1

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Index
Chapter 1: A case study of funding product development(Micro Investment Crowdfunding, K City, Hokkaido)……………………………….…..4
1-1 Overview of K City…………………………………………………………………………...….…….……….……..……4
1-2 Case overview…………………………………………………………….………..………….………….………..…...……5
1-3 Observations on Micro Investment Crowdfunding………………………….………..……..……17

Chapter 2: A case study of Super-long-term project supported by Micro
Investment Crowdfunding (N village)……………………………………..……………………......19
2-1 Overview of N Village…………………….…………………….…………………….…………………….…….…19
2-2 Overview of “100-Year Forests Initiative”.………..….……………….…………..….…..……..….…20
2-3 Fundraising Summary.………..….……………….……………..……..….…….…..……..….…..……..….…25
2-4 Observations on Micro Investment Crowdfunding.………..….…………..….…..……..….…31

Chapter 3: A case study of Micro Investment Crowdfunding for thereconstruction of MSMEs’ business after the earthquake…………………….….34
3-1 Overview of Kumamoto Prefecture……………………………………………………………..………….34
3-2 The 2016 Kumamoto earthquake………………………………………………………………..………….35
3-3 Overview of “Kumamoto Earthquake Support Fund……………………….…………..……….36
3-4 “Star‐Studded Sky” Roof Top Bar Fund by S hotel, a traditional Japanesestyle hotel in A City, Kumamoto Prefecture.……………………………………………………..………….39
3-5 Observations on Micro Investment Crowdfunding….………………..……………..………….49

FigureFigure 1 Overview of K City………………….…………………….…..………………….…..………………….……..4
Figure 2 Fundraising Scheme of F Corporation Co., Ltd.………………………………………….…..5
Figure 3 Share of Wholesale (B2B) and Retail (B2C) in Product Sales………………….……..5
Figure 4 Overview of N Village………………………………………………………….…………………………...20
Figure 5 Timber Supply and Self-Sufficiency Rate……………………………………….………….…..22
Figure 6 Value Chain of the 100-Year Forests Initiative……………………………………….....….26
Figure 7 Business Model of the “100-Year Forests Initiative”……………………………….…...27
Figure 8 Financial Structure of 100-Year Forests Initiative………………………………………..28
Figure 9 Overview of Kumamoto Prefecture…………………….…………………….…..………….….35

2

Figure 10 Cash Flow of “A half investment and a half donation fund………………………40
Figure 11 Overview of A City…………………………………………………………………………………….….…41
Figure 12 Employed population in A City……………………………………………………………………..41
Figure 13 Economy of A City…………………….…………………….…….…..…………………..…………..….42
Figure 14 Scheme of Studded Sky” Roof Top Bar Fund……………………………………………..45
Figure 15 Coverage of Financial Support (Disaster Support)……………………..……………..48

Table
Table 1 Overview of the F Corporation………………….……..………………….…..………………….……..9
Table 2 Summary of fund design……………………………………………….……………….…………….…..13
Table 3 Basic information of T-corporation Inc.………………….………………………….…….……..27
Table 4 Summary of N Village Common Forest Fund………………………..……………….……...29
Table 5 Estimated amount of damages to social overhead capitals in Kumamoto
and Ohita Prefecture…………………………………………………………….……………….………………………….…..37
Table 6 Impact of Kumamoto earthquake on the Kyushu economy…………………….….37
Table 7 Estimated Damages on basic infrastructures in A City….………………………….….43
Table 8 Overview of “Star‐Studded Sky” Roof Top Bar Fund………….……………….….45
Table 9 Fund design “Star‐Studded Sky” Roof Top Bar Fund………………..…….……..46
Table 10 Natural Disaster Recovery Phases……………………………………………………………..….47
Table 11 Results of examining eligibility of the “Star‐Studded Sky” Roof Top Bar
Fund…………………………………………………………….…………………………………………………………………….……..49

3

Chapter 1: A case study of funding product development(Micro Investment Crowdfunding, K City, Hokkaido)
A confectionery company based in K City, Hokkaido, successfully funded
development of a new product through Micro Investment Crowdfunding
after the local financial institutions denied it a corporate loan to financethe project.

1.1 Overview of K City1
K City is situated in eastern Hokkaido on the Pacific coast. Its population is
175,000 as of the end of October 2016. Affected by a cold current, theclimate is generally cool with an annual average temperature of 6°C,
reaching 20°C in summer and -5°C in winter. The annual precipitation isaround 1,000 millimeters, and by the mid-winter the snow can reach 30
centimeters.
The main economic sectors are tourism (with two national parks), wholesaletrade and retail trade. The gross municipal product for FY 2012 was JPY 576.4
billion [USD 5.0 billion], with tourism and trade accounting for 23% and 15%,
respectively. About 7.3 million tourists visited K City in FY2015, which is an 8.3%
increase from the previous year. The primary sector is also strong, mostly
represented by dairy farming, forestry, relying on abundant resources, andfisheries, with one of the biggest production volumes in Japan. Local products
such as seafood and dairy products are popular among the tourists. The only
coal-mining facility in the country, food-processing and pharmaceutical plants,
and paper mills also operate in K City. However, consumption and employment
are shrinking, and the economy is on a declining trend in line with the decreasein population.
FIGURE 1 OVERVIEW OF K CITYGROSS MUNICIPAL PRODUCT
Unit: JPY 100
million [US$ 0.9 million])
6.800
6.600
6.400
6.200
6.000
5.800
5.600
5.400
5,200
FY2006

FY2007

FY2008FY2009FY2010FY2011FY2012Gross municipal product1

K City Directory 2016 (http://www.city.kushiro.lg.jp/common/000092673.pdf)

4

1.2 Case overview
The fundraising scheme used in this case study is shown below. The main
success factors for this case are A) utilizing the Support K City Fund scheme
led by the local government (K City municipal government), and B) theattractive fund design proposed by the crowdfunding operator Music
Securities (herein after referred to as ‘MS’).
FIGURE 2 FUNDRAISING SCHEME OF F CORPORATION CO., LTD. (HEREINAFTER REFERRED TO
AS ‘F CORPORATION’)A

CITY OF K
K CITY SUPPORT FUNDAPPLYMATERIAL COST SUPPLIERSN TOWN AND K REGIONSUBSIDY FOR
COMMISSIONING

INDIVIDUALINVESTORS

B

CROWDFUNDING
PLATFORM MUSIC
SECURITIES INC.
INVESTMENTFINANCIAL RETURNPAYMENTCOMMISSION FEE

SMALL
BUSINESSESF CORPORATIONANONYMOUS
PAERTNERSHIP
AGREEMENT

DESIGN OFFICENENDOPURCHASE

COMMISSIONINGPRODUCT PROVISIONCONSUMERSPAYMENTDESIGN FREE
PRODUCT DESIGN(Created by author)

A Support K City Fund (K City municipal government)
The ‘Support K City Fund’ scheme led by the K City municipal government,
which is one of main factors of successful fundraising, is explained first.
1

Issues recognized by the municipal government.
K City is located far from major cities and the means of transportation arelimited. The population is approx. 175,000 people, forming a small market.
Like in other smaller cities, the local industries are on a declining trend
and the local purchase rate and product sales are also shrinking due tothe outflow of human resources from the city to the prefectural capitaland other major cities, aging of the population and a declining birth rate.
In this context, the following concerns were raised by K city; i) an outward
flow of goods, ii) a lack of human resources to support the city, and iii) an
unfavorable working environment2.
As a response, the municipal government promotes specific measures to2

K City Management Policy Plan (http://www.city.kushiro.lg.jp/machi/t_keiei/page00010.html)

5steer the city’s self-sustained growth based on four ‘visions’ that were
formulated in the strategic city management plan in 2012.
Based on one of the visions, “increase the value of local resources andcirculate its local economy”, the city targets to “earn from outside the city”.
The strategic measure it took was to promote high value-added local
products to attract tourists from outside of the city.
Meanwhile, the scarcity of financial services for the local small businesses
became a bottleneck to the city’s development strategy. Loans from thelocal financial institutions were the only way for local small businesses toobtain capital, and there was no venture capital. In other words, even if
the small businesses wanted to develop a new product, financial access
was limited due to the conventional ways of loan proposal assessment by
the local financial institutions.

2

Background of the Support K City Fund project
Recognizing the issues described in A) (1) above and based on the bestpractice of the Furusato investment fund in Hyogo Prefecture (the “Kirari
Hyogo Project”), K City’s municipal government carried out a feasibility
study in FY2014 to establish “Citizens’ fund” in K City, jointly with K City
Public University’s Research Center for Regional Economies and K City
credit union, to create a new financial channel for local development. In
the following year of the research, the “Support K City Fund project” waslaunched. The project utilized a Micro Investment Crowdfunding
mechanism to raise funds for small businesses which have their
headquarters or branch offices in the city. As an official K City’s Partner,
MS provides a Micro Investment Crowdfunding platform for fundraising.
It encourages individual investors to make small investments under ananonymous partnership agreement.

3

Structure of the Support K City Fund project and the role of K City
municipal government
In March 2015, K City municipal government signed an agreement withlocal organizations, financial ins titutions, universities and othereducational and research institutions of the city to jointly promote theSupport K City Fund. The municipal government suggests candidate
projects for the fund, while K City Public University’s Research Center for
Regional Economies provides advice and supervision at the selection
stage. To be qualified, the project must i) have some unique local features(25 points), ii) must resonate with people (15 points), iii) be highlyattached to K City culturally, economically, historically, etc.: (10 points),
and iv) be feasible economically (50 points). Following the qualification
done by the city, MS reviews the selected small businesses. Once the6projects/small businesses are approved for the fundraising on theplatform, the municipal government provides a subsidy to cover 90% of
the initial fund arrangement fee amounting JPY 900,000 [USD 7,826] sothat the selected small businesses just pay 10% equivalent to JPY 100,000[USD 870]. The municipal government allocated JPY 5 million [USD 43,478]
to finance up to five projects in FY2016 i to secure support to K City
Support Fund and intends to continue this subsidy support on acontinuous basis to stimulate the local economy.
When the Fund was launched, there were only three candidates, and twoof them were selected as the pilot in the first year (FY2015). The low
number of applicants showed that there was little understanding forMicro Investment Crowdfunding mechanisms among the local small
businesses. Realizing this, the municipal government organized seminars
to promote a better understanding of the Micro Investment
Crowdfunding scheme and worked actively to raise awareness andenhance the use of Support K City Fund.
4

Objectives of K City municipal government
The K City municipal government expects that Support K City Fund will
widen financial channels for the local small businesses, especially for
those that have a growth potential that may lead a local economy’srevitalization, but do not currently qualify for loans from the local
financial institutions.
It is important for the projects that seek financing through the Micro
Investment Crowdfunding to have a unique local flavor and to provoke
investors’ empathy. Provoking the investors’ empathy in the process offundraising helps a small business acquire core customers who live
outside the region. This matches the vision of “earning from outside”
which is a part of the strategic city management plan.

