Equity Crowdfunding
Content
Equity crowdfunding
Equity crowdfunding is the online offering of private rowers must demonstrate creditworthiness and the capacompany securities to a group of people to investment. bility to repay the debt, making it unsuitable for NINA or
Because equity crowdfunding involves investment into a startups. [14]
commercial enterprise, it is often subject to securities and
financial regulation. Equity crowdfunding is also referred
to as investment crowdfunding, crowd investing or crowd 2 Regulation
equity.
Equity crowdfunding is a mechanism that enables broad
groups of investors to fund startup companies and small
businesses in return for equity. Investors give money to
a business and receive ownership of a small piece of that
business. If the business succeeds, then its value goes up,
as well as the value of a share in that business—the converse is also true. Coverage of equity crowdfunding indicates that its potential is greatest with startup businesses
that are seeking smaller investments to achieve establishment, while follow-on funding (required for rapid growth)
may come from other sources.[1]
1
Investment crowdfunding can breach various securities
laws, because soliciting investments from the general
public is often illegal, unless the opportunity has been
filed with an appropriate securities regulatory authority, such as the Securities and Exchange Commission in
the U.S., the Ontario Securities Commission in Ontario,
Canada, the Autorité des marchés financiers in France
and Quebec, Canada, or the Financial Conduct Authority
in the U.K. These regulators have different ways of determining what is and what is not a security but a general
rule one can rely on (at least in the U.S.) is the Howey
Test. The Howey Test says that a transaction constitutes
an investment contract (therefore a security) if there is (1)
an exchange of money (2) with an expectation of profits arising (3) from a common enterprise (4) which depends solely on the efforts of a promoter or third party.
Any crowdfunding arrangement in which investors are
asked to contribute money in exchange for potential profits based on the work of others would be considered a security. As such, the applicable investment contract would
have to be registered with a regulatory agency, unless it
qualified for one of several exemptions (e.g., Regulation
A or Rule 506 of Regulation D of the Securities Act of
1933, or the California Limited Offering Exemption –
Rule 1001 (also known as S.E.C. Rule 1001)). The penalties for a securities violation can vary greatly and depend
on the amount of profit obtained by the “promoter,” the
damage done to the investors, and whether a violation is a
first time offense. According to Section 5 of the Securities Act, it is illegal to sell any security unless such a sale
is accompanied or preceded by a prospectus that meets
the requirements of the Securities Act.[15]
History
Investment crowdfunding can be debt-based or equitybased, or can follow other models, including profitsharing and hybrid models. The term equity crowdfunding is often used to describe crowd investing into both
debt and equity based instruments when they are offered
on an equity crowdfunding platform. The first known investment based crowdfunding platform for startups was
launched in Feb. 2010 by Grow VC,[2] followed by the
first US. based company ProFounder launching model for
startups to raise investments directly on the site,[3] but deciding later to shut down its business due regulatory reasons preventing them from continuing,[4] having launched
their model prior to JOBS Act.[5][6][7][7] One of the first
currently operational equity crowdfunding platforms in
the USA was EquityNet,[8] other early platforms include
CrowdCube and Seedrs in the UK.
Selling investments via crowdfunding has been
called crowdfund investing,[9]
hyperfunding,[10]
[11]
crowdinvesting,
or even simply crowdfunding, as in
“legalize crowdfunding”.[12] Some have called for standardization of the terminology in a way that distinguishes
the practice from other forms of crowdfunding.[13]
3 International approaches to regulation
3.1 Australia
Debt crowdfunding allows a group of lenders to lend
funds to individuals or businesses in return for interest Crowdfunding as a discrete activity is not prohibited in
payment on top of capital repayments. Also known as Australia when raising funds with donations. The proPeer to peer lending or Peer to business lending. Bor- visions of the Corporations Act need to be considered
1
2
3 INTERNATIONAL APPROACHES TO REGULATION
if raising funds with either debt or equity.[16] The Corporations and Markets Advisory Committee (CAMAC)
issued a report into proposed changes to the Australian
regulatory environment for Crowd Sourced Equity Funding in May 2014. It is anticipated that Treasury will follow with a subsequent request for comment later in the
2014.[17]
• The Markets in Financial Instruments Directive
(MiFID) (Directive 2004/39/EC) as transposed into
Irish law by the European Communities (Markets in
Financial Instruments) Regulations 2007 (the “MiFID Regulations”).
• The Investment Intermediaries Act 1995.
• The Consumer Credit Act 1995.
3.2
Belgium
Local crowdfunding sites have been active in Belgium
since 2011, and the legislation was adapted to cover them
in April 2014. This made it possible to raise up to 300k€
per projects via crowdfunding as long as crowd investors’
individual investments remained below €1000. Since
this law adaptation was limited, regional governments
have confirmed that further improvements of the legislation would remain a priority to address before 2019, and
this was officially confirmed by the Flemish government
in a published act.[18]
3.3
New Zealand
New Zealand enacted the legal framework for equity
crowdfunding in 2013 [19] and corresponding regulations
in 2014.[20] The regulations allow each New Zealand
company to raise up to $2 million in any 12 months from
the New Zealand public through a licensed equity crowdfunding platform without the usual offer document prescribed under securities law. Snowball Effect launched
New Zealand’s first equity crowdfunding offer in August
2014, with craft brewery Renaissance Brewing successfully raising $700,000 in 13 days.[21]
3.4
Canada
Canada’s first equity crowdfunding portal is Optimize
Capital Markets which launched in Ontario on September 2009.[22] In June 2013, the Ontario Securities Commission announced that it was allowing an Ontarioonly portal for accredited investors.[23] The province of
Saskatchewan made equity crowdfunding legal in December 2013.[24]
3.5
Ireland
Crowdfunding remains unregulated in Ireland. The law
with regard to crowdfunding, and in particular equity
based crowdfunding is complex. Issues to be resolved and
regulations to be reviewed include:
• The Prospectus Directive (Directive 2003/71/EC)
as transposed into Irish law by the Prospectus (Directive 2003/71/EC) Regulations 2005 (as
amended) (the “Prospectus Regulations”).
