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The Importance of Regulation in Equity Crowdfunding and How it Has Changed Over Time

Sep 1, 2016

In any emerging industry, regulation is key to maintaining ethical practices and stable growth. As a growing part of the financial sector, this is especially true for equity crowdfunding – finance being a sector that is notorious for the use of inside information and underhanded practices. The regulations in place for equity crowdfunding are relatively new and are likely to change multiple times over the coming years, in much the same way as they have been altered and fine-tuned since the advent of crowdfunding.

One of the biggest regulatory changes is the shift to allowing non-accredited investors to participate in investments for equity – until recently, such investments were reserved for high-net-worth (or “accredited”) individuals. In the US this practice has roots that extend all the way back to the Securities Act of 1933, which prohibited the advertisement of private securities investment to the general public; the only people who could be marketed to were professional investors, i.e. people with enough money to afford it. The law was designed to stop people being defrauded by bogus investments with claims of massive returns, but nowadays it has evolved into a way to retain exclusivity and shut out all lower-stakes investors.

But now new regulations exist that turn parts of the Securities Act on its head: the US JOBS Act of 2012 is a prime example, Title III of which recently went into effect, officially permitting non-accredited investors to benefit from equity investments. Before this law was passed in the States, you had to earn over $200 000 a year or be worth over $1 million to be eligible to invest. What people don’t realise is that Title III is still relatively heavily regulated: total funds raised are capped at $1 million to ensure realistic project aims, and companies are required to disclose detailed outlines of their corporate and financial information, allowing crowdfunders to be sure they aren’t being defrauded.

In the UK the FCA laid down some interesting new rules in 2014 concerning equity crowdfunding, rules aimed at addressing who exactly platforms can target their marketing towards (not unlike the initial aims of the US Securities Act). According to these rules, there are a few basic criteria that a person would have to fulfil to be eligible to take part in equity crowdfunding. Firstly, the person must understand what they are investing in and how crowdfunding works; secondly, the person must be able to demonstrate that they can afford the investment, which can be done by proving that the potential investor is A) a high net worth individual, B) can be classified as a Sophisticated Investor, C) comes with the recommendation of someone approved and regulated by the FCA, or D) can show that they are a Restricted Investor, meaning that they can prove that they’re not investing the entire sum of their available assets.

What these FCA rules ensure is that crowdfunders can only put money into investments that they can actually afford, while simultaneously putting pressure onto platforms to stop them from marketing their services in a misleading way.

Regulatory changes such as these are being mirrored in countries across the world, with each national finance authority being forced to implement new rules in response to the growing popularity of equity crowdfunding. The Monetary Authority of Singapore, for instance, has recently proposed an easing of its General Solicitation rules to allow more online equity platforms to take off.

This kind of trend is encouraging for the industry as a whole because it shows that regulatory authorities are now more open to change. And change is coming: with the internet providing more and more opportunities for democratization in a range of industries, it was only a matter of time before the finance industry began seeing new, more democratic versions of the usual models. Equity crowdfunding makes sense in the Internet Age because it opens up the investment world to almost everyone, providing them with more opportunities to grow their money. In the US, for example, equity investment was previously restricted to the country’s richest 1%, representing just 8 million people; with Title III of the JOBS Act in place, the number of people eligible to invest has shot up to 300 million. It also cannot be ignored that the internet provides the perfect platform for investment transactions – it’s quick, efficient, easy to use, and isn’t bound by geographical restrictions.

What is essential for sustainable growth in the online equity crowdfunding sector is adequate regulation to ensure that all platforms are operating above board. This is something Bricksave are passionate about: we are approved and regulated by the FCA, and are currently pushing for stronger regulatory controls in Latin America. We believe the key is to protect the investors and provide them with the best most secure returns possible.

 

by Bricksave CEO; Tom de Lucy

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