5

Continuous use of Micro Investment Crowdfunding as a financial
channel for MSMEs
As the small businesses that were selected for the pilot case of the
Support K City Fund gave positive feedback, the municipal government
intends to continuously provide subsidies to the fund. However, themunicipal government recognizes the following issues to be improved;
Application opportunities
Currently, the application opportunities are only once a year.
Applications should be accepted throughout the year to match theneeds of small businesses.

7

K City business profile
Many businesses in the city are B2B-oriented, while fewer small
businesses manufacture B2C products. As funds are raised fromindividual investors on Micro Investment Crowdfunding platform,
B2C is preferable for small businesses to appeal their products toinvestors, win empathy, and increasing the chances of successful
fund raising. Most products of K City are raw materials, and todifferentiate themselves from neighboring regions, the local small
businesses need to create unique and high value-added products.

FIGURE 3 SHARE OF WHOLESALE (B2B) AND RETAIL (B2C) IN PRODUCT SALES
Wholesale
30,339,222

775,000

5,610,008

1,096,786

Fabric and clothe retailing
Automobile and bicycle retailing
Other retailing

865,000

2,687,118

6,730,786

Various product retailing
Food and beverage retailing
Furniture, carpet, machinery retailing(Source: K City “City Directory” 2016）

Dissemination of information on Micro Investment
Crowdfunding
Unfortunately, Micro Investment Crowdfunding is still lacking
recognition among local small businesses. It is essential to ensure
a better understanding of this useful financial scheme, particularly
to reach out to small businesses with growth potential.
Collaboration with the local financial institutions can help to gain awider recognition of the functions and the potential of Micro
Investment Crowdfunding. And it is important to note that local
financial institutions can benefit from cooperating with Micro
Investment Crowdfunding because the latter helps create future
customers for the local financial institutions.
Costs of Micro Investment Crowdfunding
The total costs to raise funds through Micro Investment
Crowdfunding include auditing fees, financing and operationalcosts, which amount to roughly 20% of the total of fund. This is aconsiderable amount for small businesses. To respond to theneeds of small businesses, the municipal government also
considers other fundraising options, like pre-purchasecrowdfunding which may be more affordable for small businesses.

8B Success factors of the crowdfunding design by MS.
The design for this case is one of the key factors. This fund is well-designed
to reach the necessary target amount, provide the expected financial
returns or minimize the risk of loss of principal.

1

Profile of a small business applying for fundraising
Below is the profile of F Corporation, the confectionary company in ourcase study.

TABLE 1 OVERVIEW OF THE F CORPORATIONAREA OF BUSINESSCOMPANY NAMEHISTORY

BUSINESS PROFILEK City and N City, Hokkaido (Northern Island of Japan) F Corporation Co., Ltd.
The CEO of F Corporation was born in a family of a confectionery-maker; hegraduated from a confectionery school in Japan and had apprenticeship inFrance before opening his ﬁrst shop, F shop in N City, in 1997. He opened his
second shop in N City in 2010 and the third one in K City in 2012.
He converted his business into a joint-stock company in 2011.

It manufactures an excellent cheese cake, Swiss rolls and other Western-style
sweets made with the local dairy products (milk, cheese, butter and eggs) andnatural water of Mashu Lake in Hokkaido, where its climate is similar to dairy
regions in France. It mainly sells in K City and N City, as well as online and insome events at department stores across Japan. It recently started collaboration with a Singapore-based trading company to to expand its business overseas.

BUSINESS SCALE

The sales in FY2015 were JPY 84,488,000 [USD 734,678] (before fundraising),
while the capital is JPY 10,000,000 [USD 86,957] (according to K City Industrial
Information Network’s website, year unknown). The company employs about
20 people.

FINANCIAL
CONDITION AND
BUSINESS RESULTS

As F corporation is not a listed company, the ﬁnancial results are not disclosed. (However, according to the interview and the information from MS’s website, when it applied for ﬁnancing, its debt exceeded its assets.) Although thesales have been continuously growing, proﬁts are small due to investments
into facilities and increase of materials and employment costs. The working
capital is mostly replenished with loans from the local credit union.

MAIN
CORRESPONDENTFINANCIALINSTITUTION

K City credit union92

Fundraising history
Financing needs for a new product development
The sales of F Corporation in the N City and K City account for 70%of the total, and it is considered as one of the popular local
confectionery shops. Sales have been gradually increasing
according to the growth of the number of stores and the scale ofbusiness follows its increase in parallel.
As the next step, the company plans to advance into a new market
outside of Hokkaido and overseas. On the other hand, it also
recognized financial needs for a new product development which
is outstanding and high-impact to win new consumers.

Negotiating a loan with a local financial institution
Although F Corporation has a financial institution with a long
relationship, it unexpectedly failed to obtain a new loan.
Looking at the MSME inspection manual compiled by the Financial
Services Agency (FSA), the loan application might have been
rejected due to the debt levels that exceeded assets, and in
addition, there was a difficulty to evaluate the potential gains fromsales of the new product that the company wanted to develop.
The FSA inspection manual demands that financial institutions
develop a proper credit rating system to assess and measure thecredit risk appropriately based on the business scale andcharacteristics, and the company’s risk profile. It stresses
importance of assessing the overall condition of the borrower’s
business, as MSMEs are likely to be affected by fluctuations in theeconomy.
It also says that the “credit rating of MSMEs in particular shall bedecided not only based on their business situation, but also in
consideration of i) company’s technique, sales capacity, potential
growth, ii) payment status of compensation, income, asset
components of CEO or board members, iii) guarantee situationand capability in addition to their financial situations”, anddemands financial institutions to classify MSMEs into the following
three categories:oNormal debtors
Debtors whose business performance is good, no serious
financial problemsoDebtors under caution
Debtors that require caution: debtors which have problems
meeting the lending terms, including reduction, exemption or

10

shelving of interest, delays in payment of principal and/orinterest, as well as the debtors whose business performance ispoor and/or unstable due to financial problems .
oDebtors under possible bankruptcy
Debtors that are in a very difficult situation with little progresson the corporate improvement plan and are possible
bankruptcy in the future (including debtors receiving special
support from financial institutions etc. on an on-going basis).
More specifically, this refers to the debtors that are possible
bankruptcy as their debts exceed their assets, their businessperformance is poor, loan payments are overdue, which
threatens the full repayment of principal and interest and islikely to result in losses for the lender.

F Corporation had more debts than assets and was very likely
regarded as a company with financial problems, and not as anormal debtor. In addition, the purpose of borrowing was not toreplenish working capital but to finance new productdevelopment. In such cases, the following points must be carefully
examined in assessment of the borrower’s production and sales
capacity:
o

o
o
o
o

Estimates of orders for the new product based on the patents,
utility model rights, trademark rights, copyrights and otherintellectual property rights owned by the company andemployees
Business plan based on the new product/service development
and its sales.
Media reviews for current products/services in their businessfield.
Trends of market size and growth of shares in the businessfield for product/service.
Evaluation and situation of sale destination and product source,
superiority of sales and product source conditions against
competitors.

As F Corporation did not have a leading product, it was not clear whether
if a new product would gain popularity. As the good sales in thedepartment store were mainly with temporary events, the company isregarded that they didn’t have a clear sales channel to expand its
business, and the purchase condition was not favorable due to theincrease of material costs. Those factors are assumed as the reasons forthe rejection of a loan from the financial institution.

11

Utilization of Support K City Fund and MS’s idea to increase“empathy” of the Fund.
When F corporation was facing difficulties to obtain a loan, K City
Chamber of Commerce and Industry introduced it to the Support K
City Fund, and the company decided to apply for support. The
company made a presentation including its business plan,accounting statements and other necessary information to themunicipal government and MS that were in charge of assessment.
The CEO of F Corporation emphasized a possibility of new productthat it may contribute to K City’s economy by using local
ingredients with a high quality. He also explained the need for
expanding the business outside, as the local market was shrinking.
The CEO pointed out that the company needed a leading productwhile lacking the marketing and financial channel for the businessgrowth. The company’s challenges were consistent with the view of
the crowdfunding operator MS. In this process, MS reviews“empathy” and “business plan” with the following points; if thefund has enough potency to mobilize micro finance fromindividual investors and if their business plan is sustainablethroughout fundraising period. A story behind the project is the
key to attract and motivate investors. In this case, to strengthen
the fund’s “empathy”, Mr. Oki Sato from Design office nendo, aglobally famous designer, was introduced by MS’s CEO, Mr.
Komatsu’s suggestion, to ensure the new product was more
attractive. This series of collaborative fund was named “FinanSense” (finance + sense) and F corporation’s fund turned to be thefirst case for “Finan-Sense” (finance + sense).
3

Crowdfunding fund design
Below is a summary of MS’s Micro Investment Crowdfunding design.

12TABLE 2 SUMMARY OF FUND DESIGNTARGET AMOUNTJPY 3,500,000 [USD 30,435] (175 shares)

UNIT INVESTMENT AMOUNT (PAR SHARE)JPY 22,000 [USD 191] (JPY 20,000 [USD 174] with 2,000 JPY[USD 17] in transaction fees)

FUND OPERATION PERIOD

Two years (March 2016 to February 2018)

PROJECT PLAN

First year: Current store saels (JPY 96,225,000 [USD 86,739]),
new product sales (JPY 2,880,000 [USD 25,044]) Second year:
Current store sales (JPY 98,991,000 [USD 860,791]), newproduct sales (JPY 2,966,000 [USD 25,791])*Total sales for two years: the breakeven point at
JPY 175,000,000 [USD 1,571,739] (annual average of
JPY 87,500,000 [USD 760,870]

USE

New product development (product release in autumn
2016):
JPY 1,600,000 [USD 13,913] material cost
JPY 1,200,000 [USD 10,435] product design
JPY 600,000 [USD 5,217] materials and equipment
JPY 100,000 [USD 870] for contingencies

FINANCIAL RETURN

Up until the breakeven point: 2% of sales / 175 (no ﬁnancial
return when proﬁt is negative) After the breakeven point:
1% of sales / 175 (no ﬁnancial return when proﬁt is negative)*105.9% according to the project plan.