However, there are a number of websites that offer various types of crowdfunding services. Fund it was set up in
2011 to finance creative arts related projects, supported
by Bank of America Merrill Lynch, The Arthur Guinness Fund and a technology grant from the Department
of Arts, Heritage & the Gaeltacht. iCrowdFund which
is part of the iDonate online fundraising platform was
founded in 2014 and supports donation and reward based
crowdfunding. Linked Finance is a crowd lending site.
3.6 Italy
Italy has several well-functioning reward-based crowdfunding websites since 2011 (e.g. www.eppela.com,
www.produzionidalbasso.com). In July 2013 Italy became the first country in Europe to implement a complete
regulation on equity-crowdfunding, which applies only to
innovative startups and establishes, among other rules, a
national registry for equity crowdfunding portals and disclosure obligations for both issuers and portals.[25] The
first platform for equity crowdfunding went online on December 12, 2013 [26] and two more followed.[27][28] The
first equity crowdfunding campaign launched in Italy was
a success, raising a total of €157,780 in three months,
exceeding its initial target of €147,000.[29]
3.7 Israel
Israel has yet to enact legal framework for equity crowdfunding. Therefore, any equity crowdfunding activity is
currently regulated under the Israeli Securities Law which
permits the offering of securities to 35 non accredited individuals and an unlimited amount of accredited investors
as defined in Israel Securities Law. The Israeli Securities Authority has proposed a new regulatory framework
for equity crowdfunding in Israel, which has not been
adopted yet. Some of the main terms are:
• An aggregate financing amount of up to ILS2 million over 12 months
• Limitation of the amount to be invested by each
individual to ILS10,000 unless the investor is
“wealthy”
• A sophisticated investor (as defined in the regulations) must contribute 10% of the total financing
amount
3.12
Switzerland
3
• Office of Chief Scientist approval
where crowdfunding works as abase to crowdsource public investment decisions.[42] The donation-based Crowdhas been active in Sweden
There is an equity crowdfunding platform called Funding portal FundedByMe
[43]
and
Norway
since
2011,
and
Swedish crowdfunding
OurCrowd
activity is evolving in parallel to Crowdfunding in the
USA with Equity-Based CrowdFunding becoming active
in Sweden late in 2012.[44] Invesdor also started operating
3.8 Finland
in Sweden in February 2013.[33]
An Equity Crowdfunding portal was launched in Finland
in May 2012 by Invesdor.[30] The legal issues around
donation-based crowdfunding have been under debate in
Finland as its legislation[31] around this is different from
most countries. However the legislation about Equity and
Rewards-based Crowdfunding is more similar to the rest
of Europe, and the legal situation is clear.[32] Invesdor has
also started operating in Sweden[33] and has additionally
opened its service to Danish and Estonian companies.[34]
The Sweden-based FundedByMe also launched their Equity Crowdfunding portal in Finland in January 2013.[35]
3.9
Germany
After two smaller projects in 2010, 2011 can be
considered the first successful year for crowdfunding
in Germany. The largest crowdfunding project was
launched by the company Brainpool in December 2011.
For the movie of the successful TV series Stromberg, the
company wanted to collect one million euros by March
2012,[36] and the total amount was reached within one
week.[37] Since then, various national, but also regional,
platforms were founded, such as Crowd Berlin, Nordstarter for Hamburg and Dresden Durchstarter.
Additional specialized niche sites, mainly for games[38]
and musicians,[39] are entering the market. At the end of
2013, a new crowdfunding platform was launched called
Dreamojo,[40] which lets you collect money from anyone, for anything. Dreamojo also helps you collect money
through social networks.
3.12 Switzerland
The oldest[45] and most active [46] crowdinvesting platform in Switzerland is investiere.[47] Crowdinvesting was
responsible for 48% of the total money raised via crowdfunding in Switzerland in 2013.[48] The Swiss Financial
Market Supervisory Authority has not established specific regulations for crowdinvesting platforms. Instead,
each platform is reviewed on a case-by-case basis to decide whether the platform requires a license to operate.
In general, if the money raised is only brokered via the
platform and not centrally pooled in any way, unlicensed
providers are acting within the law.[49]
3.13 Turkey
Turkey’s crowdfunding platforms are Fonlabeni, Fongogo
and Biayda.[50]
3.14 United Arab Emirates
The first crowdfunding site in the United Arab Emirates
(UAE) is Aflamnah, the Dubai-based platform launched
in July 2012. Aimed at extensively supporting Arabproduced film projects, its operational model is based on
a hybrid form of Kickstarter and Indiegogo.[51]
The first equity crowdfunding portal for real estate in the
UAE, the GCC, and the rest of the Middle East and North
Africa (or MENA) region, was launched by Abu Dhabibased Humming Crowd Realty in May 2014. The con3.10 Singapore
cept, which is built on Western real estate crowdfunding
fundamentals, introduces global investors to propertyCrowdfunding currently falls under the Collective Investinvestment
opportunities that are compliant with Islamic
ment Scheme which is regulated by the Monetary Authorfinancing
principles
and Sharia standards.[52][53]
ity of Singapore. Despite being an Asian financial center, crowdfunding platforms are illegal in Singapore.[41]
There is no provision in the legislation specially for
3.15 United Kingdom
crowdfunding.
