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.
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.
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.
[4] The first known equity based crowdfunding platform was launched in 2007 in Australia, called the Australian Small Scale Offerings Board (ASSOB).
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.
[22] 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).
It must have a legal structure, statute and corporate purpose, name, registered addresses, shareholder registration, own website and email, among other requirements.
[25] The Australian federal government's now dissolved Corporations and Markets Advisory Committee (CAMAC)[26] released its report on equity crowdfunding in May 2014.
[27] The report proposed a regulatory regime specifically designed for and to facilitate crowd sourced equity funding (CSEF) in Australia.
[28] 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.
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.
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.
[36] 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.
[37] 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.
For the movie of the successful TV series Stromberg, the company wanted to collect one million euros by March 2012,[47] and the total amount was reached within one week.
Issues to be resolved and regulations to be reviewed[citation needed] include: Israel has yet to enact legal framework for equity crowdfunding.
[58][59][60] In October 2015, the Financial Markets Authority licensed a new equity crowdfunding portal called AlphaCrowd that said it would focus only on digital and technology companies and would also aim to attract Chinese investors to New Zealand.
[62] The June 14, 2017 Regulation of the European Parliament and the EU Council raised a threshold for no-prospectus issues to the limit of EUR 1 million, every 12 months.
[66] In February 2019, the idea of collecting equity money online gained significant media attention after the success of the offering of the football club Wisła Kraków.
[69] The first equity crowdfunding platform to receive the regulatory approval from the UK Financial Services Authority was Seedrs, co-founded by Portuguese Carlos Silva.
[84][citation needed] On 1 April 2014, the regulation of the consumer credit market transferred from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA).
[87] On 6 July 2012, Seedrs Limited was launched as the first equity crowdfunding platform to receive regulatory approval from the Financial Services Authority.
In May 2014, Crowd for Angels, which is considered the first debt and equity crowdfunding platform authorised by the Financial Conduct Authority (FCA), launched.
[91] In April 2017, Capital Cell, a specialist platform for biotech and life sciences crowdfunding from Spain, launched its subsidiary in the United Kingdom[92] and received regulatory approval from the Financial Conduct Authority in September 2017.
[93] Before June 16, 2015, equity crowdfunding (under Regulation D) was limited to individuals meeting certain net worth and income levels (accredited investors) and was conducted by a licensed broker-dealer (or funding portal).
Notable platforms for accredited crowdfunding include Angel Studios, Wefunder, AngelList, EquityNet, CircleUp, SeedInvest, and EnergyFunders.
[99] The U.S. Securities and Exchange Commission has been given approximately 270 days to set forth specific rules and guidelines that enact this legislation, while also ensuring the protection of investors.
[111] In parallel to the SEC regulations, the Financial Industry Regulatory Authority (FINRA) is creating additional rules related to member firms engaged in crowdfunding.