China’s ban of initial coin offerings (ICOs) this week has raised questions on whether other jurisdictions will do the same, and on how viable the vehicle is for SMEs to raise finance.
The Chinese government banned ICOs on Monday (September 4), effectively cutting about 40% of the ICO market out, while last month in the US the Securities Exchange Commission (SEC) began moves towards regulating ICOs.
In China 65 ICOs raised closed to $400 million over the year to July, according to Chinese news agency Xinhua.
Statistics by CoinSchedule, a cryptocurrency tracking site, show that to September 7 over $2.1 billion has been raised in 139 ICOs, up from just 46 valued collectively at $96m last year. The biggest ICO last year was $16m raised by a company called Waves.
So far this year four ICOs have each topped $100m, with the highest – Filecoin – having raised $257m. The majority of ICO funds – 44% - have been to raise funding for infrastructure, followed by data storage (13.5%) and trading and investing (10%).
In June, ICO funding hit over $550 million and it was the first month ever that it surpassed angel and seed VC funding.
Meanwhile Russia’s central bank said it won’t allow (for now) the trading of cryptocurrencies on official exchanges, nor the use of their technology for clearing and settlement infrastructure.
Despite this a Russian Blockchain venture fund, FinShi Capital said on Wednesday that it plans to will invest in ICO-related projects worth up to $1bn.
The fund aims that it has already raised $1.3m in a pre-ICO campaign, and aims to generate another $50m in an ICO in October.
'SARB offers no protection'
South Africa’s Reserve Bank also weighed in. It said as cryptocurrencies are not guaranteed by the Reserve Bank, there would be “no recourse or protection to consumers thereof”.
The Reserve Bank’s position on virtual currencies is set out in the Position Paper on Virtual Currencies issued in 2014, the bank recently established a dedicated fintech programme to increase focus and assist the existing working groups to research and analyse technology innovations in the financial services industry.
Part of the review is aimed at assessing the impact on cross border financial flows and stability of the financial system.
'Only temporary setback'
Despite this Bitcoin Foundation executive director Llew Claasen (pictured above) told SA tech publication Ventureburn that he reckons China’s ban is only a temporary setback for startups looking to raise capital through ICOs.
Claasen admitted that while there are people that are “darn right scamming” and those that are listing utility tokens as if they were securities, regulators should not place an outright ban on ICOs.
Where there is a clear expectation that those participating in the ICO will gain a share of the profits and be able to have a say in the governance of the company, the ICO can be described as essentially an initial public offering (IPO), he added.
However he said regulators should allow utility tokens to be raised - those where users can become part of a network by buying tokens but where they don’t necessarily profit from the tokens themselves.
It will however be hard to convince regulators. In the end more jurisdictions are likely to clamp down on what many believe is merely a massive casino game.
The sooner regulators get on top of things and issue clear guidelines - the better for real SMEs looking to raise cash.
Timm is a South African who writes on small business in emerging economies. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Brazilian development bank BNDES this week announced that it will make available 20 billion reals ($6.3bn) to banks until August next year, to cover working capital for SMEs.
The new financing line (BNDES Giro) was launched by President Michel Temer on August 23. Traditionally the development bank has not offered working capital in the past.
The launch follows an announcement in June that the development bank - under instructions from Temer - will boost lending to small businesses (see this post), as the country begins emerging from an over two-year long recession.
Under the new financing line, BNDES will make the working capital available through financial intermediaries – such as state banks and some commercial banks.
Using a web portal (BNDES online) business owners will be able to track their application. If all is in order the loan will be paid out into their bank accounts within 24 hours. Currently an application for working capital through BNDES can take up to 60 days, according to Planning Minister Dyogo Oliveira.
The finance will be made available at low interest rates, which because it is lent out at less than the bank lending rate (presently at 9.25%, while BNDES lends it out at 7% through its long-term TJLP rate), amounts to a subsidy, the cost of which is absorbed by the treasury.
The subsidy model is controversial and critics have blamed it for distorting the lending market (see this earlier post).
'200,000 could benefit'
BNDES president Paulo Rabello de Castro (pictured above) said on Wednesday that about 200,000 firms will take up the offer to get credit through the new vehicle – meaning on average each firm will take out on average 100,000 reals in working capital.
He said about 40% of new finance from the banks various existing schemes was directed at small and micro enterprises in the first quarter and the intention is to lift this to 60% within the next 12 months.
Every six months the bank loans about 13 billion to firms with an annual turnover of up to 300 million reals ($95m), he said.
He said while the development bank sees some signs of the economy improving (with the economy having grown by one percent in the first quarter), there are some lines of credit which are still decreasing.
Difficult getting finance
Finance is still tight in Brazil. A survey this week by Brazils’ credit protector (SPC Brasil) and Confederation of Managers (CNDL) revealed that the demand for credit from small businesses fell last month over June.
In all 86% of small and micro firms surveyed had no intention of taking out finance. About a third of business owners said it is difficult to access finance against 25% that said it is easy. Most mentioned excessive bureaucracy at banks and high interest rates as key factors making it difficult to access finance.
