Crowdsourcing Crowdfunding Rules
Crowdfunding is opening up large amounts of early stage capital for entrepreneurs. As regulators struggle to write new rules for this exploding phenomenon, they might do well to crowdsource their own questions and experiences.
Experimenting with regulatory changes in pursuit of enabling economies to fully leverage promising new ventures is relatively new to most governments around the world. As has been discussed often in this blog, startup-focused policymaking overall is new to even the most entrepreneurial economies--including the United States.
It follows therefore that nations have much to learn from each other as they test new policies. This has been the founding principal of the Startup Nations policy advisors who will gather for their annual summit in Mexico next month. If devising effective policies that are not just promoting small business, but specifically targeted at increasing new rates of firm formation is relatively new territory to most of us, why not share knowledge across borders as to the impact of our efforts.
One issue where government decision makers with good intentions are still struggling is finding the right rules to regulate crowdfunding. As I have written before, drawing the line between protecting consumers and empowering America’s enthusiasm for its risk takers and pioneers is not easy. The difficulty the SEC continues to have in finalizing rules for the JOBS Act prompts the question as to whether there is something to learn from others beyond our borders about developing rules around this phenomenon that is catalyzing entire entrepreneurial ecosystems worldwide.
In the United States, 17 states and the District of Columbia now allow some form of equity crowdfunding, and more are evaluating legislation in that regard. Crowdfunding campaigns are also taking off globally as more and more countries choose to bring this form of early stage financing to the regulated world.
If we look to Asia, there are plenty of trails to follow. Take South Korea for example, where there has not been a long tradition of individual risk-taking. Yolk, a Korean solar charger innovator, recently closed a Kickstarter campaign for Solar Paper that raised more than $900,000 and positioned its campaign as one of the most successful in the history of the global platform. This crowdfunding success story does not only bode well for the startup, but also for its local peers who now know of pools of early stage capital that see no borders.
This and several other success stories emerging from Korea were not possible until early July 2015, when Korea’s National Assembly passed legislation making fundraising from local individual investors a legal activity, along with online brokerage websites. This crowdfunding measure was part of a package of 61 economic stimulus bills proposed by President Park Geun-hye. Korean innovations are now rapidly being brought to the world’s attention through global platforms.
For now, to protect investors, the Korean Financial Services Commission limits investment in any single company to 5 million Korean won (approximately US$4,400) per year. In addition, it restricts startup owners and major shareholders from selling shares for one year after the issue is completed.
China is another country pulling the crowdfunding policy lever to counter a slowing economy where growth rates today were reported at falling below 7% for the first time since 2009. Cabinet-level policy leaders have recently vowed to encourage more entrepreneurship by promoting equity crowdfunding. According to a World Bank forecast, China could account for half of the developing world's crowdfunding by 2025, or US$50 billion.
Under draft rules from China’s Securities Association, as reported by Reuters, equity crowdfunding projects can only have up to 200 investors and investors should have at least 3 million yuan in financial assets or 500,000 yuan (approximately US$78,000) in annual average income for the previous three years.
Australians too are calling for lowering the threshold for ‘sophisticated’ investors who are allowed to participate in equity crowdfunding. Currently, only those investors with assets of at least AUD $250,000 (approximately US$182,000) can participate. The federal government there is still debating how to improve the framework. It seems most likely Australians will end up with a system that places an AUD $5 million cap on the amount a company can raise in a year, and a cap of AUD $2,500 per campaign for investors. Nearby New Zealand simplified their system, allowing as of last year, any investor to contribute and any startup to raise up to NZ $2 million each year through equity crowdfunding.
Looking closer to home at Europe, it appears nations like the United Kingdom and Sweden have already gone through more than one round of regulatory actions to fine-tune rules for crowdfunding, particularly for equity crowdfunding. The University of St. Andrews claims that the United Kingdom has “quickly established itself as the fastest growing equity crowdfunding market in the world” with companies raising £146m in 2015, up from £91m in 2014.
In Germany, the prominent failure of clean energy developer Prokon triggered the government to pass the new Small Investor Protection Act which moves the line in an attempt to strike a better balance between protecting investors and fostering new industries. Krista Tuomi, an associate professor in the International Economic Relations program at American University, is exploring ways that European crowdfunding laws and experience can help finalize how crowdfunding might work best in the United States by specifically contrasting the American JOBS Act to this German legislation.
Two interesting observations emerged from Tuomi’s research. First, unlike the US, Germany chose not to impose any resale restrictions and currently has no limitations on advertising (apart from requiring a warning notice). Second, unlike the US, there is no aggregate investor limit for German investors. “The aggregate limit is a problematic aspect of the JOBS Act since it will be difficult to enforce and tricky for platforms to administer,” argues Tuomi.
It is clear we have only seen the tip of the iceberg in terms of evidence on how to write fair equity crowdfunding regulations. As crowdfunding becomes more and more mainstream around the world, regulators might do well to listen to each other. Communities like those that form Startup Nations can collect and analyze data that can help us understand the impact that regulations have on this type of funding for new firm development and growth. However, given the global nature of virtual platforms, perhaps regulators might consider doing a little crowdsourcing themselves!
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