How Has the USA Progressed with its Equity Crowdfunding Compared to the UK?
The USA has struggled with the concept and implementation of Equity Crowdfunding. For a nation that invented rewards-based crowdfunding and still has the world’s two leading platforms, in Kickstarter and Indiegogo, watching as the SEC (Securities and Exchange Commission) wriggles and squirms to get the right balance between deal flow and investor protection, is fascinating. Especially when you sit it beside the European model, as led by the UK.
To start at the beginning, when Equity Crowdfunding first launched here in the UK in 2011, it wasn’t legal for similar transactions to take place in the USA. Sure, you could, as a business, raise equity funding without using the markets, but this was via Regulation D of the 1933 Securities Act and excluded all investors who were not branded as ‘accredited’. This meant the SEC reckoned they could look after themselves or were rich enough to employ advisers. To be accredited now, you need to be earning over $200,000 for at least the last 2 consecutive years or have a level of assets excluding your primary residence of $1m.
Companies choosing this route are not allowed to promote this offer to the general public – so anything with the word ‘crowd’ in it becomes unusable. Under rules 504/505 and 506 of this section of the Act, the sale of shares is restricted by the company having to file the same sort of information that a public offering would require. The expense of doing that on any offering up to the maximum allowed under Reg D ($1m) is prohibitive. Essentially, it closes the door on the use of real Equity Crowdfunding as we know it here. Offers tend to go out to a closed circuit of ‘accredited’ investors, so it resembles Angel investing rather than Equity Crowdfunding.
The JOBS Act (Jumpstart our Business Start-ups Act 2012) was seen by some as a way to water down the sterner rules of the SEC. In what seems a sensible move, the various pieces of the legislation were rolled out over a period of several years, with the final piece only coming into law in mid-2016. From an Enterprise Capital Funds’ standpoint, this final piece, Title III Equity Crowdfunding, was vital.
One of the initiators in gingering up the SEC to take action to ease access to Equity Crowdfunding in the USA was the tale of Oculus Rift (‘OR’). This company, in the VR space, was a huge hit on Kickstarter in 2012. It raised a staggering $2.5m on the platform. Two years later, the company was bought by Facebook for $2b. “Investors” via Kickstarter were left scratching their heads, wondering what might have been had they paid for shares instead of the perks OR was offering. Some even complained that their support for the company had been abused.
What these people missed, in the hype of this sale, was the obvious. OR was pre-selling its prototype VR goggles for any investment of around $300 or more. Under this amount, you had to put up with a t-shirt. The point is, this was a no risk venture for the “investors” – they knew what their money was buying and they all received what they had paid for.
If you look at the figures, the number of “investors” putting in enough to obtain the product ($300) represents two thirds of the total - showing that this was clearly a pre-sale event.
If OR had sold shares instead, some estimates reckon people would have seen a 1000% return. But that’s with hindsight. When investing in a pre-revenue start-up, the risk is all on the investor. Via Kickstarter, he/she got their reward regardless. Via a share certificate, they might see an ROI or be wiped out; the odds are heavily stacked in favour of the latter.
I’m pretty sure that the SEC understood this. And that’s why, despite the pressure from business to loosen the regulations around raising crowd capital, they have (to date) kept it under review.
So what of Title III? How has it impacted real Equity Crowdfunding in the USA?
It’s a little early to be sure but initial signs are that it hasn’t helped much. The way Title III is set up may explain why.
Otherwise known as Reg CF (Crowdfunding), the main idea behind it was to loosen the regulations of the 1933 SEC rules on investing into non-listed private companies, so that the shortfall in funding following the banking crash of 2008 could be alleviated.
In what has turned out to be quite an excruciatingly long winded series of add-ons, Reg CF has not achieved this aim. It would be fair to say that the SEC’s caution has ended up strangling most of the life out of Equity Crowdfunding in the USA.
Of course it is early days and there have already been amendments to Title III – the Fix Crowdfunding Act passed in July this year, for example. So, further changes should be expected. As it stands, the Act is not remotely similar to the system we operate here.
Title III summarised, states that:
- Companies can only raise a total of up to $1m in any 12 month period.
- They must use an online intermediary – i.e. an accredited Equity Crowdfunding platform.
- The company must be incorporated in the USA.
- Campaigns must disclose certain financial information, and depending on how much you plan to raise, your financial statements may need to be reviewed or audited by an accountant.
- Successful companies must fulfil certain ongoing reporting requirements.
- Companies may raise funds from both accredited and non-accredited investors, although investors are limited to investing a certain dollar amount based on their income or net worth.
- Equity Crowdfunding platforms are under an obligation to verify the campaigns they promote, and if it can be proven that they have misled with false information, would be liable to prosecution.
If you compare this to the way the FCA in the UK has adopted a hands-right-off approach, then the differences are obvious.
In the USA, they have decided that the portals making these offers available, and making a profit from doing so, owe a duty of care to the ‘members’ on their site. In the UK, there is no such duty of care and, in fact, we have seen numerous examples of other platforms listing false information. I can see no reason why platforms shouldn’t be liable to some degree.
Likewise, here in the UK, the companies, once successful, have no duty to keep investors (now their shareholders) up to date on the company’s activities. Some - like Growthdeck - do, but most don’t. That could be because they have nothing good to report but they should still be communicating.
In my opinion, the SEC has got this right. The laissez faire attitude of regulators in the UK may have stolen a march on the world of Equity Crowdfunding by allowing it to grow free of restraints, but we have yet to see the results. Few platforms in the USA have taken up the challenge and complied with the SEC regulations as they exist now – fewer than 30 applied this summer. And very little funding has been completed using Title III - certainly when compared to Reg D funding (from accredited investors).
It remains to be seen if business pressure groups can get these rules relaxed - the Fix Equity Crowdfunding Act was changed to such a degree before passing into law, that it really made very little difference. The SEC has clearly heeded the warnings from 2008. So, the big question for us must be: why haven’t we?
1 December 2017
Who is Dexster?
Sometimes controversial, always trenchant, Dexster is Growthdeck's resident blogger. Dexster will bring you his/her views on the crowdfunding scene covering a wide range of topics, including the growth of the equity crowdfunding industry, the risks faced by platforms, how businesses are faring, what investors need to look for when choosing a provider and much more.