We continue to track the equity crowdfunding legislation across the world. A bill in South Korea will change local crowdfunding substantially.
The Support for Small and Medium Enterprises Establishment Act has three key components. First, it allows all small and medium-size companies to utilize crowdfunding. Previously, the crowdfunding option was only available to companies less than seven years old. Second, the bill will allow private equity firms to form new corporations. Lastly, crowdfunding portals will be allowed to provide business consulting to firms raising funds on its service.
Corporate Finance for Small Towns
In small towns, especially across the United States, there is a general skepticism to finance groups like private equity or venture capital, even as commercial banks have historically failed to provide adequate commercial or residential financing. In parts of the United States, especially in the post-industrial northeast, Venture Capital and Private Equity are associated with long-term de-industrialization and subsequent economic decline. Private equity is seen as those who execute corporate or hostile takeovers where activist shareholders have shuttered plants and moved them to locations with less expensive inputs.
For those who work in the local economic development community, structures like private equity and venture capital are sorely needed to ensure that local firms can compete with firms launching in bigger metros.
There are other disconnects between local small businesses and finance. Many local small business operators are involved in their business because they love delivering their product. They are often content with their lifestyle and are not looking to expand regionally or nationally.
They prefer to operate as a successful piece of the fabric of their community.
Equity financing could challenge the influence that small business owners exert over their product. Owners worry that financiers seek to degrade the quality or authenticity of their product. The local economies can become a challenging environment where small business owners are unwilling to utilize capital, but at the same time many small businesses can have challenges finding sustainability or affording to pay ownership enough to put food on their table.
South Korean legislation would open the door to investor groups, venture capital, and private equity groups to operate laterally in local economies. They could acquire businesses, form new entities, and offer to consult firms raising crowd funds.
The consulting issue reflects the challenge of small business capital. On the one hand, the portal, who is acting as an issuer, should have the ability to advise the small business owner who doesn’t possess financial acumen.
The portal could help the small business identify their realistic break-even point, profitability, and accounting for the true cost associated with small business ownership. However, this gives portals more influence in the context of who they choose to provide resources to or let utilize their portal.