The state of equity crowdfunding from the world’s most active markets
By Vanessa Malone
The U.S. has seen some incredible movement on the equity crowdfunding front. Just last month, the SEC increased capital raising limits for Reg A+ from $50 million to $75 million and Reg CF from $1.07 million to $5 million.
Soon before, the SEC expanded the definition of what it means to be an “accredited investor” and created a stepping stone for investors to qualify based on defined measures of professional knowledge rather than just net worth.
In just 5 years, equity crowdfunding has established itself as an innovative way to raise meaningful capital from the crowd and this upward trend isn’t just taking place in the U.S.
Equity crowdfunding and the greater crowdfunding sector have become a powerful force globally and continues to increase access to capital. Let’s take a look at equity crowdfunding’s status across the largest players.
In 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law by President Barack Obama. The most utilized equity crowdfunding offerings that the general public may participate in are conducted using Regulation CF (Reg CF) and Regulation A+ (Reg A+). Rule 506(c) of Regulation D (Reg D) also enables issuers to market their opportunity to a large audience of investors but only high-net worth or accredited investors may participate in these offerings. Rule 506(c) of Reg D went into effect September 23, 2013; Reg A+ on June 19, 2015; and Reg CF on May 16, 2016.
Since inception, exempt securities offerings have outpaced registered offerings. According to the SEC, registered securities offerings accounted for $1.2 trillion (30.8%) of new capital in 2019 while exempt securities offerings accounted for $2.7 trillion (69.2%) of new capital (this includes Reg D, Reg A+, Reg CF).¹
Despite the COVID-19 pandemic, equity crowdfunding portals have reported upticks as fans continue to invest and support the companies they believe in. According to CrowdWise; Wefunder, StartEngine, and Republic were the top equity crowdfunding portals by capital raised in 2020.²
Secondary trading is still in its infancy. StartEngine recently launched their Alternative Trading System (ATS) for issuers who raise capital on their platform. There are other secondary marketplaces in the works as fintech companies like Horizon work to foster secondary liquidity.
The U.K. has one of the most developed equity crowdfunding markets and falls within the jurisdiction of the Financial Services and Markets Act 2000. Seedrs was the first equity crowdfunding platform to be authorized by the Financial Conduct Authority (FCA) in 2012.
While there is no limit on how much a crowdfunding platform may raise, companies typically elect to stay within the amount exempt from a costly prospectus requirement. In 2018, this limit was changed from €5 million to €8 million.³ Non-accredited investors can invest in early-stage opportunities as long as it’s not more than 10% of their net assets in a year.
The two largest equity crowdfunding platforms are Seedrs and Crowdcube. It was announced in October that the two giants have agreed to a merger, subject to regulatory approval. As for secondary market, it’s still new in the U.K as well, with Seedrs secondary market currently open one week per month for trading.
European Union (EU)
Until recently, it was very difficult for crowdfunding platforms to expand across borders. In October 2020, the European Parliament approved new rules that will enable crowdfunding platforms to easily provide services across the EU based on a single set of rules.⁴
The framework defines common authorization and supervision rules with the European Securities and Markets Authority (ESMA) facilitating the agreement.
The new rules will cover crowdfunding campaigns up to €5 million over a 12 month period with larger operations to be regulated by MiFID and the prospectus regulation. Notably, these rules will apply to the U.K. during the transitional period (end of 2021).
China is considered a major player in crowdfunding but the majority of its crowdfunding volume is derived from peer-to-peer consumer lending.² Equity-based crowdfunding in China refers to “internet non-public equity financing” and currently operates in a legal gray area between a private and public offering which has made it the least popular crowdfunding model.
According to a 2019 report from Fudan University Law School, the general trend is for equity crowdfunding platforms to adopt a lead investor who in turn brings in smaller investors.⁵
The complex regulatory landscape has taken a toll on crowdfunding in China. Where the U.S and the U.K showed growth rates of 42.4% and 30.7% from 2017 to 2018, the Chinese crowdfunding volume dropped by -39.9%.⁶ Unless more meaningful regulation is implemented, China could get pushed out as a top crowdfunding player.
According to P2P market data from the Cambridge Centre for Alternative Finance (CCAF) Cambridge, the three largest markets for crowdfunding are China, the United States, and the United Kingdom.⁷
As more countries make steps to regulate and legalize equity crowdfunding and as the market matures further, we believe that crowdfunding will continue its path to mainstream capital raising.
Horizon is a fintech company that builds and powers global securities exchanges with an integrated suite of software for compliant issuance, management, and secondary trading of securities. Truly a compliance-first business, our solutions combine Wall Street and Silicon Valley to power the next generation of IPOs and securities trading in the U.S. and globally. Visit us at https://www.horizonfintex.com/.