Equity crowdfunding
Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets. Because equity crowdfunding involves investment into a commercial enterprise, it is often subject to securities and financial regulation. Equity crowdfunding is also referred to as crowdinvesting, investment crowdfunding, or crowd 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 may come from other sources.
History
Investment crowdfunding can be debt-based or equity-based. IT can follow other models, including profit-sharing 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 baseline design of equity crowdfunding was proposed in the year of 2000 in Russia. The proposed business entity was supposed to operate the crowdinvesting processes, targeting those entrepreneurs, startups, and small businesses unable to issue securities. The platform, facilitated with a computer database, should provide information on the business plans and offer additional professional risk-assessment services to the investing audience. Also, it has been recommended that a policy maker to develop and enact legislation that promotes and protects the crowdinvesting practice. The concept suggested to sign the investment deals with the use of individual investment agreements for future profit or future equity. In 2013, such type of individual agreements was standardized to "SAFE notes" by Y Combinator.
The first known equity based crowdfunding platform was launched in 2007 in Australia, called the Australian Small Scale Offerings Board. ASSOB now trades as Enable Funding, a securities licensed equity raising platform that has raised over $150 million for 176 private companies. Over 78% of these companies were still trading profitably at the end of 2017. The first US. based company ProFounder launched a model for startups to raise investments directly on the site in May 2011, but deciding later to shut down its business due to regulatory reasons preventing them from continuing, having launched their model prior to JOBS Act. Early platforms include CrowdCube and Seedrs in the UK. Others like the European startup Exorot.com invest their own money in every new startup on top of investment received from others on their website.
Selling investments via crowdfunding has been called crowdfund investing, hyperfunding, crowdinvesting, or even simply crowdfunding, as in "legalize crowdfunding". Some have called for standardization of the terminology in a way that distinguishes the practice from other forms of crowdfunding.
Debt crowdfunding, also known as peer to peer lending or peer to business lending, allows a group of lenders to lend funds to individuals or businesses in return for interest payment on top of capital repayments. Borrowers must demonstrate creditworthiness and the capability to repay the debt, making it unsuitable for NINA or startups.
Regulation
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 is the Howey Test. The Howey Test says that a transaction constitutes an investment contract if there is an exchange of money with an expectation of profits arising from a common enterprise 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. However, as of October 30, 2015, the SEC adopted Regulation Crowdfunding under the Securities Act of 1933 and the Securities Exchange Act of 1934 to implement crowdfunding provisions of Title III of the JOBS Act. Title III added new Securities Act Section 4, which provides an exemption from the registration requirements of Securities Act Section 5 for certain crowdfunding transactions. On January 29, 2015, the SEC opened up registration process to approve online platforms intending to legally solicit offerings through equity crowdfunding. Online platforms operating under Regulation CF are expected to provide investment access via equity crowdfunding as early as mid-May 2016. 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.Crowdfunding is regulated to protect investors. Creators on crowdfunding platforms are often inexperienced and lack the ability to complete funded projects by agreed deadlines. Additionally, amateur investors are susceptible to fraud when they fail to verify projects and "free-ride" on other investors' funding histories. Above all, there is an overall risk of failure in early, platform-driven projects.
International approaches to regulation
Argentina
Although it was admitted by the Civil Code, it was not regulated, a task that was recently carried out by the National Securities Commission, an agency that is the authority of control, regulation, control, and enforcement.The Argentine crowdfunding model will flow through collective financing platforms, which must be in charge of a corporation authorized and registered by the CNV.
It must have a legal structure, statute and corporate purpose, name, registered addresses, shareholder registration, own website and email, among other requirements.
Among its activities, the corporate purpose should indicate that it puts in contact "a plurality of human and/or legal persons acting as investors with human and / or legal persons requesting financing".
Australia
Crowdfunding as a discrete activity is not prohibited in Australia when raising funds with donations. The provisions of the Corporations Act need to be considered if raising funds with either debt or equity.The Australian federal government's now dissolved Corporations and Markets Advisory Committee released its report on equity crowdfunding in May 2014. The report proposed a regulatory regime specifically designed for and to facilitate crowd sourced equity funding in Australia. The CAMAC report recommended Australia introduce legislation allowing retail investors to invest up to $10,000 a year in start-ups via equity crowdfunding, with a maximum of $2,500 in each company. It suggested companies be allowed to raise up to $2 million per year on such platforms.
In the 2015 Federal Budget, as part of its small business package, the government announced that it would make it easier for small businesses to access capital by allowing crowd-sourced equity funding and by simplifying related reporting and disclosure requirements. 'Treasury 'set aside $7.8 million in funding over four years to enable the Australian Securities and Investments Commission to implement and monitor the regulatory framework to facilitate the use of crowd-sourced equity funding when it is unveiled before the end of 2015.
Through 2016 and 2017 proposed amendments to the Corporations Act were debated and finally passed on 22 March 2017 in the form of the Corporations Amendment Bill 2016. The Bill provided 6 months for the Australian Securities and Investment Commission to enable the legislation and a further delay for licensing to occur.
On 11 January 2018 the first seven retail AFS Licences were granted to Big Start, Billfolda, Birchal Financial Services, Equitise, Global Funding Partners, IQX Investment Services and On-Market Bookbuilds.
Amendments expanding access to equity crowdfunding for proprietary companies passed parliament into law on 28 September 2018.