SPECIAL GIFT FOR INVESTORS

New cheesecake, “neyuki”, and Swiss roll, “yukimaru”, pershare (equivalent to JPY 5,000 [USD 44], including shipping
and tax)

PRINCIPAL GUARANTEE

None

MISCELLANEOUS

A tasting eventfor investors to be held in TokyoRESULTS

Reached the target amount (JPY 3,500,000 [USD 30,435]) inhalf a day after fund release.

*The return in which there is actual money transaction for individual investors is referred
to as “financial return” and other returns are referred to as “non-financial return”.
Enhancement of “Empathy”
As described above, the fund was designed to bring “empathy” forthe fund. MS’s Micro Investment Crowdfunding is a new type offinancial instrument for small businesses to promote the idea ofthe project/small business directly to investors and attracts
financing from those who like it. Ordinary financial institutions put
importance on the borrowers ability for repayment of the principal
and interest of the loan. Even if it has an impressive business idea,
financial institutions tell the small business to changes it for
seeking more profitability in the course of negotiations.
MS introduced the design company nendo to F Corporation, andthey helped to prepare the new product’s concept to present to13

investors, which helped to win their empathy and raise thenecessary finance for new product development through theMicro Investment Crowdfunding which allows much more flexible
conditions than a conventional loan.
Mr. Oki Sato who represents nendo, is a famous architect andaward-wining designer, and normally his design requires JPY 10
million [USD 86,957] per project. In this case, an initial design fee
was paid by the fund raised amount on the platform, and theremaining fee will be paid after three years from financing. It will
be 7% of total sales and will be charged every year to F
Corporation. The agreement between Mr. Sato and F corporation
is an exclusive contract, whereby Mr. Sato never signs contracts
with other confectionery makers.
As for the Micro Investment Crowdfunding investors, they aresatisfied to be involved with promoting a new productdevelopment as well as with the financial returns. According to MS,
at the tasting event for the individual investors, most of them were
women around 40 years old and many of them said that they were
not expecting a financial return but were rather enjoying theprocess of supporting a new local product.

An overview of developed products (source: MS’s platform
website “Securite “)As described above, Hokkaido is an island located in the northern
Japan, where F Corporation principally produces and sells its
product. They named the new product’s brand as “N”, from
“North”.
One of the N brand products, a cheese cake, represented a typicalsnowy landscape of Hokkaido with powdery sugar and white
creamy cheese – a little forest covered with snow (sugar powder)appears when the box is opened, and each piece of cheesecake
can be pulled out from below the snow. It makes a reference tothe traditional method of preserving vegetables and fruit in the
snow.

14

4

Benefits for each stakeholder
Small businesses (investee)Innovative MSME financing in local cities.
The biggest benefit is that the scheme enables fundraising by
opening a new financing channel for the development of new
products, which is rarely available trhough conventional loans.
Leave flexibility in business management.
Other benefit is flexibility in business management, which cannot
be reached from other loans of financial institutions or venture
capitals. In most cases of conventional loans, they give a strict
guidance to small business’s management on purpose of loan – asan effective measure to hedge the default risks of borrowers. In
the case of Micro Investment Crowdfunding, financing is raised
from individual investors who place no limitations on the purposeof spending. As MS is given full responsibility from the investors,
the MSME does not get direct intervention from investors.
Create new leading customers (fans) outside the region.
Other benefit of Micro Investment Crowdfunding is developing
new leading customers (fans). Individual investors and the small
businesses not only get linked financially, but also sharing a
product or its story, at the same time, investors can be theproducts’ ‘ambassadors’. In addition, if enough ‘empathy’ is raised
by investors, the business can expect further funding from thesame investors.
Marketing opportunities, an advertising effect and potential
for more financing.
F Corporation received some considerable media exposure
according to the innovative fundraising, which led to contracts withfranchise retailers such as a major convenience store chain, SevenEleven and a department store chain, Seibu. The new business
relations may open up negotiations for new loans with the local
financial institutions as they positively evaluate F Corporation’s
business growth.

15Collaboration with external professionals.
Through the Micro Investment Crowdfunding scheme, F
Corporation was able to engage external professionals who would
be extremely difficult to contact otherwise. Partnership
opportunities are limited when the business has limited outreachand networks. However, in this case, MS was able to introduce aworld famous designer to the local small business, that addedvalue through design and dramatically enhanced the marketing of
the new product.

Municipal government
Advertising K City.
The Micro Investment Crowdfunding project in K City often
appeared in the newspapers, magazines, and on TV. It contributed
not only to F corporation, but to raising awareness of K City’s dairy
products in general.
Acquisition of customers outside K City (“earning fromoutside”).
As described above, one of the targets of K City municipal
government is to earn money by attracting consumers andinvestors from outside the city. It materialized in the F
corporation’s case as it created consumers, investors, and evenfans from across Japan.
Efficient use of subsidy.
In the case of K City Support fund, a total amount of JPY 11.9
million [USD 103,480] was raised in FY2015, while the municipal
government subsidized JPY 1.6 million [USD 13,913] (JPY 800,000[USD 6,957] x 2 funds) of it. This shows that the public subsidy
successfully leveraged roughly eight times more investment on theplatform. For example, subsidy for the “New industry creation
project” covers up to two-thirds of MSME’s total project cost (up to
JPY 10 million [USD 86K] for a feasibility research to the newindustry creation and up to JPY 30 million [USD 260,870] foranother collaborative research to develop new technologies andfields. It is relatively effective spending, compared to the othersubsidies of Kushiro municipal government.

16

Creating a pilot project for Micro Investment Crowdfunding.
F Corporation’s success story may stimulate other small businesses
in K City to try fundraising with K City Support fund. Micro
Investment Crowdfunding has gained trust from the local MSMEs
who may apply for funding in the future, which in turn will further
contribute to the revitalization of the local economy.
Financial institutions
Avoiding high-risk financing, but getting opportunity to offer
low-risk financing.
If a fund is raised on Micro investment Crowdfunding, there is noneed for financial institutions to offer a new development costwhich is a high-risk loans, but they can extend new low-risk loans
to replenish the working capital once the borrower has achieved acertain business target with the money after fundraising. In thecase of F Corporation, their repayment ability increased throughthe fundraising process of Micro Investment Crowdfunding, forexample, their business plan became more stable and obtained
the large-scale sales channels. Micro Investment Crowdfunding
offered such non-financial services which strengthened theborrower’s business management.
Individual investors
Satisfaction from promoting K City and supporting local small
businesses.
Individual investors put importance on social significance otherthan the financial return when they decide to finance a projectthrough Micro Investment Crowdfunding. As a fan that empathizedwith the project, investors feel that they have supported K City andits good prospects through fund-raising act itself and non-financial
returns, such as gifts and products, and earn social satisfaction
through this process.
Financial return with less risk of principal impairment.
The benchmark of financial return is not linked to the sales of aparticular product, but to the total sales of the small business.
Although the use of this financing is the development of a specificproduct, there are risks and a possibility that it may not be linked
to good sales. By setting the total sales of F Corporation as abenchmark, which is generating a stable income with a lengthy

17track record, the risk of delays, non-repayment, or principal
impairment are reduced and it leads the financial returns to morecertainty.
In addition, by setting the fund management period to two years, it
avoids the influence of the total sales’ volatility. The minimum
investment amount is JPY 22,000 [USD 191] per share, which isrelatively cheap, and makes individual investors to invest easily.

1.3 Observations on Micro Investment Crowdfunding
The future challenges of Micro Investment Crowdfunding are discussed
from the perspective of each stakeholder.
1

Small business
Combination of financial and non-financial returns based on
behavioral characteristics of individual investors.
As behavioral characteristics of individual investors, not only
financial return but also a feeling of satisfaction from being part ofsocio-economic change are involved in their decision making.
Therefore, the balance of both factors of the product or the small
business are important for the fund to be attractive to investors.
Especially one of the factors that increase social satisfaction is nonfinancial returns that include gifts/special events for investors
which small businesses arrange in their fund design. Costs for nonfinancial returns can be managed by the small business, and let
the small businesses with limited financial returns to design thebest balance of financial returns and non-financial returns.
In addition, as the financial return is linked to the total sales of thecompany and the fund management period is set to two years, therisk of principal impairment is reduced. As the small businessbears a certain level of burden and cost, the fund becomes very
attractive in response.
F Corporation produces and sells confectionery which is popularparticularly among women, many of which were housewives. Someof them said that they value the social significance more than thefinancial return. In this fund contract, the small business offers
cakes that are equivalent to JPY 5,000 [USD 44] per share as a gift(non-financial return) in addition to the financial return, so thefund is satisfactory from the viewpoint of providing non-financial

18

returns. Many individual investors judged that it has financially andsocially favorable investment condition compared to the otherfund, however, for the small business, there are a certain burden
on both the financial return and gifts, and considering thecharacteristics of individual investors, even though the financial
return was less to reduce management expenditure, the possibilityof achieving the funding objective might be high.
In the midst of expansion of the number of individual investors for
Crowdfunding in Japan, even though the characteristics ofindividual investors are still biased, it is important to examine thepreferences of financial return and/or personal satisfaction oftargeted individual investors in advance, and design more optimal
return conditions for both investors and small businesses.

2

Municipal government
Raise awareness of the Micro Investment Crowdfunding
mechanism among the local small businesses.
Another success factor is that the local government actively
promoted the Micro Investment Crowdfunding platform, which
local small businesses were not familiar with. Micro Investment
Crowdfunding mechanism requires a certain financial knowledge
and it is important for local governments to fill this information
gap to promote the best use of Micro Investment Crowdfunding.
From the Micro Investment Crowdfunding platform’s point of viewalso, the local government is often a key partner to access funding
opportunities among the local small businesses.

19Chapter 2: A case study of Super-long-term project
supported by Micro Investment Crowdfunding (N village)
N village in Okayama Prefecture launched a “100-Year Forests Initiative” in2008 aiming to revive the forestry as a key industry of the village. However,it was very difficult for the financial institutions to finance this project,
given the project implementation period was up to 50 years. As a solution,
the project counted on fundraising through Micro Investment
Crowdfunding.