On 1 April 2014, the regulation of the consumer credit
market transferred from the Office of Fair Trading (OFT)
3.11 Sweden and Norway
to the Financial Conduct Authority (FCA). This includes
Crowdfunding portals have also launched in Scandinavia responsibility for regulating loan-based crowdfunding.
statement regarding
supporting both local language crowdfunding and English The FCA has published a policy
[54]
crowd
funding
in
March
2014.
language crowdfunding. The oldest active crowdfunding platform in Sweden today is crowdculture launched in Abundance Generation was the first debt crowdfunding
2010. The system works with a unique hybrid mechanism platform in the United Kingdom (UK) to be regulated by
4
4 SEE ALSO
the Financial Services Authority (now the Financial Conduct Authority). It was approved in July 2011 and was
launched to the public in 2012.[55] Abundance Generation provides democratic finance to UK-based renewable
energy developers.[56]
On 6 July 2012, Seedrs Limited was launched as the
first equity crowdfunding platform to receive regulatory approval from the Financial Services Authority.[57]
In August 2012, Richard Branson announced his support for crowdfunding, crowdinvesting and crowdlending platform BankToTheFuture.com in the Telegraph
newspaper.[58] In February 2013, the CrowdCube equity
crowdfunding platform, which was launched in 2011, was
authorised by the FSA.[59]
3.16 United States
3.16.1
Equity crowdfunding platforms
The JOBS Act allows equity crowdfunding when it is
conducted by a licensed broker-dealer or via a Funding
Portal registered with the SEC.[60] Many Crowdfunding
services have launched to fill this role, and the space
is evolving rapidly. Early portal Profounder closed before SEC guidelines were released,[61] and equity portal
Earlyshares acquired charity portal Helpersunite.[62] The
first portal operating in the U.S. and geared towards small
businesses was EquityNet in 2005, followed by Rock The
Post in 2010,[63] SeedInvest was founded in 2011 and
FundersClub in 2012.
3.16.2
Federal legislation
Thanks in part to the Crowdfunding exemption movement, the JOBS Act was signed into law by President
Obama on April 5, 2012. The U.S. Securities and Exchange Commission has been given approximately 270
days to set forth specific rules and guidelines that enact this legislation, while also ensuring the protection of
investors.[64] Some rules have already been proposed by
the SEC.[65][66]
The bill went through a number of amendments and on
April 5, 2012 President Barack Obama signed the JOBS
Act into law.[67] The legislation mandates that funding
portals must register with the SEC as well as an applicable self-regulatory organization to operate.[68]
The JOBS Act places limits on the value of securities issuer may offer and individuals can invest through
crowdfunding intermediaries. An issuer may sell up to
$1,000,000 of its securities per 12 months, and, depending upon their net worth and income, investors will
be permitted to invest up to $100,000 in crowdfunding issues per 12 months.[69] An independent financial
statement review by a CPA firm is required for raises
$100,000–500,000 and an independent financial statement audit by a CPA firm is required for raises over
$500,000.[70]
On October 23, 2013, the SEC unanimously approved the
progress of the crowdfunding bill and SEC commissioners explained that the commission’s goals are to ease online fundraising for small companies and fraud protection
for investors. As of the date of approval, the proposal is
open for public comment for a 90-day period that is followed by another SEC vote to enable the enactment of
the proposal.[71] In parallel to the SEC regulations, the
Financial Industry Regulatory Authority (FINRA) is creating additional rules related to member firms engaged in
crowdfunding.[68]
3.16.3 State legislation
Some people see the federal crowdfunding legislation as
unworkable, and several U.S. states have recently enacted
or are considering their own crowdfunding exemption
laws, to facilitate intrastate investment offerings that are
already exempt from federal (SEC) regulation.[72] These
include the Invest Kansas Exemption,[73] effective August
2011, and the Invest Georgia Exemption, effective December 2012, has $1m/$10k caps.[74] Late in 2013, both
Michigan [75] and Wisconsin [76] joined Kansas and Georgia. As of April 2013, the states of Washington[77] and
North Carolina[78] are considering their own crowdfunding exemptions.[79] In July 2012, the Wisconsin Department of Financial Institutions issued an advisory, about
legislation proposed, intended to allow crowdfunding to
raise up to $1 million from non-accredited Wisconsin investors without audited financial statements, or up to $2
million if the issuer has audited financial statements.[80]
3.16.4 Crowdfunding insurance
The draft SEC rules calls for portals to purchase a fidelity
bond of at least $100,000. As stated by the SEC is that a
“fidelity bond .. aims to protect its holder against certain
types of losses, including but not limited to those caused
by malfeasance of the holder’s officers and employees,
and the effect of such losses on the holder’s capital”.[81]
A fidelity bond generally covers a corporate policyholder
from first party losses arising from the theft of money,
securities or other tangible property so if the portal’s employees steal the funds belonging to the crowdfunding
company, the bond can be useful. However, if there is
a claim against the portal for negligence in providing its
services as a portal, the more proper insurance policy to
apply to this loss is a professional liability insurance.
4 See also
• Angel investor
• Comparison of crowd funding services
5
• Crowdfunding
• JOBS Act
[17] “Crowd Sourced Equity Funding Report”. Corporations
and Markets Advisory Committee. Retrieved April 12,
2015.
• List of highest funded equity crowdfunding projects
[18] “Regeerakkoord van de Vlaamse Regering 2014-2019”.
[19] “Getting up with the play on crowd funding”.
5
References
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“Washington Post: As-regulators-set-rules-for-equitybased-crowdfunding-investors-prepare-for-its-impact”.
The Washington Post. Retrieved July 25, 2012.
[20] “New Securities Act Exemptions Effective 1 April 2014”.
Financial Markets Authority. 1 April 2014. Retrieved 20
September 2014.
[21] “Crowd-funding craft brewer gets to $700k target early”.
National Business Review. 25 August 2014. Retrieved 20
September 2014.
[22] “Matthew McGrath, CEO/Founder of Optimize Capital
[2] http://techcrunch.com/2010/02/15/
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[3] http://techcrunch.com/2011/05/03/
[23] “OSC Approves Ontario-Only Crowdfunding Portal for
crowdsourced-fundraising-platform-profounder-now-offers-equity-based-investment-tools/
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[4] http://techcrunch.com/2012/02/17/
[24] “EQUITY CROWDFUNDING AVAILABLE
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IN
[5] “Startups, VCs Now Free To Advertise Their Fundraising
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[25] “Consob disciplina con regolamento fenomeno 'equity crowdfunding' | Business | Reuters”. Borsaitaliana.it.reuters.com. 2009-02-09. Retrieved 2013-09-03.
