Brazil’s Equity Crowdfunding Scene Develops as Entrepreneurs Await Regulations
Small businesses, which encourage a culture of entrepreneurship and create jobs, are hugely important to economic growth of Brazil. In total, the 6.3 million small- and medium-sized enterprises (SMEs) are responsible for roughly 20 percent of the country’s GDP and account for 52 percent of the country’s formal jobs.
Despite SMEs’ importance to the country’s economy and the population’s positive outlook on entrepreneurship, Brazil is at the bottom of the World Bank’s Doing Business index. More worryingly, the country placed just 174th (out of 189) in this year’s Starting a Business ranking, dropping eight spots from last year.
At least part of that can be attributed to the difficulty of raising startup capital, especially among young entrepreneurs. A 2013 EY report, for example, found that nearly 8 out of 10 entrepreneurs described access to funding as being ‘difficult,’ with 15 percent describing it as ‘very difficult.’ The latter number rose to over 40 percent among entrepreneurs under 40.
With a worsening economic outlook for 2016 and an uncertain political climate leading to worries of capital outflows, Brazil’s entrepreneurial culture can play a big part in helping the country to weather the economic troubles. One emerging tool that can aid the entrepreneurs is crowdfunding.
Crowdfunding, at the most basic level, is the practice of raising money online from a large group of people. It comes in four distinct models:
- donations-based, which is often used to raise money for personal causes or charitable organizations;
- rewards-based, typically used to raise money for a product in exchange for perks like T-shirts or as a pre-order of the final product;
- lending-based, typically employed by more established businesses looking to secure a loan to grow operations; and
- equity-based, which has been used by young firms looking to raise startup capital.
Brazil already enjoys a relatively robust crowdfunding ecosystem when it comes to donations- and rewards-based crowdfunding, with platforms like Catarse and Kickante leading the way. Over the last year, however, equity-based platforms have also come onto the scene, helping entrepreneurs to raise money for their ideas from fellow Brazilians.
It’s still early on, but the platforms are showing signs of success. Broota, the early market leader, has raised over 4.5 million real ($1.1 million) for 11 companies, with capital raises ranging from $30,000 to over $300,000 per company. StartMeUp raised over $75,000 for itself through its own platform earlier this year. EqSeed recently completed its first raise, helping 38 investors back an internet of things company called Kokar to the tune of $75,000.
Currently, equity crowdfunding does not fall under specific regulation, though relevant rules prevent companies from raising more than 2.4 million real ($610,000), and require companies to file registration papers with the Comissão de Valores Mobiliários (CVM — Brazil’s Securities and Exchange Commission). There are no limits on how much money an individual is able to invest, and the platforms are able to advertise the offering to the general public.
The CVM, however, is currently looking at creating the appropriate regulatory framework for equity crowdfunding. That would mean good news for the industry, said Greg Kelly, founder and CEO of EqSeed and the director of the trade body EQUITY – Associação Brasileira de Equity Crowdfunding.
“We want to be regulated, we want to promote credibility and ensure that there are only genuine platforms operating in the market,” he affirmed.
Kelly said the CVM is expected to hold a public consultation on the draft regulations toward the end of Q1 2016, and the final rules to be published within 2016. Issues to be discussed are likely to include investment caps and protections for investors.
Equity crowdfunding is no silver bullet that will solve all of Brazilian startups’ financing troubles. But, in the long run, it is a tool that can be immensely powerful in supporting entrepreneurs, and allowing more Brazilians to invest in promising (though highly risky) startups at home. With a gloomy economic outlook and fears of capital outflows, tools allowing Brazilians to support home-grown businesses figure to have a big impact.