2.1 Overview of N Village
N village is a small village with a population of approx. 1,500, located at thenortheastern end of Okayama Prefecture.
95% of the village is forested and 85% of the forest area is plantations ofcedar or cypress.
FIGURE 4 OVERVIEW OF N VILLAGE
Population: 1,495 (As of Sep. 1,2016)
Number of households: 596
Area: 57.97 km2 (95% forested)
Annual rainfall: approx. 2,000mm
Major industries: Forestry, Agriculture, Tourism

OkayamaPrefecture

Budget of the village: approx. 1.95 billion yen [0.02 billion USD] (2016)(Source: N Village statistics)

POPULATION OF N VILLAGE

2500
2000
1500
1000
500
0

1970 1975 1980 1985 1990 1995 2000 2005 2010

(Source: National census (Statistics Bureau))

20Thanks to the forestry industry, the Village had flourished during post-WWII
Japan. However, as in many rural areas of Japan, the population gradually started
declining from the 1970s mainly due to the outflow of young people seeking forboth academic and employment opportunities in the metropolitan areas. The
population of the village once exceeded 2,000 in the end of 1970s, and currently
it is about 1,500. According to the population forecast by the Ministry of Health,
Labor and Welfare, this figure is envisioned to drop to 1,000 by 2040, with anelderly rate of 65%.
In response to a residents’ poll in 2004, N Village announced its decision to leave
the Absorption Conference3 where six municipalities were discussing a potential
merger into a single municipality, “M City”. The merger of municipalities was ongoing under a national policy of the time, given the outstanding trend of
shrinking and aging local population. However, N Village ventured to withdraw
itself from the planned merger and decided to remain as it was. Since thedecision not to merge, the villagers started striving to shape the direction of theirvillage in all seriousness and have it remained “independent” in a sustainable
manner.

2.2 Overview of “100-Year Forests Initiative”
Background
After WWII, the Government of Japan actively took a lead to plant
coniferous trees, including cypress and pursued an “afforestation policy” tomeet increasing demand for wood in the country’s reconstruction.
Specifically, there was a strong demand for fast-growing cypress trees,
which are easily used for construction materials. In this regard, cypress
trees were planted in N Village in the 1950s and 60s.
Around 1965, N village started selling off municipal forests to the local residents.
Consequently, the mountains ended up in the hands of multiple owners, withthe land segmented. The wood self-sufficiency rate of Japan has consistently
declined after liberalizing timber imports in 1960; from 86.7% in 1960 to 19.2% in
1999. The Japanese forest industry has been hard hit by cheap wood imported
from abroad, and the forestry industry of N village also shrank drastically.

3

The members were N village, H village, M town in A county and O, S, A and K towns of K county. M City was newly
formed in March 2005, with the merger of towns and villages except for N village.

21

FIGURE 5 TIMBER SUPPLY AND SELF-SUFFICIENCY RATETIMBER SOURCES (DOMESTIC/ IMPORTED)

120
86.7

100
90

100

70

80

60
50

60

40

45.0
31.7

40

26.4

30
20.5

19.2

10

20
0

20

domestic sorced timber (%)

Timber supply (mil.m3)

80

60

70

80

Domestic

90
Imported

95

99

0

%Domestic(Source: Japan Tropical Forest Action Network)

Cypress trees planted in the village in the 1950s and 60s were ready for logging
after more than half a century. However, the forests had not been properly
maintained and the timber resources were damaged to some extent, so thevillage Mayor took a strong initiative, to revive.
In 2007, the N Village Office (hereinafter called “Village Office”) established the“Employment Strategy Council” that was assisted by subsidies from the Ministryof Health, Labor and Welfare. In the following year, the “100-Year Forests
Initiative” was announced at the council and the village started to campaign forpeople to move to N Village from the metropolitan areas and other cities.
Subsequently, the “100-Year Forests Initiative” was actually launched when a“Memorandum of Understanding on forest management and operation in N
village” (hereinafter “MOU”) was signed by the three parties in 2009;N village, the
M City-east Forestry Cooperative (hereinafter called “Forestry Cooperative”) andT-corporation Inc., a private forestry developer.4 The main points specified in the
MOU are as follows:
4

t-corporation Inc. is a private company, which provides various services such as forest operation management,
marketing and finance to public and private sector clients.

22

1

N village receives administrative right of the segmented forest land
owned by multiple residents and entrusts the forest operation and thesales management to T-corporation Inc.

2

T-corporation Inc. obtains necessary finance for the forest operation andsales management on fund collected via Micro Investment
Crowdfunding., specifically for acquiring such items as high-spec forestry
machines etc.
The distribution agreement between N village and T-corporation Inc.
stipulates the following:T-corporation Inc. provides business support for Forestry
Cooperatives, to make the effective forest operation andmaintenance.
T-corporation Inc. leases high-spec forestry machines etc. toForestry Cooperatives.
The Forestry Cooperative offers business to support T-corporation
Inc. to make the sales management more effective.
The Forestry Cooperative cooperates with T-corporation Inc. with aview to the forest product development to be rewarded to micro
investors.

Description of the project
The “100-Year Forests Initiative” in N village is featured by the “Consolidation” offorests, “Rationalization” of the forest operation and the “High-value-adding” ofmarketing and processing. Above all, the driver of this project is stakeholders’motivation to realize co-existence and co-prosperity with this sustainable value
chain, which forms a pleasant eco-system for the local residents as well.
The main competitive disadvantage of the Japanese forest industry is the lack ofvalue chain; forest operation → transportation → wood processing → sales,
which is essential to have the whole forest industry highly value-added.
To rebuild a sustainable value chain of forestry in N village, the following
issues need to be addressed:oo

Low profitability caused by the excessive fragmentation of ownership(lack of economies of scale)High dependence on conventional inefficient forestry machines in the23

oforest operation and maintenance.
Lack of negotiation capability in the production side, the transaction
costs were low and was not be differentiated.

These issues are currently being solved with the cooperation between thefollowing three parties: the Village Office, Forestry Cooperative and N School ofForest Co., Ltd.5 (hereinafter called “School of Forest” - firstly participated as Tcorporation Inc.”) . They cooperate one another to create new style forestry withhigh added value.

FIGURE 6 VALUE CHAIN OF THE 100-YEAR FORESTS INITIATIVE

N Village Oﬁcce

FOREST
MAINTENANCEFINAL

CONSOLIDATIONFOREST

PROCESSING(CRAFT-WORK)

School of Forest(T-corporation)

HIGH VALUEADDING

100-YEARFORESTINITIATIVEOPERATIONRATIONALIZATION

M city north Forestry
coperative

SPORTING
MARKETING/PRIMARY
PROCESSING(Created by author)

The Village Office is trying to acknowledge the vision “100-Year Forests Initiative”
amongst all the forest owners and persuading to conclude a long-term (10-year)
stewardship consignment contract with each one by one, to ensure their forest
to be consolidated. The Forestry Cooperative oversees the operation andmaintenance of forest including the construction of strip roads by using highspec forestry equipment leased by T-corporation Inc. Instead of the timber to be
sold in the raw wood market, the School of Forest oversees marketing on a newsales channel for the timber and developing new products while supporting theforest operation.
5

A company independent from t-corporation Inc. in the purpose of specific project which is after-mentioned.

24Each stakeholder respectively tries to make as much profit as possible. Since the“100-Year Forests Initiative” was launched, they encountered many difficulties in
improving an eco-system to a solid, newly created value chain. For example,
many land owners doubted and had uncooperative attitudes toward this project
shortly after the inauguration. Quite a few people showed antipathy toward Tcorporation Inc., too. The Village Office staff members contacted every single
land owner, provided detailed explanations, and won their consent step by step.
Since the inauguration of this project seven years ago, the three parties havecontinuously held a monthly discussion to jointly tackle various issues.
Business model
The thinned timber logged in the contracted forest area of the N village is oncetransported to the timber yard of the Forestry Cooperative, then processed andsorted into grades “A”, “B” or “C” by the quality and shape of the wood before
they are finally sold to either house-builders or construction material
manufacturers through sales channels of the School of Forest.
They also buy some timber so that craftsmen can make the wooden furniture fordirect marketing. 50% of the sales proceed from the timber is pooled in a special
account on the Village Office to manage the “100-Year Forests Initiative”, while
the remaining 50% is paid out to the land owners. The forest operation costconsignment toward the Forestry Cooperative is paid from pooled fund in thespecial account, adding some national subsidies and/or the general account of
the Village Office.
Below is a diagram of the business model of the “100-Year Forests Initiative.

25

FIGURE 7 BUSINESS MODEL OF THE “100-YEAR FORESTS INITIATIVE”

Raw Timber (1m2)¥ 9000 (78.7 USD)

Transportation-¥ 1000 (8.6 USD)

Storage charge-¥ 400 (3.4 USD)

Sales commission-¥ 400 (3.4 USD)Sporting charge-¥ 1200 (10.4 USD)

National Forest Insurance-¥ 1000 (8.6 USD)SELLING PRICE-¥ 5000 (43.4 USD)

2.3 Fundraising SummaryThanks to the “100-Year Forests Initiative”, N village has created a sustainableeco-system where stakeholders can enjoy a win-win relationship. The Micro
Investment Crowdfunding of MS played an important role in realizing this ecosystem.
T-corporation Inc. launched fund appeals twice through the Micro Investment
Crowdfunding platform of MS to raise approx. 50 million JPY (0.43 million USD).

