The popularity of equity crowdfunding among retail investors has required international legislation to keep apace with their rapidly-evolving involvement. It’s this active involvement of ‘mum and dad’ investors that contributed to the World Bank’s valuation of the global crowdfunding industry nearing $90 billion by 2020. Nonetheless, not all governments have been quick to assist in the active collaboration of different investor types within the crowdfunding industry. Today, Equitise addresses why investors should take a look at changes in crowdfunding regulation, and why governments sometimes lag behind the financial community in terms of new legislation.
The passage of the US JOBS Act in 2012 was supposed to build the way for you, your mum, your neighbour or your high-school teacher to be able to add ‘startup investor’ to your CV. Startups could tap into a potentially endless pool of entrepreneurs, and retail investors needn’t be part of any existing financial institution to have some skin in the game. Nonetheless, it took 3 years of additional regulations and SEC discussion to create a version of the JOBS Act they considered to protect investors.
Finally, the modern superpower has crafted legislation allowing investors of all types to contribute in a truly democratic manner. Restricting equity crowdfunding to accredited investors in 2012/13 hindered what has been a stratospheric rise for the industry – in the US, it went from $6.1 billion in 2013 to $34.4 billion in 2015, when it had been expanded to include retail investors. The appetite of these investors is demonstrable, lending to the suggestion the industry could surpass Venture Capital investment from 2016 onwards. There is a fine line, however, between wanting to protect retail investors, and unnecessarily limiting the industry as a whole.
The US seeks to protect retail investors by regulations – individuals with an annual income/net worth of <$100,000 can only invest $2,000 maximum/5% of the lesser of their annual income or net worth. Individuals with an income of minimum $100,000 can invest the 10% of either annual income or net worth. In Canada, however, the limit is $2,500 per offer. In the UK, where equity crowdfunding is the most active investment type, the limit is 10% of net assets total. The legislation of these countries stands in stark contrast to New Zealand – where there is no limit. See below for a chart which demonstrates the differing limits and regulations (thanks to Crowdfund Insider).
Why Investors Should Care
“By simply broadening the gender and racial makeup of potential investors, which crowdfunding does, opportunities for women and minority-owned business will increase.” - Georgia Quinn, CEO of iDisclose
Equity crowdfunding rose to prominence by offering access to the hitherto private world of financial investment to investors from all industries and walks of life. This benefits diverse startups also – as evidence by the above quote, in an industry where only 7% of venture capital principals are women, equity crowdfunding helps create a more diverse and inclusive financial marketplace. Moreover, the global investor response to the GFC has been one calling for innovation and rehaul of our existing financial structures - a key tenet of political platforms this election year has been the economy, and shoring up our financial system to prevent further failings. While every equity crowdfunding platform would be quick to remind its potential investors that there are risks involved, putting the financial power and decision-making back into the hands of retail investors - whose funds can be used to sponsor more innovative banks, like Mondo, and other Fintech companies, is an innately appealing concept.
Ultimately, we've seen regulations gradually keep pace with equity crowdfunding platforms the globe over - in 2010, the level of growth in the UK, let alone in NZ, was unprecedented and completely unpredictable. To ensure we retain this open marketplace, where companies can source funds from the crowd and retail investors can be engaged in the financial sector more than ever before, it's important to keep apace yourself with changes in equity crowdfunding regulation.