The head of Brazil's small business agency Guilherme Afif Domingos in 2015 raged about bank's "pornographic rates" (see this post). While interest rates remain high, the bank lending rate has fallen from a high of 14.25% in October and was cut to 9.25% last month.
Brazil is doing much already to boost finance to small businesses. Earlier this month it launched a new call to finance high-growth tech start-ups under Start-Up Brasil (see this post), while last month the country's exchange commission issued regulations on equity crowdfunding (see here).
Banks can do with cutting more red tape. More alternative financing mechanisms will may mean there may be less need for BNDES and the distorting effect the development agency giant has on the finance market.
Timm is a South African who writes on small business in emerging economies. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Start-ups could get access to millions of rands to finance government contracts, following an announcement this week by Finance Minister Malusi Gigaba (pictured here) of a new plan to get the economy going again.
The plan which was revealed today (July 13), includes a number of measures such as the partial privatisation of state-owned enterprises.
Among the measures Gigaba announced that the National Treasury would finalise a public procurement bill by March next year, while the Minister of Small Business Development Lindiwe Zulu will by February finalise a "complementary government fund" aimed at financing start-ups.
Start-ups need access to finance to undertake government contracts, all the more so with a 30% set-aside of state procurement for small businesses, which came into effect in April (see this story and this post).
The new regulations allow government departments, municipalities and state entities “if feasible” to ensure that those that win bids of R30 million ($2.2m) or higher subcontract at least 30% of the bid’s value to small businesses.
With the state spending about R500 billion on goods and services, small businesses are set to win big. Yet if winning bidders cannot secure funding to pay for equipment and staff, the measure could fail.
Late payments hindrance
In addition the government continues to pay late, despite regulations in effect since 2005 which instruct national and provincial departments to pay suppliers within 30 days on receipt of an invoice.
The problem is so acute that both the Department of Performance Monitoring and Evaluation and The National Treasury have units to track late payments and intervene on behalf of suppliers to get departments to pay late invoices.
In May in the budget vote for the Department of Performance Monitoring and Evaluation Minister Jeff Radebe said since the unit was set up in early 2015 the department had intervened in 207 cases of non-payment of valid invoices, and R327m had been paid to service providers, as at end of March.
According to a news report the National Treasury’s Office of the Chief Procurement Officer said last month that it had received over 5,000 queries about invoices unpaid by government departments, amounting to R620m, between July last year and the end of March. Just under half had so far been resolved.
There's perhaps no need to set up a new fund. Zulu's department could use the Small Enterprise Finance Agency (Sefa) to drive lending to start-ups. The agency lent out R1.1bn to over 43,000 small businesses in the 2016/17 year.
But the rapidly increasing rate of impairments, most linked to loans lent directly to small businesses (the agency also lends via intermediaries), is making it unsustainable to do so.
Impairments were at a massive 47% of total loans as of the end of March, Sefa chief executive Thakalani Makhuvha told MPs last month. This is up from 38% in of its loans book in 2015 and 25% in 2014 (see this earlier post).
Makhuvha in April last year said a number of business owners who took out bridging finance to bankroll tenders failed to honour payments. Some defaulted after not performing on contracts.
He said the agency often opens joint bank accounts with clients as a form of security, but that this has not stopped some from later changing to another account.
One way to resolve this would be for borrowers to cede contracts to the agency. But under current treasury rules this is prohibited. Makhuvha says the agency is in talks with national treasury to permit cessions.
It will be crucial to resolve this if the 30% set-aside is to have any substantial impact
Another way would be to increase the use of credit guarantees In the 2015/16 year Sefa issued just R40.5m to financial institutions (including banks and non-banking institutions) down from R50.7m the year before.
Banks have largely abandoned the scheme in recent years saying they have run up too many bad debts and that the claims procedures are too lengthy (see this post and here).
Sefa has now linked up with non-banking financial institutions, including micro-enterprise funding companies and private corporates to offer credit guarantees to groups of small businesses.
In its 2015/16 annual report Sefa said it had enhanced business processes and IT systems and added that it was in discussion with banks to formulate new portfolio guarantees with new terms and conditions, the most attractive change being the scrapping of co-vetting of transactions with the banks.
Zulu's department should learn from more successful credit guarantee schemes in India (see this post), Chile (see here) and Malaysia (see here)
Use Financial Sector Code
A third way is to compel banks – many of which are already involved in contract finance programmes with the state – to have bridging finance products for start-ups.
For example Nedbank has partnered with the Enterprise Public Works Programme and reported in March last year that it had lent R40m in contract finance to 180 start-up entrepreneurs, said spokesperson is Tracy Afonso, Head of Professionals and Small Business Banking at Nedbank.
The government can use the Financial Sector Code (an industry charter under the Black Economic Empowerment policy) to compel banks to lend contract finance to start-ups.
The Financial Sector Code compels banks to invest a collective R48bn between 2012 and the end of 2017 in various targeted investments, including black farmers, black SMEs, transformational infrastructure and affordable housing.