26

The fund was then allocated to purchase high-spec forestry equipment for more
efficient forest operation and maintenance.
The basic information of T-corporation Inc. is stated below:
TABLE 3 BASIC INFORMATION OF T-CORPORATION INC.
COMPANY NAME

T-corporation Inc.
(Parent company of N village/School of Forest Co., Ltd.)FOUNDED

February 2, 2009

BUSINESS LINEUP

BUSINESS SCALE

Forest operation management
Production, processing and sales of forest assets (wood)
Regional branding, marketing, ﬁnance
Planning and operation of human resource development
Revenue for Fiscal 201532,000,000 JPY (278,261 USD)
Capital 77,700,000 JPY (675,652 USD)
Number of employees Approx. 5

T-corporation Inc. was established as a consulting firm for forestry in 2009.
Originally T-corporation Inc. was a subsidiary of A-corporation Co., Ltd., which isalso a consulting firm, providing environmental solutions and effective use ofunutilized resources. 20% of T-corporation’s shares are owned by more than 10
individuals and the remaining are owned by the management of T-corporation
Inc. along with the progress of its business. T-corporation Inc.’s the sales amountas of FY2015 was mostly from advisory fees. When T-corporation Inc. develops a
new forestry-related business, a new vehicle called the “fund”, which is
independent from T-corporation Inc. is established. T-corporation Inc.’smanagement system is similar to the one of non-profit organizations. Therefore,
it is considered that there is no large fixed asset in the balance sheet of Tcorporation Inc. and the personnel expenses mainly account its operating
expenses. Moreover, borrowings are made through established fund on Micro
Investment Crowdfunding for new projects, so T-corporation Inc.’s borrowing islimited.
T-corporation Inc. considers unused forest resources as local assets, and theytake necessary measures to improve efficiency and profitability for thecommercialization of the forestry industry. Equipment used in the project andrental fee expenses are covered by the stable sales revenue of timber andtimber processed goods, therefore creditworthiness of T-corporation Inc. does
not have any influence on fundraising.

Financial Structure
T-corporation Inc. purchases high-spec forestry equipment with Micro
Investment Crowdfunding fund and concludes a contract with the Forestry

27

Cooperative to lease the equipment. In addition, T-corporation Inc. receives arental fee from the Forest Cooperative and sales support fee from the Village
Office, and pays an annual financial return (refer to the “Summary of fund”
below) that is calculated based on the preset formula in the anonymous
partnership contract of the Micro Investment Crowdfunding.
Main purpose of the fund was to purchase the machinery for forestry andleasing it to the Forest cooperatives. Forestry is the core industry of the village
with established sales channels that has kept the business sustainable.
Therefore, as long as the forestry continues, income from leased machinery also
continuously will be yielded and a stable source of financial returns will be kept.
In addition, T-corporation Inc. is tackling to widen sales channels for more
profitable business operations. The village intensively works in this project inorder to lead the maximum and effective use of the forest resource, as well as tosecure the expected profitability of the fund.
FIGURE 8 FINANCIAL STRUCTURE OF 100-YEAR FORESTS INITIATIVE
Sales proceeds (1/2)

Forest management fee

M City North
Foresty
Cooperative

Sales
proceeds

Sales proceeds (1/2)

Rentalequipment

School ofForestSales
proceeds

TimberWood craft

Dividend
from thepoodindfund

Sales suport

Rental fee
TimberN Village Oﬃce

Land
OwnersSales
suport fee

T- coporation

Fund
Investment Dividend management comission
services

Flow of funds
Flow of goods and services

Buyer/
ConsumerMusic Securities
Inc.

Investment

Financial
returnIndividual
Investors(Created by author)

28

A summary of the fund is as shown below:
TABLE 4 SUMMARY OF N VILLAGE COMMON FOREST FUND
FUND NAME

N Village Common Forest Fund (2009/2010)MAXIMUM AMOUNT OFSTAKES COLLECTED

49,400,000 JPY (998 units) (0.43 million USD)First term : 25,200,000 JPY (504 units)(0.22 million USD)
Second term: 24,200,000 JPY (484 units)(0.21 million USD)MINIMUM CONTRIBUTION(PER UNIT)

51,000 JPY (443 USD)
(Capital contribution: 50,000 JPY (435USD) / Handling fee:
1,000JPY(8.70USD))PERIOD OF FUNDOPERATIONFirst term: July 1, 2009 - June 30, 2019
Second term: January 1, 2011 - June 30, 2019

OPERATION PLAN

FUND APPLICATION(INVESTMENT TARGET)FINANCIAL RETURNSFirst term:
Revenue from forestry machines lease for 10 years: 90 million JPY(0.78 million USD)
Revenue from sales support for 10 years: gross timber sales 10%+ ﬁnancial return from the pooling fund*Second term:
Revenue from rental forestry machines for 8 years and 6 months:
53.062 million JPY (0.46 million USD)
Revenue from sales support for 8 years and 6 months: gross timbersales 10% + ﬁnancial return from the pooling fund** If there is a surplus of the pooling fund controlled by the VillageOﬃce, after all the necessary expenses have been paid, the surplus
will be shared by all landowners and T-corporation Inc.
Purchases of high-spec forestry equipment.
Forest Stewardship Council (FSC) Certiﬁcation: proof of sustainable
forest management. It could also upgrade the quality and added
value of the wood.
* Costs of acquiring certiﬁcate etc.
First period̓Before the break-even poinẗ́*
Revenue from rental forestry machines 80% + Revenue fromsales support 50%
̓After the break-even poinẗ́*
Revenue from rental forestry machines 80% + Revenue fromsales support 23%* Break-even point̴Revenue from rental forestry machines 90
million JPY, Revenue from sales support 60 million JPY (0.52
million USD)
Second period̓Before the break-even poinẗ́*
Revenue from rental forestry machines 80% + Revenue fromsales support 50%
̓After the break-even poinẗ́*
Revenue from rental forestry machines 80% + Revenue fromsales support 23%* Break-even point̴Revenue from rental forestry machines
53,062,800 JPY,
Revenue from sales support 13,899,520 JPY

SPECIAL BENEFIT FOR
INVESTORS

A plate with the stakeholders list to be placed in the facility of the
School of Forest, Nvillage
Free stay at the house of wood (show house) in Nvillage,Free tickets
for hot spring bathing
Discounts upon using the facilities of the N forest village promotion
agency

PRINCIPAL GUARANTEE

No

29

Benefits to stakeholders
The stakeholders can gain the following benefit under this project:
1

N Village Office
Increasing the forest value as public assets.
Forests are effectively managed with the latest machinery to
produce a better quality of timber and considered as village’s
valuable public assets to sustain its production basis but alsofunction as disaster prevention.
Community revitalization / Job creation.
In 2004, N village chose to remain as an independent village andwas not merged with other villages. Under the view of the “100Year Forests Initiative” in 2008, many new ideas for the forests andforestry have been incubated and implemented one after another.
Sales of forestry and related activities amounting 100 million JPY(0.90 million USD), and reached 800 million JPY (6.96 million USD)
under sales expansion based on diversification of products thatbroaden a sales channel.
This means more job opportunities and the resulting success interms of revitalizing the community economy and creating jobs. In
fact, the village has already created 130 new jobs to date (2016).
Although the village is now prospering with this project, theongoing dwindling and aging population is still obvious issue to beaddressed, thus it is an extremely worthwhile scheme for N village.

2

Forest Owners (Local residents)
Boost properties’ (forests) economic value.
Some forest owners have simply received the land by inheritance,
whereas the others have already moved out from the village. As
each land plot that they own is segmented, many owners founddifficulties of maintenance and effective use, and also wished toenhance its economic value. The “100-Year Forests Initiative”
supported to exploit those idle assets by adding a value, created aproperly managed forest that produces high quality timber.

Rebuild a relationship within the village.
Many of villages in local areas suffering from depopulation andaging also suffer from tenuous relationships amongst local30

residents. The “100-Year Forests Initiative” rebuilt a relationshipamongst local residents, by bundling people’s heart aside from theeconomic linkage and cultivated affection for their village.
3

Forest cooperative
Revive pride in the forest industry.
The number of forest industry workers is declining nationwide.
One of the reasons is linked to the image of “muddy, heavy anddangerous” works. In N village, however, a positive vision of the“100-Year Forests Initiative” removed that established image andpeople happened to re-evaluate forestry work. The Forestry
Cooperative succeeded at raising the status of forest industry
workers by showcasing the “100-Year Forests Initiative” for many
people who visit the village to study. It has also motivated staff
members in the Forestry Cooperative and they revive “pride” intheir work, having a major part to play in an important project for
their village.

Increase in job opportunity by accelerating an effective forest
operation and maintenance.
Consolidation of the segmented forest lands boosted theimplementation of the optimized operation for the Forestry
Cooperative and increased a capability of skilled forestry workers.
Thus, the Forestry Cooperative accomplished to implement more
active and rationalized forest operation. In 2016, 26 staff members
are working at the Northern branch of the Forestry Cooperative inthe village, 20 of whom in the forests (6 in the office). This numberof personnel is relatively high compared to the neighboring
Forestry Cooperatives.

4

School of Forest (T-corporation Inc.)
Acquiring empathy for the project.
The “Common Forest Fund” was the first project to support
forests/forestry with Micro Investment Crowdfunding scheme inJapan which T-corporation Inc., succeeded. T-corporation Inc. wasestablished in February 2009 by its parent company,
Acorporation Co., Ltd.., shortly before the “Common Forest Fund”
was created. In general, a newly founded small business, such as
T-corporation Inc. at that time, confronts a difficulty in obtaining

31

significant amount money from either the financial market or
financial institutions due to a lack of insufficient credit history,
unless they have a guarantee supplied by a third party with
sufficient financial capacity.
The concept of the “100-Year Forests Initiative” became well-known
among numerous investors, and even without guarantee, Tcorporation Inc. successfully raised the fund in purchasing theequipment through Micro Investment Crowdfunding.
Added the market value of wooden products “made in N village”
Investors of the “100-Year Forests Initiative” had an emotional
attachment to wooden handicrafts produced in N village. These art
crafts marked completely different value from the othercommercialized wooden handicrafts. This market value enhances
the marketability of those products made in N village.

Securing new human resources.
It is further expected that the School of Forest promotes an inflow
of young generations and highly-motivated personnel by offering awork in the design and production field that can add value for themarket of N village.

