Oct 19, 2012 02:35 PM

Tapping into Crowd Power with Website Finance

(Beijing) – Investing like an angel now costs no more than an average duck dinner in Beijing.

The force driving China's growing ranks of small-scale angel investors are crowdfunding websites, which offer individuals access to business financing pools for as little as 100 yuan each.

But these websites are operating in a regulatory gray area in China. And investors are called to give money for flimsy returns: In one case, they were rewarded for their financial backing with scarves in lieu of cash. 

Online crowdfunding started in China last year and since then has dramatically lowered thresholds for entry in an investment realm usually dominated by venture capital firms with deep pockets.

Website companies such as Demohour and Dreamore popped up with funding platforms to serve small business owners with big ideas. They've built money pools via electronic networks linking small investors, and then doled out cash to businesses.

The scheme, pioneered in the United States, lets complete strangers collaborate to support an entrepreneur whose bright idea they like. Because each contribution is small, individual investors bear little risk.

But unlike crowdfunding in the United States, where the networks were formally legitimized in May when President Barack Obama signed a new law for business fund-raisers, China's small-investor websites have yet to receive regulatory attention.

Some legal experts have suggested the websites may violate Chinese laws against illegal fund-raising in the financial sector.

"Determining whether an act constitutes illegal fund-raising depends on whether it raises money from unspecified persons and also on the types of returns," said Tao Yusheng, a lawyer at the Beijing Dacheng Law Office.

Popular Funding

Dreamore officials say their website has raised more than 200,000 yuan combined for more than 40 start-up businesses and entrepreneurial projects since it was established in September 2011. An average investment is 114 yuan.

Altogether, Dreamore has approved platforms for 70 fund-raising requests. Some are still waiting for investors, and about a dozen failed to raise enough from interested investors to meet the system's minimum requirements, said website founder and chief Du Mengjie.

Demohour, which celebrated its first anniversary in July, boasts a better record. The company has to date raised nearly 3 million yuan for 150 of the 318 businesses that it approved for platforms. And it has gotten more than 5,500 financing requests, said website co-founder and CEO Zhang You.

The average contributed by each angel was 107 yuan, Zhang said, and the highest amount raised for a single project was 339,480 yuan.

Dreamore, Demohour and other Chinese crowdfunders have followed the business model crafted by operators of a website called Kickstarter. Founded in New York in 2009, Kickstarter says it has raised about US$ 350 million for some 30,000 initiatives from more than 2.5 million people.

Like their U.S. counterpart, Demohour and Dreamore officials review each project proposal but approve and launch a crowdfunding platform only for those with solid potential. They weigh factors such as company's goals and the intended use of the financing before giving a green light.

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