredit isn?t? a cure-all and a panacea intervention. Money alone can?t solve all the problems within a household or the community at large.

Geoffrey M.

Microcredit - Loose Change for Real Change.

Introducing Equity Crowdfunding to Raise Funds for Startups in the USAEquity crowdfunding is a type of crowdfunding that is primarily concerned with Title III of the Jumpstart Our Business Startups (JOBS) Act. It is an investment type where several investors invest their capital into a specific startup business in exchange for equity shares. Often, this type of crowdfunding is used by the early-stage companies to raise their seed funding. Non-accredited investors can invest in equity crowdfunding as it has the potential for earning profit as the startup succeeds. Besides, it doesn't need a substantial amount of money to get started, as it depends on how much a startup seeks funding.However, there are drawbacks, too, with equity crowdfunding such as inherent risk and timeframe. With no guarantee of whether a new startup will take off or fail, equity shares of the investors would be worthless. Even after the success of a startup, it may take years before investors can sell equity shares.Equity Crowdfunding Regulation in the USAs soliciting investments from the public is illegal, so equity crowdfunding can breach different security laws unless it is filed with proper securities regulatory authority. The Securities and Exchange Commission (SEC) in the US is a regulatory authority having ways such as the Howey Test to determine security in equity crowdfunding. Securities concern the investors who have been asked to contribute money in exchange for profits on funding startups through equity crowdfunding. [<a href="https://en.wikipedia.org/wiki/Equity_crowdfunding">1</a>]Is Equity Crowdfunding Legal? Under What Law Does it Fall?Equity crowdfunding is legal under the JOBS Act in the US, which was signed by President Barack Obama on April 5, 2012. This law is primarily intended to facilitate funding for startups and small businesses to ease securities regulations. There are three types of equity crowdfunding that comes under the following laws:1. Regulation A+ OfferingThis offering falls under Title IV of the JOBS Act, which further has two types of financial raises: Tier 1 Raise &amp; Tier 2 Raise.Both Tier 1 &amp; Tier 2 offerings are open to both ordinary and accredited investors. Moreover, companies can test the waters period in both Tier 1 &amp; 2 raise to determine the demand of the investors, which is a part of Rule 225.In Tier 1 offerings, you can raise $20 million in 12 months, while you can raise $50 million in 12 months in Tier 2. Tier 1 should meet the Blue-Sky investing regulations of the state in which the investor resides, whereas, in Tier 2 offerings, you don?t have to worry about the state-by-state regulations under the Blue-Sky Laws. However, audited financials and post-offering reporting are required.2. Regulation D OfferingThese are the traditional form of crowdfunding to raise funds for a startup which existed before the JOBS Act came into effect. You can raise as much money as you would like from Accredited investors and up to 35 other investors. It has rules 506(b) and 506(c) which are also referred to as private placements. As per both Reg D Rule 506(b) and Reg D Rule 506(c), you can raise money from accredited investors. However, there is one significant difference: you are allowed to advertise that you are raising capital under Rule 506(c) and must verify the status of accredited investors.3. Title III or Regulation CF OfferingTitle III or the Regulation Crowdfunding (RF) of the JOBS Act permits non-accredited investors to purchase shares in startups. Under this rule, you can raise:? $1,070,000 or less in 12 months from ordinary by disclosing audited or reviewed financial statements and tax returns.? $535,000 or less by providing reviewed or audited financial statements reviewed by an accountant.? $535,000 or more for first-time providers, audited or reviewed financial statements reviewed by an accountant. In the case of the non-first-time providers, financial statements audited by a public accountant independent of the issuer are required.Along with the above conditions, companies also have to present annual reporting requirements. Not every company can participate in a Reg CF offering. The securities sold through a funding portal are controlled by the federal securities laws and should be held for a year before they can be resold. Though disclosures are vital in Reg CF, the burden of risk is now shifting to individual investment limits allowing more investors to lose less. [<a href="https://www.howardkennedy.com/en/latest/blog/regulation-of-crowdfunding-in-the-uk-us-and-israel_a-comparative-review">3</a>]Who can be considered as an Accredited Investor in the US?An accredited investor is one with a special status under the financial regulation laws in Rule 501 of Regulation D of the US Securities and Exchange Commission (SEC). Many types of equity crowdfunding are permitted only to accredited investors, such as banks, employee benefit plans, and trusts, insurance companies, and individuals considered as affluent to have less requirement for specific protections. You must earn more than $200,000 per year, has a net worth exceeding $1 million, or be a general partner, executive officer, or director for the security issuer to be considered as an accredited investor. [<a href="https://en.wikipedia.org/wiki/Accredited_investor">3</a>]Is Crowdfunding of Fundraising Governed at Federal or State Level?Under the federal legislation, the funding portals should register with the SEC and an applicable self-regulatory organization to operate. The SEC approved the progress of the crowdfunding bill to ease online fundraising for startups and small companies and provide fraud protection for investors. Along with the SEC regulations, the Financial Industry Regulatory Authority (FINRA) creates additional rules for member businesses involved in crowdfunding. Both Regulation CF and the FINRA has a role in evaluating and approving the applications of these crowdfunding portals.As the federal legislation for crowdfunding seems unworkable for some people, many US states have recently enacted or are considering their crowdfunding exemption laws. This is to enable intrastate investment offerings that are exempted from federal (SEC) regulation. The Invest Kansas Exemption and the Invest Georgia Exemption are instances of crowdfunding exemption laws. [<a href="https://en.wikipedia.org/wiki/Equity_crowdfunding">4</a>]Equity Raising PlatformsBefore the equity crowdfunding bill was passed under