Except in the United States of America where it has been regularized by the introduction of the Jobs Act 2012, the other countries yet lack an exhaustive and systematic legislative backing for crowdfunding.
The introduction of JOBS ACT, 2012 and the SEC regulations have revolutionized the concept of equity crowdfunding in USA. The enactment has brought an end to the 80-year old ban on “general solicitation” and advertising in specific kinds of private placements of securities. Further it enables companies to raise money publicly and privately and allows them to stay private longer. JOBS Act introduced the concept of accredited investors and has also increased the number of shareholders from 500 in total to 500 unaccredited and 2000 in total, before being required to be registering its common stock with SEC. Also it has exempted some specific kind of public offerings from being registered with SEC, though these exemptions have certain conditions attached to them like limiting the amount of money allowed to be invested in such offerings. It has also relieved the emerging companies from certain disclosure requirements which they need to follow after going public. Overall the act is expected to increase the revenues from the equity-based platforms along with ensuring safety to both investors and borrowers.
New Zealand became the first country to develop crowd funding legislation in Asia- Pacific region. The Financial Markets Conduct Act came into force from 1st April, 2014. It regulates both equity and peer to peer lending. The new law allows companies to raise up to $2 million in any 2 month period by offering shares to the public with no equity cap. It requires share issuers to seek funds only through licensed providers, and also it’s mandatory for licensed providers to conduct background checks on issuers and directors, and the requirement to make investors aware of the inherent risks associated with investment via equity crowd funding.
The crowd funding platforms in UK are divided into two categories:
From 1st April, 2014, the regulations for loan-based crowdfunding got transferred to Financial Conduct Authority (FCA) from the Office of Fair Trading (OFT). The new enactments made it compulsory for existing crowdfunding to hold an appropriate license from OFT for operating in March, 2014 and also have to apply for interim permission to continue from FCA to continue its activities. All the firms coming up after April, 2014 need a prior license from FCA to operate. Crowdfunding platforms also need to have a minimum paid up capital of £ 20,000 from October this year to £50,000 from April, 2017. Investors are also given the option to cancel their agreement with a 14 day cooling off period in case if the crowdfunding doesn’t provide access to secondary market.
Regulations for investment-based platforms are very similar to the ones provided for loan based platforms including the provisions for 14 days cooling off period. It also restricts the people who can invest categorizing them into 4 different types namely:
The investor is also required to pass an investor appropriateness test conducted by the crowdfunding platform to be launched before October, 2014.
Italy was the first country in Europe to regularize equity crowdfunding in the year 2013. The law allows funding of “innovative start-ups” and newly founded companies. The company needs to be registered and has to fulfill the following requirements:
To be an innovative start-up, the company must meet at least one of the following requirements:
Many crowdfunding platforms like Pikaventure, Wishberry, Indiegogo and Kickstarter have come up in India as well. But most of them are either donation based or work on the peer to peer model. Equitybased crowdfunding has not been made legal in India yet. Taking cue from JOBS Act, the Securities and Exchange Board of India released a “Consultation Paper on Crowdfunding” in 2014 with a view to provide systematic framework to govern this model. In any instance of crowdfunding, the following aspects have to be mandatorily looked into namely:
Investors play a vital role in the success of any crowdfunding campaign. They can make the project successful by advancing the requisite money. But one of the crucial considerations of any business entity will be regarding the reliability of the investors. Considering the demographic extent of a country like India, it becomes very challenging to identify and ascertain trustworthy investors. Thus, SEBI has come up with the concept of accredited investors.
SEBI has proposed that the following set of people who come under the category of accredited investors namely:
Thus, by prescribing a criterion for the investors, SEBI tries to limit the people who can finance so that only those with certain knowledge and experience can invest and be depended upon.
The very essence of crowdfunding is to provide funds to those enterprises which are unable to raise funds from the conventional sources. Also, it is mainly the start-ups and SME’s which are going to benefit from this practice. So it has been suggested by SEBI that this channel of crowdfunding be allowed to be accessed by early stage startup or SME which is an unlisted public company incorporated in India. Further to ensure that only genuine businesses are allowed to raise money, certain stringent qualifications and directions have been prescribed by SEBI.
Further to ensure that the investors are not defrauded by the company, certain disclosure requirements are also mentioned by SEBI. Some of them include submitting the Private Placement Offer Letter containing a description of the business, the amount of funds intended to be raised, past history of crowdfunding, description of the financial condition of the company, the price at which the securities are offered, principal risks to the issuer’s business, grievance redressal mechanism, etc. There might be a need of disclosure of other information also like the audit statement of the business, any penalty against the company etc. This can be a slight hindrance for the business as they might have to meet strict standards in conformity with the rules laid down by SEBI.
Although there have been some successful crowdfunding campaigns in India, the overall popularity of this method as a means of raising funds is not yet well-known. Recently, SEBI had released a consultation paper on crowdfunding with the need to regularize this technique. A number of changes have been proposed like the concept of accredited investors, guidelines for who can raise funds from the public and the extent to which they can raise, certain disclosure requirements so that the investors are not defrauded etc. Except USA, no other countries have an exhaustive and systematic legislative backing for crowdfunding. Thus, after looking at the International practice and the Indian situation, it appears that there is a need for a strong legislative backing to bring in the concept of crowdfunding into the mainstream and help the business ventures accrue the benefit of it.
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