An extension of the newly introduced notion of crowdsourcing, equity crowdfunding democratizes the traditional venture capital investment model. While traditional legislation around equity and equity financing has existed for hundreds of years, the rapid introduction and adoption of Internet and social media has paved the way for drastic revisions to the classical private investing model.
While many young investors and prospective startups are excited to see full-scale deployment of equity crowdfunding realized, the global legal environment relating to equity crowdfunding has yet to catch up with this fad. While the specifics vary between countries, all equity crowdfunding laws are subject to securities and financial regulation, as equity crowdfunding involves investment into a commercial enterprise.
To further emphasize legal and regulatory complexity, the available investment pool in all countries will be liberalized to include potential investors that are not accredited under equity crowdfunding. As it stands in most countries, it’s only these accredited investors that are able to participate in private equity markets, and the criteria required under that designation further reduces the number of potential players to a small percentage of a given country’s population.
Although several extensions and exemptions are currently in place to allow some deviation from the traditional venture capital private equity model, there has yet to be a country that has fully regulated the notion of equity crowdfunding. That said, many countries are in the process of passing legislation to move towards full-scale equity crowdfunding.
Democratizing Investment Through Regulation: The US JOBS Act
In April 2012, the Jumpstart Our Business Startups (JOBS) Act went into effect, which outlines seven titles addressing various legalities of the equity crowdfunding process in the United States. In September 2013, Title II of the JOBS Act was signed into effect by bipartisan agreement. While Title II doesn’t provide deployment of a full-scale equity crowdfunding model, it modifies a series of laws that enable startups to seek funds that have been deemed illegal since Franklin Roosevelt’s Securities Act of 1933.
Title II Redefines Who Can Invest
Title II provides definitions of accredited and non-accredited investors. An accredited investor is defined as someone who has a net worth of at least $1,000,000 or an income in excess of $200,000 per annum. A non-accredited investor however is someone with a net worth of less than $1,000,000, and a net income less than $200,000 per annum. Furthermore, under Title II, businesses can have up to 35 non-accredited investors provided they offer full disclosure of all relevant and material information.
Title III Allows Non-Accredited Investment
Although it has not yet come into effect, Title III of the Jobs Act will provide a major stepping stone towards the realization of a full-scale equity crowdfunding model. Poised to come into effect either late 2015 or early 2016, Title III provides several adaptations to existing legislation pertaining to equity crowdfunding which opens many doors for startup companies and eager investors. In essence, Title III allows companies to solicit funds from as many non-accredited investors as they wish, subject to the following constraints:
Organizations may only solicit $1 million annually
Only registered broker-dealers and funding portals may intermediate purchases or investments
Investors may make a maximum investment of $2000 or five percent of their income if their annual income and net worth are less than $100,000.
Investors with a net income or net worth of over $100,000 may invest up to 10% of either
Businesses must offer total disclosure to all investors
The new provisions outlining who can participate in equity crowdfunding markets significantly change the private investing landscape. In the United States, there are currently approximately 3.5 million accredited investors. When Title III comes into effect, it is projected that the number of investors that can participate in equity crowdfunding markets will be around 233.7 million. A jump like this has the opportunity to not only redefine the entire startup business landscape, but allows prospective startup companies to tap into a wealth of potential equity funds predicted to be in excess of several trillion dollars - up from the estimated US Venture Capital market value of about $30 billion.
The Canadian ECF Environment
In Canada, there is progress towards democratizing the private equity investment process as well. While there are currently seven provinces that are moving towards full scale equity crowdfunding, Ontario is subject to different regulations than the other six.
In B.C., Saskatchewan, Manitoba, Quebec, New Brunswick, and Nova Scotia, a legal provision known as the Startup Exemption has been adopted. Approved in May by the aforementioned provinces, this provision allows companies with head offices in these provinces to raise up to $500,000 per year - but no more than $250,000 in a single offering. Further, individual investments are capped at $1500 per deal, and investors have the right to withdraw their investment within 48 hours.
In Ontario however, a new rule is poised to come into effect fall 2015. Named the Crowdfunding Exemption, this provision is broader than the Startup Exemption, allowing companies to raise a maximum of $1.5 million each year, with a $2500 ceiling for individual investors per deal. Further, investors are allowed a maximum of $10,000 per year. Ontario also wants crowdfunding portals to be registered with securities regulators as dealers – a provision not required by the other six provinces.
Other countries that are working on regulation of equity crowdfunding include Australia, New Zealand, and Italy. All of these countries have allowed reward-based crowdfunding as a business model for several years, but equity crowdfunding is still relatively new, and is therefore approached with a high degree of scrutiny. These countries are also outlining legal provisions necessary to move forward with deployment of full-scale equity crowdfunding models.
Other countries not mentioned in this article are also becoming involved with equity crowdfunding. As private equity markets transition to the online landscape, opportunities for crowdfunding become more globalized. Once the underlying legalities are up to date with the potential of existing technology, it is likely that full-scale deployment of equity crowdfunding models will ensue.
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