[6] “All-comers join web party for a punt on best start-ups”.
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[26] http://www.unicaseed.it
[7] “Startups Remain Cloudy on the New General Solicitation Rule”. Bloomberg Businessweek. Retrieved September 20, 2013.
[28] http://www.assitecacrowd.com
[8] Thorpe, Devin. “Equity Crowdfunding Site Embraces
Real Estate”. Forbes.
[9] “Crowdfund Investing For Dummies – Sherwood Neiss,
Jason W. Best, Zak Cassady-Dorion”. Wiley. Retrieved
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[27] http://www.starsup.it
[29] “Startup completes first equity crowdfunding drive in
Italy”. www.reuters.com. Retrieved 13 November 2014.
[30] “Invesdor Launches Equity-Crowdfunding Platform That
Skips The Paperwork”.
[31] “Legal Challenges Related To Crowdfunding, Volume 1”.
[32] “Legal Challenges Related To Crowdfunding: Volume 2”.
[10] “Igniting That Startup Spark”. Wharton Magazine. 201305-16. Retrieved 2013-09-03.
[33] “Suomalainen joukkorahoituspalvelu Ruotsiin”.
[11] Koren, Gijsbert. “First crowdinvesting platform with ROI
» | Smarter money | weblog about crowdfunding & crowdsourcing”. Smartermoney.nl. Retrieved 2013-09-03.
[35] “FundedByMe To Launch Branch In Finland As Crowdfunding Heats Up In The Nordics”.
[12] Mattise, Nathan (2012-03-22). “Senate passes legislation to legalize crowdfunding”. Ars Technica. Retrieved
2013-09-03.
[13] Sang Lee (2013-04-22). “Stop Calling It Crowdfunding”.
Crowdfund Insider. Retrieved 2013-09-03.
[14] Art Patnaude (27 March 2013). "'Crowdfunding' Takes
Hold in the U.K”. The Wall Street Journal.
[15] Cohen, Corcoran & Landis. “Securities Act of 1933”
(PDF). Securities Act of 1933. U.S. Securities and Exchange Commission. Retrieved 5 March 2014.
[16] “ASIC guidance on crowd funding”. Australian Securities
& Investments Commissionaccess. Retrieved April 12,
2015.
[34] “Great improvements to our crowdfunding service!".
[36] ""Stromberg revolutionizes movie funding”, Financial
Times Germany, 16 December 2011”. ftd.de. Retrieved
2013-04-24.
[37] “Stromberg, one million € in one week”. quotenmeter.de.
Retrieved 2013-04-24.
[38] “Crowdfunding for games”. Retrieved April 24, 2013.
[39] “Crowdfunding for musicians”. Retrieved April 24, 2013.
[40] “Social crowdfunding platform”. Retrieved 23 December
2013.
[41] http://www.mas.gov.sg/
regulations-and-financial-stability/
regulations-guidance-and-licensing/
securities-futures-and-funds-management/forms/
collective-investment-schemes.aspx
6
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[42] “Arctic Start-up: Stockholm Partners With CrowdCulture
To Fund Culture”.
[65] “Crowd SEC: Rules for advertising crowdfunding” (PDF).
Retrieved October 15, 2012.
[43] “Oslo Tecknopol: Crowdfunding comes to norway”.
[66] “Venturebeat: SEC uses JOBS Act to set up new roadblocks to crowdfunding”. Retrieved October 15, 2012.
[44] “Site Makes Pennies to Big Ideas”.
[45] Swiss Venture Capital Firm Raises 600'000
[46] Crowdfunding for Equity in Europe: Which Platforms are
bringing in the most money?
[47] investiere’s website
[48] Crowdfunding Monitor 2014, P.9
[49] Finma Crowdfunding Factsheet, December 2014
[50] “Ekibin Seçtikleri”. Fonlabeni (in Turkish). Tüm hakları
saklıdır. September 2013. Retrieved 23 September 2013.
[51] “Rothe, Nina E, “Aflamnah: Looking for crowdfunding in
the Arab World”, Huffington Post, 09 May 2013”. www.
huffingtonpost.com. Retrieved 19 May 2014.
[52] “Real estate crowdfunding in the UAE, GCC, and MENA
growth corridors”. Learning Islamic financing principles
and Sharia standards. www.hbr.ae. Retrieved 19 May
2014.
[53] “Teh, Robin, “Revisiting REITs in the UAE real-estate
market”, Gulf News, 30 September 2013”. www.
gulfnews.com. Retrieved 19 May 2014.
[54] “Policy Statement: The FCA’s regulatory approach to
crowdfunding over the internet...” (PDF). fca.gov.uk. Financial Conduct Authority. Retrieved 24 June 2014.
[55] “Danny Fortsen, “Fivers make the windmill turn”, Sunday
Times, 22 April 2012”. thesundaytimes.co.uk. Retrieved
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[56] “About Abundance”. The Abundance Positive Cycle.
Abundance NRG Ltd. Retrieved 5 March 2014.
[57] “James Hurley, “Regulated financing market for start-ups
launched”, Telegraph, 13 July 2012”. London: Telegraph.co.uk. July 13, 2012. Retrieved August 19, 2012.
[58] Hurley, James (August 14, 2012). “Richard Branson
backs 'Bank to the Future’". London: The Telegraph. Retrieved 3 September 2013.
[59] “James Hurley, “FSA gives green light to 'crowdfunding”,
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[60] “SEC: Crowdfunding Intermediaries”. Retrieved October
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[61] “Profunder Shutting Down”. Retrieved October 15, 2012.
[62] “Crowdsourcing Dot Org: EarlyShares acquires Helpersunite”. Retrieved October 15, 2012.
