Type of investing
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 (required for subsequent growth) 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). 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 (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)). However, as of October 30, 2015, the SEC adopted Regulation Crowdfunding ("Regulation CF") 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(a)(6), 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 (Regulation CF). Online platforms operating under Regulation CF are expected to provide investment access via equity crowdfunding as early as mid-May 2016 (pending SEC approval). 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 (CNV), 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 (CAMAC) 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 (CSEF) 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 (ASIC) 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 (Crowd-sourced Funding) Bill 2016" (Bill). The Bill provided 6 months for the Australian Securities and Investment Commission (ASIC) 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 (small) proprietary companies passed parliament into law on 28 September 2018.
Austria.
Austria introduced a new law in August 2015 which specifically regulates crowdfunding and other alternative forms of investment. The law is meant to set a clear legal framework for crowdfunding to not only make this form of investment more accessible to entrepreneurs, but also to protect the investors better and prevent misuse. One campaign in Austria was introduced by Hanfgarten. In a single run, they gathered almost one million Euro.
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.
Canada.
Canada's first equity crowdfunding portal is Optimize Capital Markets which launched in Ontario in September 2009. In June 2013, the Ontario Securities Commission announced that it was allowing an Ontario-only portal for accredited investors. The province of Saskatchewan made equity crowdfunding legal in December 2013.
On May 14, 2015, the securities regulatory authorities of British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia announced that they were adopting substantially harmonized registration and prospectus exemptions (the start-up crowdfunding exemptions) to allow start-up and early-stage companies in these jurisdictions to raise up to $500,000 per calendar year through online funding portals. These exemptions will be in effect until May 13, 2020.
China.
On November 19, 2014, in the State Council address, prime minister Li Keqiang endorsed equity crowdinvesting as part of financial innovation to solve financing difficulties for small and medium enterprises. On January 20, 2015, the China Securities Regulatory Commission (CSRC) approved the first eight equity crowdinvesting platforms.
Cyprus.
The Cyprus Securities and Exchange Commission updated their legislation in 2024 to regulate Crowdfunding firms offering CSP (Crowdfunding Service Provider) licenses to Cyprus Investment Firms. A public register is maintained on the CySEC government website listing all firms that possess the CSP sub-license. The oldest CSP licensed crowdfunding company in Cyprus is CrowdX, whose underlying company Eurivex has been offering stock market listings, pre-IPO and regulated fundraising services since 2012.
Estonia.
The largest equity crowdfunded company in Estonia is Change, which has raised over €20M to-date. The first equity crowdfunding system was launched in August 2015 by Fundwise. There is no special law regarding crowdfunding but there is a Good Practice of Crowdfunding guidelines that were set up by Finance Estonia industry association and Deloitte in 2016. Estonia is home to the only equity crowdfunding platform in Europe that is licensed for trading of investments in a secondary marketplace, Funderbeam, which is licensed by the FCA (UK) EFSA (Estonia) &amp; MAS (Singapore).
Finland.
An Equity Crowdfunding portal was launched in Finland in May 2012 by Invesdor. The legal issues around donation-based crowdfunding have been under debate in Finland as its legislation 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. Invesdor has also started operating in Sweden and has additionally opened its service to Danish and Estonian companies. The Sweden-based FundedByMe also launched their Equity Crowdfunding portal in Finland in January 2013.
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, and the total amount was reached within one week.
Companisto is the largest equity-based crowdfunding website in Germany.
Hong Kong.
An equity crowdfunding platform may need to be licensed under the Securities and Futures Ordinance (Cap. 571) before it is permitted to