Banks have far exceeded this. Between 2012 and 2015 banks lent out over R209.3bn, the Banking Association of SA (Basa) said in March. Of this, R41bn went to black SMEs.
The new draft code has yet to be gazetted by the Minister of Trade and Industry Rob Davies.
Black business however is not satisfied. While the targets for the new code have not yet been finalised, Black Business Council secretary general George Sebulela wants banks to ring-fence at least R50bn for black SMEs, which could be geared four or five times.
Some of this money could be used to fund black start-ups seeking funding to undertake state contracts.
Perhaps the department need not go to the trouble of setting up a whole new dedicated fund. The government is already struggling to find revenue to fund other pressing needs.
Using a mix of credit guarantees, direct finance through Sefa which is backed by cessions and concessions from banks through the Financial Sector Code to fund black start-ups - the department could help make it easier for start-ups to contract with the state,
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
As Brazil begins to recover from a two-year recession its leaders have ordered the country’s much criticised development bank BNDES to ratchet up lending to small firms.
These were the instructions from President Michel Temer, as the bank’s new president, economist Paulo Rabello de Castro (pictured above), assumed the role of head of the institution on June 1, according to a news report.
Big firms, easy money
The development bank, which dominates long-term lending in Brazil because of sky high interest rates at banks, has long been criticised for providing mostly big (many of them politically connected) firms with easy money.
Among the bank’s 145,000 clients, large companies account for fewer than five percent of transactions at the bank, but made up almost 69.1% of disbursements last year, according to the banks 2016 annual report.
In 2012 large firms accounted for 49% of disbursements, reveals a BNDES report, while the bank revealed recently that between January and April just 38% of loans went to small businesses, totalling 8.2 billion reals or 13% less than the same period last year.
In recent months the bank has come under fire for its connections with businesses it helped fund such as Odebrecht, which the state is investigating for corruption.
The bank has also been criticised for relying on the treasury to subsidise cheap credit - something it is seeking to now address. In 2016 the bank also undertook to pay off debt of 100 billion reals ($30bn) to the treasury.
In addition after expanding at 12% per year between 2007 and 2014 reaching 187.8bn, the bank’s total disbursements slumped to 88.3bn reals last year.
As such the bank is now trying to find new ways to ramp up lending to small businesses.
These include simplifying its application processes, the introduction last year of a new venture-capital fund, a new venture debt offering to be rolled out this year and the expansion of its successful Cartão BNDES - a card which allows small firms to get services and goods on credit from approved suppliers.
The venture capital fund-of-funds offering, Criatec 3 - the bank's third since 2007 - was launched in February last year.
The fund will invest in private funds that will then invest in firms in innovative sectors such as IT and biotechnology with an annual revenue of up to 12 million reals ($3.6m). The 22m reals fund is managed by a private sector company Inseed.
Last year almost 1,000 applications were evaluated and in April BNDES announced the first investee - Chip Inside, a software firm that performs real-time monitoring of the gestation period of dairy cows.
Also in April BNDES announced that it would support small innovative businesses through a new venture debt instrument whereby it will launch a 20-million reals fund that would see it invest alongside private investors.
The fund will be managed by a private investor, which will be announced in August following a public call.
In addition the bank in March doubled the maximum limit for disbursements under its BNDES card, to 2 million reals,
Under the card small firms can buy goods and services from approved service providers on credit (see this earlier post). The interest rate is lower than the banks (on 31 December last year it stood at 1.19% a month).
The bank’s director of indirect operations Ricardo Ramos said in December last year that the bank also intends to create a version of the card for agribusiness.
Lending under Cartão BNDES halved last year to just over 5.6 billion reals through over 422,000 transactions, from 11.2 billion the year before through 571,000 transactions.
The card has made some impact. A 2011 BNDES study revealed that companies that used the card were able to increase employment by 8% at the end of year for those that used the card in 2008 and an increase of almost 10% in late 2009, in relation to the companies that were issued the card in 2008 but did not use it.
But an accounting trick – the bank in December increased the annual revenue threshold for firms that qualify as small businesses from 90 million reals to 300 millions reals – might help the bank to increase disbursements to small businesses by about 20%, according to the bank’s director of indirect operations Ricardo Ramos.
It will mean about 1,500 new businesses will be labelled as small businesses in 2017.
However the bank’s simplification of certain procedures has lowered the average application period from 30 to just two working days, he said.
Yet though the economy grew by one percent in the first quarter, unemployment has worsened – expanding from 12.6% in the quarter to end of January, to 13.6% in the quarter to end of April.
Above all Brazil badly needs to become more innovative. It has slipped from 40th place in 2009 on the International Institute of Management Development’s competitiveness ranking to 61st of three worst, this year.
Expanding funding to small firms, particularly those developing innovative solutions, may be one way Brazil could boost its lagging competitiveness, while adding new jobs.
Timm is a South African who writes on small business. He has not visited Russia before. Click here to sign up for the monthly Small Business Insight newsletter.
Stephen Timm is a