“Kickstarter is crowdfunding with training wheels”
– Hal M. Bundrick
The UK was an early adopter of Equity-Based Crowdfunding (EBC). Less than two months after President Obama signed the JOBS Act, dubbed the “Crowdfunding Bill”, Escapethecity.org raised £500,000.
While EBC raised £28 million in the UK last year, it only became “legal” in the US on 22 September 2013 – the day Title II of the JOBS Act came into effect.
However, an examination of the two countries’ relevant regulations reveals that the US may overtake the UK as the world’s EBC capital – perhaps even this year.
US legal position
September and October 2013 kept crowdfunding analysts busy.
Title II lifted a ban, dating back to 1933, on the public advertisement of stock placements. Entrepreneurs and crowdfunding providers can now solicit any accredited investor, including someone who is presumed to be a sophisticated investor with an annual income of at lest $200,000 or a net worth exceeding $1 million.
On 23 October the U.S. Securities and Exchange Commission proposed its recommendations on how to implement Title III of the JOBS Act. According to these, non-accredited investors earning less than $100,000 per year can invest up to 5% of their income, or $2,000, whichever is more. The recommendations are set to enter into force without any major amendments by July.
UK legal position
The relevant UK law is the product of a pre-crowdfunding era, and only caters to professional investors. Arranging an equity investment constitutes a regulated activity under the Financial Services and Markets Act 2000. As such most EBC providers require the approval of the Financial Conduct Authority (FCA), unless their model falls within a limited number of narrow exceptions.
Approval is usually tied to restrictions determined on a case-by-case basis, which aim to limit the type of retail investor the provider may transact with.
Seedrs and Crowdcube – the UK’s two largest EBC providers – are FCA approved. As they have different business models, they face different restrictions.
On 24 October the FCA published a Consultation Paper (CP 13/13) aiming to “make investment-based crowdfunding more accessible to a wider, but restricted, audience of consumers.”
This is to be achieved by moving away from a case-by-case analysis of what investors are suitable to the following fixed categories:
1) Those who are self-certified or self-certify as sophisticated investors;
2) Those who are certified as HNIs;
3)Those who certify that they will not invest more than 10% of their net investible portfolio in unlisted shares; and
4) Those who confirm that they will receive regulated investment advice or investment management services from an authorized person.
The Paper also defines an “appropriateness test” providers must apply if no investment advice is given to the investor. This is mainly to ensure that the client understands the risks of the investment.
In the race to become a crowdfunding hub, the UK was quick off the mark. Its existing regulatory regime could accomodate the business models of different EBC providers, and its government encouraged tax efficient investment in emerging companies (e.g. through the EIS scheme).
However, not moving forward is heading backwards.
The FCA’s existing case-by-case approval process is piecemeal, lengthy and lacks transparency.
As such, the Consultation Paper is a welcome opportunity to clarify the law and therefore reduce the uncertainty and risk of non-compliance for EBC providers.
If this clarification does not happen before EBC gains traction in the US, the UK risks loosing its head-start, and accordingly its share of an industry that could to be worth up to $300 billion.