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 crowd-investing, investment crowdfunding, or crowd equity. 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 crowd-investing, 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. Investment crowdfunding can be debt-based or equity-based, or 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 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 model for startups to raise investments directly on the site in May 2011, but deciding later to shut down its business due 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. 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. 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.