[63] “Crowdfunding comes to small businesses”. Business Insider. Retrieved June 15, 2012.
[64] “HR3606” (PDF). Retrieved 25 July 2012.
[67] Landler, Mark (5 April 2012). “Obama Signs Bill to Promote Start-Up Investments”. New York Times. Retrieved
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[68] “Crowd Fnding News: FINRA Seeks Public Input on
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[69] “EGS: Crowdfunding Alert” (PDF). Retrieved 16 Oct
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[70] Denlinger, Craig. “Crowdfunding Audits”. Retrieved 5
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[71] CHRISTINE LAGORIO-CHAFKIN (23 October 2013).
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[72] “Crowdfunding state by state? – William Carleton, Counselor @ Law”. Wac6.com. 2013-03-08. Retrieved 201309-03.
[73] “Office of the Kansas Securities Commissioner, KS – Invest Kansas”. Ksc.ks.gov. 2013-06-21. Retrieved 201309-03.
[74] http://rules.sos.state.ga.us/docs/590/4/2/08.pdf
[75] McGlade, Alan (December 31, 2013). “Michigan Governor Signs Intrastate Crowdfunding Exemption”. Forbes.
[76] http://docs.legis.wisconsin.gov/2013/related/acts/52
[77] “House Bill 2023” (PDF). Retrieved 2013-09-03.
[78] “Invest NC Exemption” (PDF). Retrieved 2013-09-03.
[79] “State Crowdfunding Law”. State Crowdfunding Law.
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[80] Murphy, Patrick; Melissa York, Godfrey & Kahn S.C.
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[81] http://www.sec.gov/rules/proposed/2013/33-9470.pdf
7
6
Text and image sources, contributors, and licenses
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6.3
Content license
• Creative Commons Attribution-Share Alike 3.0
Equity crowdfunding is the online offering of private rowers must demonstrate creditworthiness and the capacompany securities to a group of people to investment. bility to repay the debt, making it unsuitable for NINA or
Because equity crowdfunding involves investment into a startups. [14]
commercial enterprise, it is often subject to securities and
financial regulation. Equity crowdfunding is also referred
to as investment crowdfunding, crowd investing or crowd 2 Regulation
equity.
Equity crowdfunding is a mechanism that enables broad
groups of investors to fund startup companies and small
businesses in return for equity. Investors give money to
a business and receive ownership of a small piece of that
business. If the business succeeds, then its value goes up,
as well as the value of a share in that business—the converse is also true. Coverage of equity crowdfunding indicates that its potential is greatest with startup businesses
that are seeking smaller investments to achieve establishment, while follow-on funding (required for rapid growth)
may come from other sources.[1]
1
Investment crowdfunding can breach various securities
laws, because soliciting investments from the general
public is often illegal, unless the opportunity has been
filed with an appropriate securities regulatory authority, such as the Securities and Exchange Commission in
the U.S., the Ontario Securities Commission in Ontario,
Canada, the Autorité des marchés financiers in France
and Quebec, Canada, or the Financial Conduct Authority
in the U.K. These regulators have different ways of determining what is and what is not a security but a general
rule one can rely on (at least in the U.S.) is the Howey
Test. The Howey Test says that a transaction constitutes
an investment contract (therefore a security) if there is (1)
an exchange of money (2) with an expectation of profits arising (3) from a common enterprise (4) which depends solely on the efforts of a promoter or third party.
Any crowdfunding arrangement in which investors are
asked to contribute money in exchange for potential profits based on the work of others would be considered a security. As such, the applicable investment contract would
have to be registered with a regulatory agency, unless it
qualified for one of several exemptions (e.g., Regulation
A or Rule 506 of Regulation D of the Securities Act of
1933, or the California Limited Offering Exemption –
Rule 1001 (also known as S.E.C. Rule 1001)). The penalties for a securities violation can vary greatly and depend
on the amount of profit obtained by the “promoter,” the
damage done to the investors, and whether a violation is a
first time offense. According to Section 5 of the Securities Act, it is illegal to sell any security unless such a sale
is accompanied or preceded by a prospectus that meets
the requirements of the Securities Act.[15]
History
Investment crowdfunding can be debt-based or equitybased, or can follow other models, including profitsharing and hybrid models. The term equity crowdfunding is often used to describe crowd investing into both
debt and equity based instruments when they are offered
on an equity crowdfunding platform. The first known investment based crowdfunding platform for startups was
launched in Feb. 2010 by Grow VC,[2] followed by the
first US. based company ProFounder launching model for
startups to raise investments directly on the site,[3] but deciding later to shut down its business due regulatory reasons preventing them from continuing,[4] having launched
their model prior to JOBS Act.[5][6][7][7] One of the first
currently operational equity crowdfunding platforms in
the USA was EquityNet,[8] other early platforms include
CrowdCube and Seedrs in the UK.
Selling investments via crowdfunding has been
called crowdfund investing,[9]
hyperfunding,[10]
[11]
crowdinvesting,
or even simply crowdfunding, as in
“legalize crowdfunding”.[12] Some have called for standardization of the terminology in a way that distinguishes
the practice from other forms of crowdfunding.[13]
3 International approaches to regulation
3.1 Australia
Debt crowdfunding allows a group of lenders to lend
funds to individuals or businesses in return for interest Crowdfunding as a discrete activity is not prohibited in
payment on top of capital repayments. Also known as Australia when raising funds with donations. The proPeer to peer lending or Peer to business lending. Bor- visions of the Corporations Act need to be considered
1
2
3 INTERNATIONAL APPROACHES TO REGULATION
if raising funds with either debt or equity.[16] The Corporations and Markets Advisory Committee (CAMAC)
issued a report into proposed changes to the Australian
regulatory environment for Crowd Sourced Equity Funding in May 2014. It is anticipated that Treasury will follow with a subsequent request for comment later in the
2014.[17]
• The Markets in Financial Instruments Directive
(MiFID) (Directive 2004/39/EC) as transposed into
Irish law by the European Communities (Markets in
Financial Instruments) Regulations 2007 (the “MiFID Regulations”).