Regulation D, it was limited to individuals who met with specific net worth and income levels, called accredited investors, and was conducted by a licensed broker-dealer. However, after the Title III of the 2012 JOBS Act's Regulation CF came into effect, equity crowdfunding was allowed regardless of the net worth or income and conducted by a licensed broker-dealer or via a funding portal registered with SEC. Some of the notable equity raising platforms include:<ol><li>ProFounder- This is the first US company to facilitate equity crowdfunding between startups needing funds to launch and willing investors who were ignored of how to invest in a private firm. This platform closed even before the law on equity investment come into force in the US [<a href="https://en.wikipedia.org/wiki/Equity_crowdfunding">5</a>]</li><li>Wefunder- It is the largest funding portal by many investors and investment volumes. Over the years, it has become more successful than other portals as it encouraged businesses to use fundraising mechanisms other than equity. [<a href="https://www.practicalecommerce.com/Has-Crowdfunding-from-Ordinary-Investors-Been-Successful">6</a>]</li><li>StartEngine- It is one of the world's largest equity crowdfunding sites that allow investors to buy equity in companies that are rising to $50 million. [<a href="https://startupfundingsecrets.io/equity-crowdfunding-sites/">7</a>]</li><li>AngelList- This is the oldest and most-established equity crowdfunding platform for accredited investors who know the "inside baseball" game in Silicon Valley. Designed for professionals, it is the perfect "operating system" for startups, providing many useful services. [<a href="https://www.moneycrashers.com/equity-crowdfunding-sites-investors-entrepreneurs/">8</a>]</li><li>SeedInvest- It started to help technology startups get access to capital from people willing to make sizeable equity investments. It allows only US-based businesses and has a picky selection criterion. It has a positive reputation with a growing base of investors and successful companies. [<a href="https://www.business.org/finance/loans/best-crowdfunding-sites-for-startups/">9</a>]</li></ol>Notable SuccessBeta Bionics, based in Boston that builds bionic pancreas to improve the lives of people who have type 1 diabetes, had a successful campaign on Wefunder. It raised $1 million from 817 investors on a $100 million valuation in August 2016. Hopsters Brewery, a Boston based brewpub restaurant, raised $1 million on a $4 million cost from 713 investors on Wefunder in 2017.Sondors Electric Car, based closer to Silicon Valley in California, has successfully raised $1 million on a $32.4 million valuation on StartEngine. Recently, Hackernoon has completed a $1.07M raise through the equity crowdfunding platform, StartEngine. [<a href="https://www.securities.io/top-5-equity-crowdfunding-websites-opinion/">10</a>]Notable FailuresOne of the notable failed equity crowdfunding cases includes Rebus, which was founded in 2010 and raised ?816,790 in 2015 on Crowdcube by selling 6.63% of its shares to 109 investors. As per Crowdcube, Rebus is its biggest bankruptcy that shows there is a deficient public understanding of the risks related to equity crowdfunding. Other notable failed equity crowdfunding cases are Buy2Let and Alchemiya Media. [<a href="https://books.google.co.in/books?id=8QrBDwAAQBAJ&amp;lpg=PR1&amp;dq=Crowdfunding%3A%20Fundamental%20Cases%2C%20Facts%2C%20and%20Insights&amp;pg=PR1#v=onepage&amp;q=Crowdfunding:%20Fundamental%20Cases,%20Facts,%20and%20Insights&amp;f=false">11</a>]Can Non-Accredited Investors Invest in Startups Through Funding Platforms?As per the rules that went into effect on May 16, 2016, anyone can invest through equity crowdfunding platforms. An ordinary individual can invest in the startup companies that earlier used to be the stuff of Angel and Venture Capitalism (V.C.) investors only. Of course, some restrictions apply, and there are higher risks and potential rewards for early-stage companies.What Are the Rules Around Non-US Citizens Investing Through These Platforms?The participation of non-accredited investors to fund startups on funding portals is not free for all. The SEC has placed a few restrictions on how much investment can be made by the non-accredited investors throughout 12-months based on their net worth and income. This is to prevent the risk to non-accredited investors who are not aware of investments and crowdfunding.<ul><li>If your net worth and annual income are less than $107,000 per year, you can invest less than 5% of your income or net worth</li><li>If your annual income and net worth exceed $107,000, you can invest up to 10% of your income or net worth</li></ul>Despite the progress made in the past around equity crowdfunding, the US still operates on archaic laws, and that's why you should ensure to know the rules on different platforms around accepting international investors. Ensure that the US-based platforms comply with the US securities regulations and regulators (SEC and FINRA) and foreign securities laws related to any investor outside the US [<a href="https://www.investopedia.com/articles/entrepreneurship-small-business/050216/guide-crowdfunded-investments-nonaccredited-investors.asp">12</a>]Benefits of Equity Crowdfunding for the stakeholder, investors, VC, and person in need of fundingEquity crowdfunding is a feasible option for the person in need of funding their startups but are struggling to communicate their values to VCs, investors, and stakeholders to finance their idea. A major benefit of equity fundraising is quick access to raise millions without going through the tedious process involved with appealing venture capital. It can foster strong bonds and vital partnerships that could help your startup to succeed. [<a href="https://www.businessnewsdaily.com/11173-equity-crowdfunding-basics.html">13</a>]Development on the HorizonNon-accredited investors should keep in mind that although Title III allows universal participation, you should not jump on every crowdfunding platform. Moreover, as you compare different investment opportunities, it is vital to pay close attention to the fees on each platform as these can impact your returns over the long-term.With the governments of the nations across the globe implementing lockdown measures to prevent the spread of COVID-19, leading to the current economic turmoil, SEC has announced new steps intended to help many small businesses that are facing challenges to access urgently needed capital.

Anjali Prabhanjanan

Things You Should Know About Equity Crowdfunding for Your Startup

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