2.4 Observations on Micro Investment Crowdfunding
The “100-Year Forests Initiative” was launched in 2008 and has been successful
to date (2016), thanks to the N Village “Common Forest Fund”.
The following were key findings for the successful fundraising:
Investors’ “empathy” to the “100-Year Forests Initiative”
Innumerable local villages in Japan, like N village, suffer from depopulation andaging society, but it must be difficult for such villages to organize and implementa large-scale and comprehensive countermeasure like the “100-Year Forests
Initiative”. The investors of “Common Forest Fund” feel strong empathy to theconcept of “100-Year Forests Initiative”, in the sense that the challenge to revive
the community by commercializing the forest resources as well as effectively
maintaining and protecting them. It was reported6 that 76% of the investors who
invested in the fund are male and 71% of the total investors live in urban areas
6“Furusato toshi no Subete” Akai, Komatsu, matsuo, (2013)32

like Tokyo and Osaka. Those investors visit N village to see how the invested
money is utilized. It seems like a large majority of investors did not expect highfinancial return, but they give importance to be involved and deal withenvironmental issues through their investment in the project. Their empathy
should be highlighted in this specific case, as these investors take high priority inthe level of empathy that they feel when selecting their investment on the Micro
Investment Crowdfunding platform. In this particular case, increase in theawareness of environmental issues that was triggered by the Kyoto protocol(1997), highly relates to the investor’s interests.
As the N village decided to leave the Absorption Conference and stay
independent, a sense of crisis might have positively cohered the whole policy
and philosophy of local residents. They realized that they urgently needed asustainable economic development plan to stay independent, and this urged
them to focus on an asset, the forest industry. This clear story made an appeal tothe individual investors who have a high environmental awareness and throughinvesting in the fund, they share the feeling of keeping the forest together for the
next 50 years.

Well-designed ProjectN- village, together with T-corporation Inc., spent considerable time preparing
and addressing some predicted issues for the “100-Year Forests Initiative” as well
as for the “Common Forest Fund ”. The project was the first trial of funding forforestry through Micro Investment Crowdfunding and to have a sustainablevalue chain was the first requisite for success, and to guarantee sufficientprofitability. As a result, the two funds were successfully raised in the expectedperiod.
The key findings of this case are as follows:
Concept of the optimizing forest management as a valuable
resource of the village fits with the times.
N village chose to develop forestry as its main industry to sustain
its society. The forest, trees planted in the 1950s and 60s is the
only resource that the village is capable to add value in terms of
successful revitalization of local economy. The concept had
enough potential to grab the attention of people who have a highenvironmental awareness, consequently, generated and cultivatedtheir empathy to invest.

Cooperation to create a sustainable value chain as a whole.

33

The strong initiative by the village office especially that of theMayer, and the well-designed project led three stakeholders toeffectively cooperate to build a sustainable value chain rather thanseeking for each ones benefit but for empathy for the initiative.
Compatibility between Micro Investment Crowdfunding and along-term project.
“100-Year Forests Initiative” is a long-term project that continues
for more than 50 years. Micro Investment Crowdfunding enables
the project to be economically sustainable by providing a longterm finance for T-corporation Inc., to acquire the importantequipment that sustains forest maintenance, which is the main
activity for this project.
Despite T-corporation Inc. being a small consulting firm, it planned
to raise 49,400,000 JPY (0.43 million USD) on Micro Investment
Crowdfunding platform to purchase high-spec forestry machines.
In general, financial institutions do not provide a large amount ofloan for a small-scaled company like T-corporation Inc., with a debt
to sales ratio of more than 1.57.
As T-corporation Inc. needed to raise the fund in the same year of
their establishment in 2009, there were no track record in banks
and was not able to obtain a loan. Moreover, in spite that they had
a guarantee supplied by the third party, A-corporation, theirparent company with enough financial capacity, it was also
insufficient.

However, by fulfilling “empathy” of investors through the concept of “100-Year
Forests Initiative”, T-corporation Inc. successfully raised the targeted amount for
10 years funds. In addition to empathy, a high possibility of sustainable businessplan that may guarantee sufficient cash for constant distribution of the financial
return on the fund maturity, which is based on the value chain created by the“100-Year Forests Initiative” was also highly evaluated by the investors.

7

In general, it is preferable that the debt to sales ratio is less than 30%.

34

Chapter 3: A case study of Micro Investment Crowdfunding
for the reconstruction of MSMEs’ business after theearthquake.
This is the case of a traditional Japanese style hotel in A City, which is raising afund through a Micro Investment Crowdfunding platform (as of Dec 2016). It
aims at reconstruction from the serious damage caused by the criticalearthquake which hit Kumamoto Prefecture in April 2016. A distinctive feature ofthis particular Micro Investment Crowdfunding mechanism is its unit
composition of each fund: “half investment and half donation”*. [*See 3-3)]

3.1 Overview of Kumamoto Prefecture8
Kumamoto Prefecture is located in central Kyushu Island, neighboring Fukuoka,
Ohita, Miyazaki and Kagoshima Prefectures. Kumamoto Prefecture’s western
coastline faces Ariake Sea.
Kumamoto Prefecture has a population of approximately 1.8 million, however,trends of both Population and Employed Population have been gradually
decreasing during the last 10 years.
FIGURE 9 OVERVIEW OF KUMAMOTO PREFECTURE

POPULATION TRANSITION IN KUMAMOTO PREFECTURE
2,000,000<Kumamoto Prefecture>
Land Area: 7.409km2

1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
Population

200,000
0

1995

2000

2005

2010

Employed
population(Source: National Census 2010)8

Kumamoto Prefecture Web site（http://www.pref.kumamoto.jp/Default.aspx）

35

Grossprefectural

product(GPP)

ofCOMPOSITION OF
Kumamoto Prefecture is USD 52,205
SECTOR IN KUMAMOTO million, ranked 25th among 47 prefectures
PREFECTURE
in Japan. The tertiary sector accounts for
3%
25%
72%

PrimarysectorSecondarysectorTertiary
sector

72% of the GPP. Main industries in tertiary
sector are amusement service industry,food and drink service industry, etc. The
secondary sector accounts for 25% and it iscomprisedofsemiconductor
manufacturing, transportation equipment
manufacturing, food processing and so on.
Gross Product in Kumamoto Prefecture ineach sector is relatively stable. Consideringvarious factors, the economy in Kumamoto
basically was kept in good condition
between 2009 and 2013, but turned into asteep recession when the huge earthquake
struck Kumamoto Prefecture and damagedsocial overhead capitals in 2016.

3.2 The 2016 Kumamoto earthquake9
On the 14th of April 2016, an earthquake with a magnitude of 6.5 centeredin the Kumamoto region occurred and was immediately followed by anaftershock with a magnitude of 7.3, which caused further damage in the
Kumamoto and other regions. In addition to the series of the earthquakes,
a heavy rain caused a massive landslide in the region. As of December 8th,
2016, 151 people have passed away and 2,337 people have been injured.
In the affected areas, life-line infrastructure, production facilities and equipmentthat sustained the local economy and life of the local people were extensively
damaged. Estimated amount of damage to the social overhead capitals(buildings, roads, supply of electricity, water and gas) in Kumamoto and Ohita
Prefecture is around JPY 40,000 million (approximately USD 21,739).

9

Trial Calculation of influence on Kumamoto Earthquake in 2016, Cabinet Office
http://www5.cao.go.jp/keizai3/kumamotoshisan/index.html

36

TABLE 5 ESTIMATED AMOUNT OF DAMAGES TO SOCIAL OVERHEAD CAPITALS IN KUMAMOTOAND OHITA PREFECTURE

ITEM

ESTIMATE OF DAMAGE(MILLION USD)

Buildings (house, oﬃce building, factory and etc.)

13,913 ~ 26,957

Social infrastructure (roads, ports, airports and etc.)

3,478 ~ 6,087

Electricity, water, and gas supply

870

Other social overhead capital

3,478 ~ 6,087

TOTAL AMOUNT

21,739 ~ 40,000(Source: Estimation of impact from Kumamoto Earthquake in 2016, Cabinet Office)TABLE 6 IMPACT OF KUMAMOTO EARTHQUAKE ON THE KYUSHU ECONOMY (UP TO FY2016)

CONTENTSESTIMATE OF DAMAGE(MILLION USD)

Stagnation of producing activity due to the damage ofinfrastructure.

200 ~ 557

Stagnation of producing activity due to the damage ofsupply chain.

104 ~ 340

Decrease of consumption due to a downturn in consumer
sentiment.

1,652 ~ 2,000

Downturn of touristic consumption due to the decline of
tourists from out of Kyushu.

313

TOTAL AMOUNT2,270 ~ 3,209(Source: Trial Calculation of impact on Kumamoto Earthquake in 2016, Cabinet Office)3.3 Overview of “Kumamoto Earthquake Support Fund”
1

Background: Furusato Investment
In 2014, the Government of Japan launched Furusato investment(“investment in hometown”), a new initiative for stimulating andrevitalizing local economies. The Japanese cabinet office organized aliaison conference involving the local governments, financial institutions,
crowdfunding platform operators, relevant associations, advisors, andother relevant ministries and agencies to discuss how to promote
Furusato investment by making the best use of crowdfunding.

37

Following the strong initiative taken by the Government of Japan, theKumamoto Prefectural Government established a conference to promote
Furusato investment in Kumamoto, with a focus on following activities; (i)providing and sharing information through the regional network, (ii)
Raising awareness of Micro Investment Crowdfunding scheme, and (iii)
other necessary activities to achieve its purpose. MS was involved in thisconference to promote a wide use of Micro Investment Crowdfunding. It
is thanks to this conference effort that some MSMEs successfully raised
the fund via the Furusato investment scheme, and the conference iscontinuously trying to disseminate this financial assistance scheme forthe local economy development. It was actually shortly after theestablishment of the conference that the earthquake happened.

2

Background: Financial Needs for Reconstruction
Right after the 2016 Kumamoto earthquake hit, the central and local
governments, some governmental policy-based financial institutions (e.g.
Development Bank of Japan (DBJ), Regional Economy Vitalization
Corporation of Japan (REVIC)) and local financial institutions started tosupport the rehabilitation in Kumamoto, utilizing the experiences andlessons learned from the Great East Japan earthquake in 2011. As aresult, the rehabilitation made significant progress.
On the other hand, the economy in the Kumamoto region has not been
fully recovered to the level prior to the earthquake because of certain
stagnation in the manufacturing sector and downturn in the tourism
sector, etc. One of the bottlenecks in the reconstruction of its local
economic activity is the constrains of the public financial support; publicfinancial support is limited to pure rehabilitation and/or reconstruction
and not for the concept of “build back better”.