• The Investment Intermediaries Act 1995.
• The Consumer Credit Act 1995.
3.2
Belgium
Local crowdfunding sites have been active in Belgium
since 2011, and the legislation was adapted to cover them
in April 2014. This made it possible to raise up to 300k€
per projects via crowdfunding as long as crowd investors’
individual investments remained below €1000. Since
this law adaptation was limited, regional governments
have confirmed that further improvements of the legislation would remain a priority to address before 2019, and
this was officially confirmed by the Flemish government
in a published act.[18]
3.3
New Zealand
New Zealand enacted the legal framework for equity
crowdfunding in 2013 [19] and corresponding regulations
in 2014.[20] The regulations allow each New Zealand
company to raise up to $2 million in any 12 months from
the New Zealand public through a licensed equity crowdfunding platform without the usual offer document prescribed under securities law. Snowball Effect launched
New Zealand’s first equity crowdfunding offer in August
2014, with craft brewery Renaissance Brewing successfully raising $700,000 in 13 days.[21]
3.4
Canada
Canada’s first equity crowdfunding portal is Optimize
Capital Markets which launched in Ontario on September 2009.[22] In June 2013, the Ontario Securities Commission announced that it was allowing an Ontarioonly portal for accredited investors.[23] The province of
Saskatchewan made equity crowdfunding legal in December 2013.[24]
3.5
Ireland
Crowdfunding remains unregulated in Ireland. The law
with regard to crowdfunding, and in particular equity
based crowdfunding is complex. Issues to be resolved and
regulations to be reviewed include:
• The Prospectus Directive (Directive 2003/71/EC)
as transposed into Irish law by the Prospectus (Directive 2003/71/EC) Regulations 2005 (as
amended) (the “Prospectus Regulations”).
However, there are a number of websites that offer various types of crowdfunding services. Fund it was set up in
2011 to finance creative arts related projects, supported
by Bank of America Merrill Lynch, The Arthur Guinness Fund and a technology grant from the Department
of Arts, Heritage & the Gaeltacht. iCrowdFund which
is part of the iDonate online fundraising platform was
founded in 2014 and supports donation and reward based
crowdfunding. Linked Finance is a crowd lending site.
3.6 Italy
Italy has several well-functioning reward-based crowdfunding websites since 2011 (e.g. www.eppela.com,
www.produzionidalbasso.com). In July 2013 Italy became the first country in Europe to implement a complete
regulation on equity-crowdfunding, which applies only to
innovative startups and establishes, among other rules, a
national registry for equity crowdfunding portals and disclosure obligations for both issuers and portals.[25] The
first platform for equity crowdfunding went online on December 12, 2013 [26] and two more followed.[27][28] The
first equity crowdfunding campaign launched in Italy was
a success, raising a total of €157,780 in three months,
exceeding its initial target of €147,000.[29]
3.7 Israel
Israel has yet to enact legal framework for equity crowdfunding. Therefore, any equity crowdfunding activity is
currently regulated under the Israeli Securities Law which
permits the offering of securities to 35 non accredited individuals and an unlimited amount of accredited investors
as defined in Israel Securities Law. The Israeli Securities Authority has proposed a new regulatory framework
for equity crowdfunding in Israel, which has not been
adopted yet. Some of the main terms are:
• An aggregate financing amount of up to ILS2 million over 12 months
• Limitation of the amount to be invested by each
individual to ILS10,000 unless the investor is
“wealthy”
• A sophisticated investor (as defined in the regulations) must contribute 10% of the total financing
amount
3.12
Switzerland
3
• Office of Chief Scientist approval
where crowdfunding works as abase to crowdsource public investment decisions.[42] The donation-based Crowdhas been active in Sweden
There is an equity crowdfunding platform called Funding portal FundedByMe
[43]
and
Norway
since
2011,
and
Swedish crowdfunding
OurCrowd
activity is evolving in parallel to Crowdfunding in the
USA with Equity-Based CrowdFunding becoming active
in Sweden late in 2012.[44] Invesdor also started operating
3.8 Finland
in Sweden in February 2013.[33]
An Equity Crowdfunding portal was launched in Finland
in May 2012 by Invesdor.[30] The legal issues around
donation-based crowdfunding have been under debate in
Finland as its legislation[31] around this is different from
most countries. However the legislation about Equity and
Rewards-based Crowdfunding is more similar to the rest
of Europe, and the legal situation is clear.[32] Invesdor has
also started operating in Sweden[33] and has additionally
opened its service to Danish and Estonian companies.[34]
The Sweden-based FundedByMe also launched their Equity Crowdfunding portal in Finland in January 2013.[35]
3.9
Germany
After two smaller projects in 2010, 2011 can be
considered the first successful year for crowdfunding
in Germany. The largest crowdfunding project was
launched by the company Brainpool in December 2011.
For the movie of the successful TV series Stromberg, the
company wanted to collect one million euros by March
2012,[36] and the total amount was reached within one
week.[37] Since then, various national, but also regional,
platforms were founded, such as Crowd Berlin, Nordstarter for Hamburg and Dresden Durchstarter.
Additional specialized niche sites, mainly for games[38]
and musicians,[39] are entering the market. At the end of
2013, a new crowdfunding platform was launched called
Dreamojo,[40] which lets you collect money from anyone, for anything. Dreamojo also helps you collect money
through social networks.
3.12 Switzerland
The oldest[45] and most active [46] crowdinvesting platform in Switzerland is investiere.[47] Crowdinvesting was
responsible for 48% of the total money raised via crowdfunding in Switzerland in 2013.[48] The Swiss Financial
Market Supervisory Authority has not established specific regulations for crowdinvesting platforms. Instead,
each platform is reviewed on a case-by-case basis to decide whether the platform requires a license to operate.
