April 21st, 2017
Equity-based crowdfunding: Will the US overtake the UK?
For many, equity-based crowdfunding is the final stage of crowdfunding’s evolution. The United Kingdom was an early adopter of equity crowdfunding. Less than two months after President Barack Obama signed the JOBS Act in 2012, dubbed the “Crowdfunding Bill”, UK platform Escapethecity.org had already raised £500,000.
While equity crowdfunding raised £28 million in the UK last year, it only became “legal” in the United States on 22 September 2013 – the day Title II of the JOBS Act came into effect allowing “general solicitation” of private placement share offerings. The average American is still prohibited from acquiring shares online via crowdfunding.
However, an examination of the two countries’ regulatory frameworks reveals that the US may overtake the UK as the world’s equity crowdfunnding capital – perhaps even this year.
US legal position: September and October 2013 kept crowdfunding analysts busy.
Title II of the JOBS Act lifted a ban on the public advertisement of stock placements, which dated back to 1933. Entrepreneurs and crowdfunding providers can now solicit any accredited investor. This includes someone who is presumed to be a “sophisticated investor” with an annual income of at least $200,000 or a net worth exceeding $1 million.
On the 23rd of October 2013, the U.S. Securities and Exchange Commission (SEC) proposed its regulations on how to implement Title III of the JOBS Act. According to these recommendations, non-accredited investors earning less than $100,000 per year, can invest up to 5% of their income, or $2,000, whichever is more. This would make equity crowdfunding available to the 80% of Americans who earn less than $100,000. The recommendations are expected to enter into force later in 2014.
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 (FSMA), the UK’s financial regulation framework.
As such most equity crowdfunding providers require the approval of the Financial Conduct Authority (FCA – the agency responsible for enforcing FSMA), 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 investor the provider may transact with.
Therefore, in contrast to the US’ initial blanket restriction, crowdfunding slotted into the UK’s existing regulatory framework, – hence the head-start.
However, the government aims to move away from the case-by-case approach to a more streamlined approval process. On the 24th of October 2013, 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.”