Tianxiang Zhou, MJLST Editor
While donation-based crowdfunding (giving money to enterprises or organizations they want to support) is flourishing on online platforms in the US, the equity-based crowdfunding (funding startup enterprises or organizations in return for equity) under the JOBS Act is still staggering as the requirements are proving impractical for most entrepreneurs.
Donation-based crowdfunding is dominating the major crowdfunding websites like Indiegogo, Kickstarter, etc. In March, 2017, Facebook announced that it will introduce a crowdfunding feature that will help users back causes such as education, medical needs, pet medical, crisis relief, personal emergencies and funerals. However, this new crowdfunding feature from Facebook has nothing to do with equity-based crowdfunding; it is only used for donation-based crowdfunding. As for the platforms specialized in crowdfunding, equity-based crowdfunding projects are difficult to find. If you visit Kickstarter or Indiegogo, most of the crowdfunding projects that appear on the webpages are donation-based crowdfunding project. As of April 2, 2017, there are only four active crowdfunding opportunities appearing on the Indiegogo website that are available for investors. The website stated that “more than 200 (equity-based) projects funded in the past.” (The writer cannot find an equity-based crowdfunding opportunity on Kickstarter or a section to search equity-based crowdfunding opportunities.)
The reason why equity-based crowdfunding is not flourishing is easily apparent. As one article points out, the statutory requirements for Crowdfunding under the JOBS Act “effectively weigh it down to the point of making the crowdfunding exemption utterly useless.” The problems associated with obtaining funding for small businesses that the JOBS Act aims to resolve are still there with crowdfunding: for example, the crowdfunding must be done through a registered broker-dealer and the issuer have to file various disclosure statement including financial statement and annual reports. For smaller businesses, the costs to prepare such reports could be heavily burdensome for the business at their early stage.
Compared to crowdfunding requirements in the US, the UK rules are much easier for issuers to comply with. Financial Conduct Authority (FCA) introduced a set of regulations for the peer-to-peer sector in 2014. Before this, the P2P sector did not fall under any regulatory regime. After 2014, the UK government requires platforms to be licensed or to have regulated activities managed by authorized parties. If an investor is deemed a “non-sophisticated” investor constraints are placed on how much they are permitted to invest, in that they must not invest more than 10% of their net investable assets in investments sold via what are called investment-based crowdfunding platforms. Though the rules require communication of the offers and the language and clarity of description used to describe these offers and the awareness of the risk associated with them, much fewer disclosure obligations are required for the issuers such as the filing requirements of annual reports and financial statement.
As a result, the crowdfunding market in the UK is characterized as “less by exchanges that resemble charity, gift giving, and retail, and more by those of financial market exchange” compared with the US. On the UK-based crowdfunding website Crowdcude, there are 14 opening opportunities for investors as of April 2, 17, and there were 494 projects funded. In comparison, the US-based crowdfunding giant Indiegogo’s statement that “more than 200 projects funded in the past” is not very impressive considering the difference between the sizes of the UK’s economy and the US’ economy.
While entrepreneurs in the US are facing many obstacles in funding through equity-based crowdfunding, the UK crowdfunding websites are now providing more equity-based opportunities to the investors, and sometimes even more effective than government-lead programs. The Crowd Data Center publicized a report stating that seed crowdfunding in the UK is more effective in delivering 40% more funding in 2016 than the UK government funded Startup Loans scheme.
As for the concern that the equity-based fraud funding involves too much risk for “unsophisticated investors,” articles pointed out that in countries like UK and Australia where lightly regulated equity crowdfunding platforms welcomed all investors, there is “hardly any instances of fraud.” While the equity-crowdfunding JOBS Act has not failed to prove its efficiency, state laws are devising more options for the issuers with restrictions of SEC Rule 147. (see more from 1000 Days Late & $1 Million Short: The Rise and Rise of Intrastate Equity Crowdfunding). At the same time, the FCA stated that it will also revisit the rules on crowdfunding. It would be interesting to see how the crowdfunding rules will evolve in the future.