3

Cooperation with relevant stakeholders -Lessons learnt from theGreat East Japan Earthquake .
During the aftermath of Great East Japan Earthquake which struck thenortheast region of Japan in 2011, the Government of Japan had toaddress the rehabilitation of affected areas as well as the accident inFukushima nuclear power plant. A complex and unprecedented crisis
prevented from a smooth governmental support operation, and there
was unfortunately a critical delay in public financial assistance to MSMEs.
Meanwhile, crowdfunding by individuals came in to fill this gap infinancing. MS played an important role as one of the major crowdfunding
platform operators that channeled MSME financing, and started a unique38

Micro Investment Crowdfunding consisting of half investment and half
donation. Based on this working experience in the Great East Japan
Earthquake, MS found that it is very important and necessary to
implement fundraising in coordination with local stakeholders like local
government even in the chaotic situation shortly after the earthquake,
which can also reduce MS’s burden in the implementation. Given thisprior experience, MS agreed to the idea of Kumamoto prefectural
government to utilize Micro Investment Crowdfunding for the
rehabilitation and reconstruction of local MSMEs in Kumamoto
Prefecture.
Consequently, the prefectural government, Kumamoto University, andChamber of Commerce and Industry of Kumamoto (herein after “CCI
Kumamoto”) joined to collaborate for the Kumamoto Earthquake Support
Fund, one of Micro Investment Crowdfunding projects to be funded by
MS via Securite—MS’s online platform— for the local enterprises seeking
fundraising.
A basic role of the prefectural government of Kumamoto is not only
introducing Securite to local MSMEs, but also subsidizing a part of initialand administrative costs that Securite’s fund recipients (local MSMEs)
need to pay to MS.
Compared to the collaborative framework that MS had alreadyestablished with other municipalities so far, the involvement of theacademic institution, Kumamoto University in this case, is considereddifferent from others as one of its unique characteristics. Kumamoto
University is expected to promoting the understanding and use of Micro
Investment Crowdfunding as well as stimulating and cultivating
entrepreneurship of students in relation with local innovative MSMEs.
Kumamoto University can be an important stakeholder adding value inthis sense. Future entrepreneurs of MSMEs planning to raise funds fortheir start-up, on a Micro Investment Crowdfunding may be identified
through joint working with Kumamoto University.
The CCI Kumamoto also plays a role to introduce MS to the local MSMEs.
As CCI has a strong connection with local communities and is responsible
for supporting local enterprises in a hands-on style, CCI Kumamoto is also
capable to find hidden financial needs of local potential MSMEs.
Since the local financial institutions in Kumamoto had established theirown investment fund for reconstruction as well, they do not need toparticipate in this scheme, for instance, The Higo Bank, Ltd. established
Kumamoto Disaster Reconstruction Fund in cooperation with the otherregional banks. Local financial market is well-developed in Kumamoto

39

Prefecture; dominated by the several core regional banks such as theHigo Bank, Ltd. and the Kumamoto Bank, Ltd., those banks could
efficiently identify financial needs of local MSMEs. It did not take so longto establish their own funds for recovery right after the earthquake.

4

Structure of the “Kumamoto Earthquake Support Fund” (“halfinvestment and half donation”).
A basic structure of a fund is the same as other MS’s Micro Investment
Crowdfunding. However, the most unique feature of this case is themixed form of money between donation and investment. This financial
structure is the same as the Great East Japan Earthquake Fund created by
MS in 2011. Needless to say, the biggest advantage for the MSMEs in thisscheme is the smaller financial burden which is made possible by the mix
with donations.

FIGURE 10 <NUMERICAL EXAMPLE> CASH FLOW OF “A HALF INVESTMENT AND A HALF
DONATION FUND”
1 5,000 YEN(unit: Yen)

1 5,000 YEN

INVESTORS
Total -5,800(Expenditure)
1 Investment -5,000
1 Donation -5,000
2 Commission -800
(Revenue)
3 Dividend +5,000

MS
2 800 YEN

Commission

Financial
returnDonation
Investment

SMALL
BUSINESSES
Total+5,000(Revenue)
2 Commission+800(Revenue)
1 Donation +5,000
1 Investment +5,000(Expenditure)
3 Dividend +5,000

3 5,000 YEN

DONATIONINVESTMENT

3.4 “Star‐Studded Sky” Roof Top Bar Fund by S hotel, a
traditional Japanese style hotel in A City, Kumamoto
Prefecture.
1

Summary of A City 1011
‘A’ City is located in the northeast of Kumamoto Prefecture, with one of
the world's largest caldera, a single volcano with five peaks. It is relatively
cool throughout a year with a pluvial climate, an annual averagetemperature of 13℃ and average rainfall is about 3,000mm. The city has a

10
11

A City website (http://www.city.aso.kumamoto.jp/municipal/profile/outline/)
A City Statistics（http://www.city.aso.kumamoto.jp/files/uploads/2014/02/toukei_h28.pdf）

40

population of 27,018 people in 2015, but the total and industrial
population is slightly declining year by year.
FIGURE 11 OVERVIEW OF A CITY

POPULATION TRANSITION IN A CITY
35,00030,00025,00020,00015,00010,000Population

5,000
0

1995

2000

2005

2010

Employed
population(Source: A City Statistics)

The gross municipal product (GMP) of A City is USD 935 million and thesecondary sector, whose main industries are rubber products, electricalequipment, and chemical products, accounts for 37% of GMP, the tertiary sector
with tourism of A caldera area accounts for 56%.
FIGURE 12 EMPLOYED POPULATION IN A CITYEMPLOYED POPULATION BY INDUSTRIAL SECTOR IN A CITY
17%
22%
61%

Primary sector

Secondary sector

Tertiary sector(Source: A City Statistics)

Gross municipal product during the last 5 years since 2009 is on an increasing
trend thanks to the rise of the secondary sector, however, the tertiary sector
stagnates due to a decline in tourism caused by the heavy rain in 2014. Many

41

tourists considered that the affected area was still under recovery from thedamage and tended to cancel their visit.
FIGURE 13 ECONOMY OF A CITYTOTAL GROSS MUNICIPAL PRODUCTUSD mil
1,000
900
800
700
600
500
400
300
200
100
0

2009

2010

2011

2012

2013

Gross municipal product

GROSS MUNICIPAL PRODUCT BY SECTOR IN A CITY
USD mil
600
500
400
300
200
100
0

2009

2010

Primary sector

2011
Secondary sector

2012

2013

Tertiary sector

NUMBER OF TOURISTS IN A CITYPEOPLE
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0

2010

2011

2012

2013

2014

(Source: A City Statistics)

42

2

Impacts from the Earthquake on A City
Regarding the damages caused by the earthquake, particularly in A City,
the seismic center, was heavily ravaged. For example, the damages onbasic infrastructures in the city are shown in the tables below.

TABLE 7 ESTIMATED DAMAGES ON BASIC INFRASTRUCTURES IN A CITY (AS OF OCT 2016)

NUMBERAMOUNT

ROADS

847

USD 337mil

RIVER

190

USD 83mil

BRIDGE57

USD 219mil

EROSION CONTROL FACILITY

19

USD 16mil

ANTI-LANDSLIDE WORK1

USD 0.1mil

SEWERAGE15

USD 6mil

TOTAL-

USD 661mil(Source: Kumamoto Prefecture website)

Compared to the annual GMP, the estimated damage on basic infrastructures
accounts for almost 70%. Regarding the human damages, the number of deaths
was 24 and 318 suffered from injuries. The earthquake did damages toagricultural sector which was totally equivalent to 407 million USD and to theforest industry which amounted 312 million USD. Furthermore, what is worse isthat a number of touristic facilities has been in work cessation due to thedestruction and a large majority of planned tourism tours has been canceled.
Particularly, since one of the most vital economic resources to the city is tourism
industry in the tertiary sector, these damages and cancellations negatively
influenced the whole economy of Kumamoto Prefecture.
The affliction happened in A City, the value chains in the tertiary sector and thesecondary sector had been partially disrupted. Several arterial transportation
networks are still partially paralyzed. To make the matter worse, the volcano
erupted and volcanic alert level was raised from 2 to 3 since October 2016 andhas not been lifted. Consequently, the number of tourists is continuously
declining.

43

3

Background of “ Star‐ Studded Sky” Roof Top Bar Fund
S hotel, a Japanese traditional hotel which suffered from damages by theearthquake, is trying to raise a fund to create the hotel’s value-addition
after the reconstruction of damaged buildings, which is to create a new
facility to make use of the roof top to attract foreign tourists.
History of S hotel
S hotel was opened in 1963. Up to 2016, the hotel is well known fora natural hot spring bath which has a history of over 100 years andsurrounded by seasonally blooming trees and flowers andmagnificent scenery of the mountains.
In 2012, there were only 350 tourists from abroad, but the number
has been increasing to around 1,000 in 2013 and respectively
reached 2,402 in 2014. Together with this increase, the hotel was
highly appreciated with high satisfaction reviews from the foreign
tourists on several travel websites such as Tripadvisor. Moreover,they won the “2014 Best Guest Review Award” from Booking.com.
The hotel accommodated 3,205 of foreign inbound tourists and it
accounts for 25% out of total guests who stayed at the hotel.
Financially, the hotel consecutively recorded the highest operating
income throughout 2014-2016.
Damage caused by the earthquake
The earthquakes destroyed the pipe and pumping facility from thefountainhead of the hot spring, which was the lifeline for thistraditional Japanese style hotel. The hotel was forced totemporarily suspend operation without this key content of thehotel for more than 3 months. Including the reconstruction, total
costs for resuming was over USD 434,783 and S hotel asked
financial support from a regional bank, with which the hotel has
long-standing relationship.
Due to the continuous cut off of transportation, such as roads andtrains, as well as the additional negative impact caused bycontinuous explosive eruption of the volcano in Oct 2016, thenumber of tourists was still far lower than that of before theearthquake. Especially, those foreign tourists which accounted for
25% of the hotel’s guests were quite sensitive to the risk
information about earthquake brought by mass media. In
addition, a special support campaign for the Kyushu trip that was
initiated by the Japan Tourism Agency to support those affectedareas ends in December 2016, and continuous recess of tourist
numbers is assumed.

44

4

Key concept of “ Star‐ Studded Sky” Roof Top Bar Fund
Even given this unfavorable business situation, the CEO has a new
business plan to attract further inbound tourists more up to 50% of all
tourists by 2020, considering this difficulty as a chance adversely toenhance the attractiveness of the hotel. As there are few bars in A City,
the CEO found a potential business opportunity. Hence the hotel tried toraise the fund to reform the roof top as bar space, as summarized in thetable below:

TABLE 8 OVERVIEW OF “STAR‐STUDDED SKY” ROOF TOP BAR FUND
AREA OF BUSINESSA City, Kumamoto Prefecture

COMPANY NAME

S hotel Co., Ltd.(The hotel opened in 1963.)