In general, if the money raised is only brokered via the
platform and not centrally pooled in any way, unlicensed
providers are acting within the law.[49]
3.13 Turkey
Turkey’s crowdfunding platforms are Fonlabeni, Fongogo
and Biayda.[50]
3.14 United Arab Emirates
The first crowdfunding site in the United Arab Emirates
(UAE) is Aflamnah, the Dubai-based platform launched
in July 2012. Aimed at extensively supporting Arabproduced film projects, its operational model is based on
a hybrid form of Kickstarter and Indiegogo.[51]
The first equity crowdfunding portal for real estate in the
UAE, the GCC, and the rest of the Middle East and North
Africa (or MENA) region, was launched by Abu Dhabibased Humming Crowd Realty in May 2014. The con3.10 Singapore
cept, which is built on Western real estate crowdfunding
fundamentals, introduces global investors to propertyCrowdfunding currently falls under the Collective Investinvestment
opportunities that are compliant with Islamic
ment Scheme which is regulated by the Monetary Authorfinancing
principles
and Sharia standards.[52][53]
ity of Singapore. Despite being an Asian financial center, crowdfunding platforms are illegal in Singapore.[41]
There is no provision in the legislation specially for
3.15 United Kingdom
crowdfunding.
On 1 April 2014, the regulation of the consumer credit
market transferred from the Office of Fair Trading (OFT)
3.11 Sweden and Norway
to the Financial Conduct Authority (FCA). This includes
Crowdfunding portals have also launched in Scandinavia responsibility for regulating loan-based crowdfunding.
statement regarding
supporting both local language crowdfunding and English The FCA has published a policy
[54]
crowd
funding
in
March
2014.
language crowdfunding. The oldest active crowdfunding platform in Sweden today is crowdculture launched in Abundance Generation was the first debt crowdfunding
2010. The system works with a unique hybrid mechanism platform in the United Kingdom (UK) to be regulated by
4
4 SEE ALSO
the Financial Services Authority (now the Financial Conduct Authority). It was approved in July 2011 and was
launched to the public in 2012.[55] Abundance Generation provides democratic finance to UK-based renewable
energy developers.[56]
On 6 July 2012, Seedrs Limited was launched as the
first equity crowdfunding platform to receive regulatory approval from the Financial Services Authority.[57]
In August 2012, Richard Branson announced his support for crowdfunding, crowdinvesting and crowdlending platform BankToTheFuture.com in the Telegraph
newspaper.[58] In February 2013, the CrowdCube equity
crowdfunding platform, which was launched in 2011, was
authorised by the FSA.[59]
3.16 United States
3.16.1
Equity crowdfunding platforms
The JOBS Act allows equity crowdfunding when it is
conducted by a licensed broker-dealer or via a Funding
Portal registered with the SEC.[60] Many Crowdfunding
services have launched to fill this role, and the space
is evolving rapidly. Early portal Profounder closed before SEC guidelines were released,[61] and equity portal
Earlyshares acquired charity portal Helpersunite.[62] The
first portal operating in the U.S. and geared towards small
businesses was EquityNet in 2005, followed by Rock The
Post in 2010,[63] SeedInvest was founded in 2011 and
FundersClub in 2012.
3.16.2
Federal legislation
Thanks in part to the Crowdfunding exemption movement, the JOBS Act was signed into law by President
Obama on April 5, 2012. The U.S. Securities and Exchange Commission has been given approximately 270
days to set forth specific rules and guidelines that enact this legislation, while also ensuring the protection of
investors.[64] Some rules have already been proposed by
the SEC.[65][66]
The bill went through a number of amendments and on
April 5, 2012 President Barack Obama signed the JOBS
Act into law.[67] The legislation mandates that funding
portals must register with the SEC as well as an applicable self-regulatory organization to operate.[68]
The JOBS Act places limits on the value of securities issuer may offer and individuals can invest through
crowdfunding intermediaries. An issuer may sell up to
$1,000,000 of its securities per 12 months, and, depending upon their net worth and income, investors will
be permitted to invest up to $100,000 in crowdfunding issues per 12 months.[69] An independent financial
statement review by a CPA firm is required for raises
$100,000–500,000 and an independent financial statement audit by a CPA firm is required for raises over
$500,000.[70]
On October 23, 2013, the SEC unanimously approved the
progress of the crowdfunding bill and SEC commissioners explained that the commission’s goals are to ease online fundraising for small companies and fraud protection
for investors. As of the date of approval, the proposal is
open for public comment for a 90-day period that is followed by another SEC vote to enable the enactment of
the proposal.[71] In parallel to the SEC regulations, the
Financial Industry Regulatory Authority (FINRA) is creating additional rules related to member firms engaged in
crowdfunding.[68]
3.16.3 State legislation
Some people see the federal crowdfunding legislation as
unworkable, and several U.S. states have recently enacted
or are considering their own crowdfunding exemption
laws, to facilitate intrastate investment offerings that are
already exempt from federal (SEC) regulation.[72] These
include the Invest Kansas Exemption,[73] effective August
2011, and the Invest Georgia Exemption, effective December 2012, has $1m/$10k caps.[74] Late in 2013, both
Michigan [75] and Wisconsin [76] joined Kansas and Georgia. As of April 2013, the states of Washington[77] and
North Carolina[78] are considering their own crowdfunding exemptions.[79] In July 2012, the Wisconsin Department of Financial Institutions issued an advisory, about
legislation proposed, intended to allow crowdfunding to
raise up to $1 million from non-accredited Wisconsin investors without audited financial statements, or up to $2
million if the issuer has audited financial statements.[80]
3.16.4 Crowdfunding insurance
The draft SEC rules calls for portals to purchase a fidelity
bond of at least $100,000. As stated by the SEC is that a
“fidelity bond .. aims to protect its holder against certain
types of losses, including but not limited to those caused
by malfeasance of the holder’s officers and employees,
and the effect of such losses on the holder’s capital”.[81]
A fidelity bond generally covers a corporate policyholder
from first party losses arising from the theft of money,
securities or other tangible property so if the portal’s employees steal the funds belonging to the crowdfunding
company, the bond can be useful. However, if there is
a claim against the portal for negligence in providing its
services as a portal, the more proper insurance policy to
apply to this loss is a professional liability insurance.
