Because reward crowdfunding came first most regulators are fashioning their equity crowdfunding legislation for unaccredited investors around the pathway and figures reward crowdfunding has trodden.
They are two different animals though.
1) Reward crowdfunding is based on instant gratification (You get the DVD, watch, cooler etc as a reward)
2) Equity crowdfunding is based on hope. (You will wait years for an outcome and in the meantime you live on hope.)
However regulators, including advisory bodies like CAMAC in Australia, are building legislation recommendations that are built to handle volume (extrapolation from rewards) rather than recognising that the equity raises built on hope and protected by securities legislations will seldom have hundreds and thousands of investors. Why? If you pump up hope you mislead investors and there is plenty of legislation to prevent this. Directors are liable for misleading statements.
What start up or growth SME wants hundreds and thousands of investors and more importantly what would they need to say (pump up) to get hundreds and thousands of “retail” or “unaccredited investors.
Both Crowdcube and ASSOB’s equity funding platforms have been operating for a number of years with “retail” or “unaccredited” investors. In ASSOB’s case 63% of investors are “retail” or “unaccredited.
Recently I scrolled through 101 completed raises on Crowdcube. Most companies that had raised the funds they sought had obtained under 100 investors to achieve their targets. And with Crowdcube you can invest as little as a hundred pounds if you choose!
So why spend months working out how to build legislation to allow for hundreds and thousands of investors? Why not focus instead on the 95% of raises that will have under 100 shareholders, will create jobs and benefit society.
If we look at the American statistics for external funding sources the $60 Billion from Friends and Family is as much as all the other sources put together. It is in the legitimisation of these funds through proper share certificates and holding statements and loan documents that the bulk of equity crowdfunding potential lies for society. Yes there will be additional investors beyond this due to the raise being empowered by “equity crowdfunding” but for a raise based on hope I doubt it will be over 20% of the funds raised for 95% of raises. Friends and family funding will still provide the majority of funds raised.
How can regulators empower startups and growth companies so that they can accept legitimate investment from friends, family, fans and followers of businesses plus say an additional 10 to 25% more from “the crowd”.
In Australia’s case there is over 20 years experience with friends and family funding through the small scale offerings legislation. Why not just modify it tomorrow, as you would in any lean startup environment, and and see if shifting from 20 to 100 retail investors per annum is a good start.
Ask any advocate of the lean startup.
Bringing in totally new legislation for equity crowdfunding based on the best unproven equity crowdfunding legislation around the world is high risk.
It may only suit the 1 to 5% of companies that get thousands of investors and thus be a failure.
These 1 to 5% of companies would probably have been picked up by angels or VC’s anyway.
Surely regulations should be focussed on the companies that make up the 95% that will have less than 100 shareholders.