BUSINESS PROFILE

The hotel oﬀers relaxing accommodation service with a traditional
Japanese style of hot spring with high quality hospitality.

BUSINESS SCALE

Revenue in FY2015 were USD 1,551,496 (before fundraising). It has about 70
employees.

FINANCIAL CONDITION AND
BUSINESS RESULTS

As S hotel is an unlisted company, the ﬁnancial results are not disclosed.
(However, its debts exceeded the assets when it raised funds according to
the interview and Securite website). Although the revenue continue toincrease gradually every year, and operating proﬁt has been recorded
before 2015. The proﬁts turned into loss triggered by the earthquake.
The working capital is mostly raised with loans from local bank and repaid
on schedule.

FIGURE 14 SCHEME OF STUDDED SKY” ROOF TOP BAR FUND

“Kumamoto Earthquake support fund”
Prefectural
Governmentof Kumamoto

Propose to
create funds

INDIVIDUALINVESTORS

Subsidize for fundcreation fee

Introduce
MSME to MS[Crowdfunding
platform]MS

Fund Creation
Commission fee

Investment
Financial return[Small business]

S-HotelAnonymous partnershipagreement“Star-studded sky” Roof top Bar Fund
(Created by author)

45

Overview of the fundThe “Star‐Studded Sky” Roof Top Bar Fund was offered through theMicro Investment Crowdfunding platform “Kumamoto Earthquake
Support Fund”. The contract between S hotel, a small business,and individual investors is under a form of anonymous
partnership agreement. The fund is featured to compose ofinvestment and donation by half and half.

Feature of the fund
The fund scheme does not make significant difference from thepost-disaster-type Micro Investment Crowdfunding created by MS.
The overview of the fund is as bellow:

TABLE 9 FUND DESIGN “STAR‐STUDDED SKY” ROOF TOP BAR FUND
MAXIMUM INVESTMENT TARGETUSD 91,304[10,500,000 JPY] (50% of each unit amount is donation.)

UNIT AMOUNT (PER SHARE)USD 93.9[JPY 10,800] (USD 43.5[JPY 5,000] as investment,
USD 43.5[JPY 5,000] as donation and USD 7 [JPY 800]handling fees)

FUND APPLICATION PERIOD

November 2016 to May 2017

FUND OPERATION PERIOD

5 years (August 2017 to July 2022
Year 1: Accommodation revenue (USD 1,723 K) *Complete repairof facility and opening a new construction of roof top bar.

PROJECT PLAN

Year 2: Accommodation revenue (USD 1,774 K) Year 3:
Accommodation revenue (USD 1,825 K)
Year 4: Accommodation revenue (USD 1,874 K)
Year 5: Accommodation revenue (USD 1,874 K)*Total revenue of 5 years: breakeven point at USD 7,737 K (annual
average of USD 1,547 K)

USE

Construction cost of the roof top bar ( USD 86 K as internal
equipment and material cost, USD 4 K for contingency )Up to breakeven point: 0.59% of revenue / 1,050 (no return
payment when proﬁt is below zero)

RETURN

After breakeven point: 0.59% of revenue / 1,050 (no return payment
when proﬁt is below zero)
Return will be paid in a lump sum after Year 5.
*111.6% when based on project plan

FRINGE BENEFIT TO INVESTORSOne drink service at the roof top bar.

PRINCIPAL GUARANTEE

No

46

5

Creative MSME financing supply
Funding not for Rehabilitation, but for Reconstruction.
Technically speaking, there are three phases in post natural
disaster recovery, that is to say, “Emergency Response”,“Rehabilitation” and “Reconstruction” in chronological order.

TABLE 10 NATURAL DISASTER RECOVERY PHASESPHASEOBJETIVES
1Minimizing thedamages2

Monitor secondary
disaster

1

Returning to thestandard level of
economic activities

1

Reconstructing andreorganizing thewhole business
operation

EMERGENCY RESPONSEREHABILITATIONRECONSTRUCTIONACTIONS REQUIRED TO SMALL BUSINESSES

Emergency rescue,
Evacuation,
Building temporary oﬃces and/or stores,
Providing foods and daily necessities to
employees, if necessary etc.

Restarting normal services,
Rehabilitating building,Repairing machines and equi etc.
Reviewing the business plan to
optimize the existing management
resources.
Reconstructing the facilities
Purchase necessary machines andequipment.

Most of public subsidy and donations to the MSMEs damaged by natural
disasters are for emergency response and rehabilitation in theory, so that
their business operation can utilize such public support to returns to thestatus prior to the natural disaster occurrence. The effectiveness of thesefinancial supports is measured by sufficiency and speed.
The Kumamoto Earthquake Support Fund is designed to provide financial
support to the MSMEs which are in the phase of “Reconstruction”. As for time for
fundraising, Micro Investment Crowdfunding takes longer than that of donations.
Furthermore, the Micro Investment Crowdfunding needs to target the small
businesses that have enough financial capability to pay the financial returns
exceeding the par value, as previously described. In that sense, the urgent
financial needs in “Emergency Response” and “Rehabilitation” phases conform
less from Micro Investment Crowdfunding perspective. Also, it is difficult to
expect profitability from initial donations in those early phases. Simple donations
may fit well especially to the first two phases since the goals in these phases are
not generating profits but responding to more urgent needs and sustaining the47

minimum activity of small businesses. Bank loans and investment funds are
more suitable for the last “Reconstruction” phase because investors and lenders
can expect financial return from the investment. The diagram below shows thefitness of funding modalities to the financial needs of small businesses.
FIGURE 15 COVERAGE OF FINANCIAL SUPPORT (DISASTER SUPPORT)LATE STAGE
BANK LOAN

Reconstruction

PHASE(POST-NATURALDISASTER)UPGRADE

MICRO INVESTMENT
CROWDFUNDING “A HALF

RECOVERYINVESTMENT AN HALF
DONATION FUND”

REHABILITATIONGOVERNMENTFINANCIAL SUPPORTEMERGENCYRESPONSEEARLY STAGE

Before the natural
disaster level

DONATION

FUND (REVIC+REGIONAL BANK)

HIGH

LOW
DONATION

FUND (REVIC+REGIONAL BANK)EXPECTED CONCESSIONALITY(Created by author)“Half investment and half donation fund”
Both portions have a significant effect, the donation portion
attracts investors as supporters, and the investment portion
encourages small businesses to make returns to thoseinvestors/supporters by improving sustainability and profitability
through optimized revenue under business operation. Moreover,financial cost of the Kumamoto Earthquake Support Fund is set
lower than other Micro Investment Crowdfunding arranged by the
CEO of S hotel considers that people investing in this fund likely to
become S hotel’s potential customers as well as investors.
Moreover, as this investment will be matured after 5 years, a small
business can develop relationships with investors for a long term.
At present (2016), though the fund has just been created, thenumber of customers visiting their website is increasing. In thisregard, fundraising through Micro Investment Crowdfunding
greatly helps to draw people’s attention to innovative projects.

Transparency about usage of money funded though Micro
Investment Crowdfunding.

48

In the case of conventional types of donation, investors cannot
see how their money is actually used (e.g. Red Cross). In the caseof Micro Investment Crowdfunding however, the investors canselect a small business with a specific project, of which they canvisually see the impact of their investment. Once the fundraising is
successfully completed, a small business regularly reports theirstatus, and maintains either direct or indirect relationship with theinvestor. Micro Investment Crowdfunding helps to anchor
investors’ empathy both on the small business andproducts/services.

“Equity-Capital-Like-Debt-Borrowings”(ECLDB).
As mentioned in Chapter 2, if a small business wishes to havemoney recognized as capital, anonymous partnership agreement
is required to meet some requirements in accordance with theguidance by Financial Services Agency. The below is the results of
examining eligibility of the “Star‐Studded Sky” Roof Top Bar Fund
as in terms of “capital” classification:

TABLE 11 RESULTS OF EXAMINING ELIGIBILITY OF THE “STAR‐STUDDED SKY” ROOF TOPBAR FUND
CONDITIONSRESULTS#1

The borrowing is not required to be repaid speciﬁcally over ﬁve years

Eligible (The duration of fund is over 5 years)#2

The borrowing is repaid in a lump sum.

Eligible (Financial return including the principal is to be paid
after 5 years)#3

The borrowing is subordinated in case of legal bankruptcy

Eligible (The investor could receive their ﬁnancial returnsubordinatedto ordinal creditors)#4

The borrowing should not be secured in principle

Eligible (The investment is not covered by any collateral)#5

The ﬁnancial return should be paid based on the suﬃcient
corporate earnings for ﬁnancial return .

Eligible (In case of the lack of accumulated earnings, the ﬁnancial
return would not be paid)Comparing the conditions applied to the fund and the required conditions of
ECLBD, the fund is possibly recognized as ‘equity’ by banks. The scheme isadvantageous both to small businesses and to financial institutions because it
can improve the soundness of financial condition if the raised fund is recognized
as a capital, so that the small business could improve its credit capability andbanks can extend new loans in some cases.

49

3.5 Observations on Micro Investment Crowdfunding
1

Fundraising speed“Half investment and half donation fund” would fit to financial needs ofthe MSMEs in the reconstruction phase. On the other hand, publicattention to the damaged areas may be declining while time is going by;
therefore, if it takes long time before offering funds, it would getsomehow difficult for MSMEs to successfully raise the expected amountof money through Micro Investment Crowdfunding. This uncertainty offunding makes small businesses reluctant to develop a mid-term andlong-term business plan. It is very important to make the fundraisingprocess as quick as possible in order that small businesses can raise thefunds to meet the financial needs for the reconstruction after natural
disasters.

2

Flexibility of Balance between Investment and Donation
At present, MS only has one selective option for the donation portion in
the fund: “half investment and half donation”. As shown above, for thefinancial needs of MSMEs right after a large natural disaster, donations
are the best fit for emergency response and rehabilitation. Thus, anotherconsideration is that if MSMEs can have a flexible discretion to determine
the share of donation in the raised fund in response to target stage ofpost natural disaster support, a Micro Investment Crowdfunding becomes
more user-friendly to damaged small businesses and widely utilized
efficiently to appropriately hedge the risk to be taken by investors.

50