4 See also
• Angel investor
• Comparison of crowd funding services
5
• Crowdfunding
• JOBS Act
[17] “Crowd Sourced Equity Funding Report”. Corporations
and Markets Advisory Committee. Retrieved April 12,
2015.
• List of highest funded equity crowdfunding projects
[18] “Regeerakkoord van de Vlaamse Regering 2014-2019”.
[19] “Getting up with the play on crowd funding”.
5
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[20] “New Securities Act Exemptions Effective 1 April 2014”.
Financial Markets Authority. 1 April 2014. Retrieved 20
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[21] “Crowd-funding craft brewer gets to $700k target early”.
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[6] “All-comers join web party for a punt on best start-ups”.
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[7] “Startups Remain Cloudy on the New General Solicitation Rule”. Bloomberg Businessweek. Retrieved September 20, 2013.
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[27] http://www.starsup.it
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[31] “Legal Challenges Related To Crowdfunding, Volume 1”.
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[12] Mattise, Nathan (2012-03-22). “Senate passes legislation to legalize crowdfunding”. Ars Technica. Retrieved
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[13] Sang Lee (2013-04-22). “Stop Calling It Crowdfunding”.
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[14] Art Patnaude (27 March 2013). "'Crowdfunding' Takes
Hold in the U.K”. The Wall Street Journal.
[15] Cohen, Corcoran & Landis. “Securities Act of 1933”
(PDF). Securities Act of 1933. U.S. Securities and Exchange Commission. Retrieved 5 March 2014.
[16] “ASIC guidance on crowd funding”. Australian Securities
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2015.
[34] “Great improvements to our crowdfunding service!".
[36] ""Stromberg revolutionizes movie funding”, Financial
Times Germany, 16 December 2011”. ftd.de. Retrieved
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[37] “Stromberg, one million € in one week”. quotenmeter.de.
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[38] “Crowdfunding for games”. Retrieved April 24, 2013.
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[40] “Social crowdfunding platform”. Retrieved 23 December
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[41] http://www.mas.gov.sg/
regulations-and-financial-stability/
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securities-futures-and-funds-management/forms/
collective-investment-schemes.aspx
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[42] “Arctic Start-up: Stockholm Partners With CrowdCulture
To Fund Culture”.
[65] “Crowd SEC: Rules for advertising crowdfunding” (PDF).
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[43] “Oslo Tecknopol: Crowdfunding comes to norway”.
[66] “Venturebeat: SEC uses JOBS Act to set up new roadblocks to crowdfunding”. Retrieved October 15, 2012.
[44] “Site Makes Pennies to Big Ideas”.
[45] Swiss Venture Capital Firm Raises 600'000
[46] Crowdfunding for Equity in Europe: Which Platforms are
bringing in the most money?
[47] investiere’s website
[48] Crowdfunding Monitor 2014, P.9
[49] Finma Crowdfunding Factsheet, December 2014
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saklıdır. September 2013. Retrieved 23 September 2013.
[51] “Rothe, Nina E, “Aflamnah: Looking for crowdfunding in
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huffingtonpost.com. Retrieved 19 May 2014.
[52] “Real estate crowdfunding in the UAE, GCC, and MENA
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[53] “Teh, Robin, “Revisiting REITs in the UAE real-estate
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[54] “Policy Statement: The FCA’s regulatory approach to
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[55] “Danny Fortsen, “Fivers make the windmill turn”, Sunday
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[56] “About Abundance”. The Abundance Positive Cycle.
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[57] “James Hurley, “Regulated financing market for start-ups
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[58] Hurley, James (August 14, 2012). “Richard Branson
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[61] “Profunder Shutting Down”. Retrieved October 15, 2012.
[62] “Crowdsourcing Dot Org: EarlyShares acquires Helpersunite”. Retrieved October 15, 2012.
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[64] “HR3606” (PDF). Retrieved 25 July 2012.
[67] Landler, Mark (5 April 2012). “Obama Signs Bill to Promote Start-Up Investments”. New York Times. Retrieved
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[68] “Crowd Fnding News: FINRA Seeks Public Input on
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[69] “EGS: Crowdfunding Alert” (PDF). Retrieved 16 Oct
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[70] Denlinger, Craig. “Crowdfunding Audits”. Retrieved 5
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[71] CHRISTINE LAGORIO-CHAFKIN (23 October 2013).
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[72] “Crowdfunding state by state? – William Carleton, Counselor @ Law”. Wac6.com. 2013-03-08. Retrieved 201309-03.
[73] “Office of the Kansas Securities Commissioner, KS – Invest Kansas”. Ksc.ks.gov. 2013-06-21. Retrieved 201309-03.
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[76] http://docs.legis.wisconsin.gov/2013/related/acts/52
[77] “House Bill 2023” (PDF). Retrieved 2013-09-03.
[78] “Invest NC Exemption” (PDF). Retrieved 2013-09-03.
[79] “State Crowdfunding Law”. State Crowdfunding Law.
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[80] Murphy, Patrick; Melissa York, Godfrey & Kahn S.C.
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[81] http://www.sec.gov/rules/proposed/2013/33-9470.pdf
7
6
Text and image sources, contributors, and licenses
6.1
Text
• Equity crowdfunding Source: https://en.wikipedia.org/wiki/Equity_crowdfunding?oldid=670317934 Contributors: Ronz, NeilN, Kashmiri, Cydebot, DGG, Redtango88, CorenSearchBot, Trivialist, Download, Yobot, FreeRangeFrog, Poshpaddy, Vc20, Дени Дидро,
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Images
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6.3
Content license
• Creative Commons Attribution-Share Alike 3.0
