THE term “crowdfunding”, or “crowdsourcing”, refers to an open call made to the world via the Internet to solicit funds from interested parties to finance a business or social project. The funds received may be in the form of donations (without rewards), or exchange for specified rewards, rights or financial returns.
Historically, crowdfunding may be traced back to 1885, when renowned publisher Joseph Pulitzer launched a fundraising campaign in his newspaper, The New York World, to seek funds from the public for the construction of a pedestal for the Statue of Liberty — a gift of friendship from the French government to the United States.
The shortfall of more than a third of the amount needed for the construction was covered by funds solicited via a crowdfunding campaign in the newspaper. The call was successful without the Internet.
The fast-growing phase of the Internet in 1990s marked another success story for crowdfunding. British rock band Marillion in 1997 succeeded in its call via the Internet to collect US$60,000 from the fans to fund its concert tour. Since then, Internet-mediated crowdfunding platforms started to flourish in many countries, particularly in the United States, the United Kingdom, and recently, in other parts of the globe.
The rapid emergence of these platforms since early 2000, such as KickStarter, Kiva.org and GlobalGiving, indicate the viability of crowdfunding as an effective platform for fund solicitation to finance business ideas or social causes.
Indeed, it has shown its promising potential as the alternative to traditional fundraising devices, such as bank loans, government grants and venture capital.
As at 2014, the value of the crowdfunding industry worldwide reached US$16.2 billion (RM69.7 billion). The figure was predicted to increase to US$34.44b in 2015.
Fundamentally, crowdfunding has developed based on two major categories; community-based crowdfunding and financial-return crowdfunding.
The first category can either be donation-based or reward-based, while the latter may be in the form of peer-to-peer (P2P) lending or equity crowdfunding or royalty-based.
GlobalGiving, GoFundMe and DonorsChoose are examples of donation-based crowdfunding platforms, while KickStarter, SliceThePie and IndieGoGo are known for their reward-based platforms.
Examples of P2P lending platforms are Prosper.com and Kiva.org, while CircleUp is for equity crowdfunding. Quirky, TubeStart and RoyaltyClouds are instances of royalty-based crowdfunding platforms.
They are all based in the US and the UK.
In donation-based crowdfunding, donors contribute to the fund set up for the idea or project campaigned via the platform without expecting perks, while in reward-based crowdfunding, the contributors would expect something in return for the contributions made in favour of the project campaigned by the platform.
Usually, the rewards comprise a token of appreciation like T-shirts advertising the project, or group funded thank-you mails, an artist’s autograph, free tickets and many more.
In financial-return crowdfunding, on the other hand, the investors expect returns in the form of interest, dividend or royalties paid in consideration of the amount lent or invested to the projects campaigned via the platforms.
Recognising its tremendous potential to the financial market and economic ecosystem, many countries have taken the initiative to provide necessary adjustments to their regulatory regimes to accommodate the operation of crowdfunding, including Malaysia.
Currently, the focus of the regulatory adjustments responding to the development of crowdfunding exercises is more on the financial-return crowdfunding.
The reason behind it is that it directly involves the act of fund solicitation or investment from the public, which catches the authorities’s attention.
The Securities Commission of Malaysia (SC) issued the Guidelines on Regulation of Markets under Section 34 of the Capital Markets and Services Act 2007 on Feb 10, 2015, to regulate the equity crowdfunding (ECF) platforms. Since then, the SC has approved six ECF platforms, namely FundedByMe, Ata Plus, Crowdo, Eureeca, Equity.pitchIN and Crowdplus.Asia to start their operation.
On April 13 last year, the SC revised the guidelines to incorporate the additional provisions on P2P lending platforms. Eventually, on Nov 3 last year, the SC announced the licensing of B2B FinPAL, Ethis Kapital, FundedByMe Malaysia, ManagePay Services, Modalku Ventures and Peoplender as the first six P2P platforms in the country.
The current laws governing community-based crowdfunding platforms are, on the other hand, piecemeal. This is due to the fact that charities or charitable organisations are governed by several regulators, inter alia, the Registrar of Societies, Legal Affairs Division under the Prime Minister’s Department, Companies Commission of Malaysia, the Labuan Financial Services Authority and state governments.
The provisions on crowdfunding under their governing laws are still unclear. It is important to note that the legal landscape concerning the financial-return crowdfunding in Malaysia is responsive to the current development of financial technology.
However, the relevant laws to properly govern the emergence of community-based crowdfunding are still vague and warrant a revisit to ensure that the public is well-protected from any illegal or irresponsible solicitation of funds, particularly Internet-mediated crowdfunding.
Granting that no prohibited activity is involved, Islam is, in principle, supportive of all beneficial cooperation (ta’awun) (Quran, 5:2) and wealth-generating trades (Quran, 4:29).
**The writer is a research fellow at the International Institute of Advanced Islamic Studies (IAIS) Malaysia.