TILBURG UNIVERSITY LAW SCHOOL

Master Thesis for the International Business Law LLM

Equity - where is the industry today?

Student: Dagmar Pasovs

Emp: u1275499, ANR: 566890

Supervisor: Erik P.M. Vermeulen

Academic Year: 2015-2016 Table of Contents Foreword ...... 4 Introduction ...... 5 Chapter I: Overview on and the Master Thesis structure ...... 7 1.1 The general overview on equity crowdfunding ...... 7 1.2 Problem description ...... 9 1.3 Research question ...... 11 1.4 Master thesis structure ...... 11 Chapter II: Why is equity crowdfunding a good way forward? ...... 13 2.1 What is the core of equity crowdfunding? ...... 13 2.2 What are the numbers telling about the activity on equity crowdfunding market? ...... 15 2.2 Equity crouwdfunding vs and Business Angels ...... 17 2.4 How do platforms manage ownership of the shares? ...... 20 Chapter III: The changing landscape of equity crowdfunding regulation ...... 22 3.1 Why do we need regulation after all? ...... 22 3.1 JOBS Act in the United States...... 26 3.1.1 What is JOBS Act Title III? ...... 26 3.1.2 limitations ...... 27 3.1.3 Disclosure and issuer requirements ...... 29 3.1.4 Rules for Intermediaries (crowdfunding platforms) ...... 35 3.1.5 Rule for companies regarding maximum sum to be raised via platforms ...... 39 3.1.6 Conclusion ...... 40 3.3 What is happening in Europe? ...... 42 3.1.1 Legislation in the United Kingdom ...... 44 3.1.2 Legislation in Austria ...... 46 3.1.3 Legislation in Switzerland ...... 48 3.1.4 Legislation in Italy ...... 50 3.1.5 The current regulatory framework in other parts of Europe ...... 53 3.1.6. Conclusion ...... 57 Chapter IV: What are the success stories of cases telling us about the industry? ...... 58 4.1 JustPark ...... 58 4.2 Chilango ...... 60 4.3 Sugru ...... 61 4.4 Assetz Capital ...... 62

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4.5 1Rebel ...... 63 4.6 Camden Town Brewery ...... 63 4.7 eMoov ...... 64 4.8 ...... 65 4.9 Other success stories ...... 65 Conclusion ...... 66 Chapter V: What are the cases telling us and what role has the law to play in this? ...... 67 5.1 Maximum amount allowed to be raised by the issuer ...... 67 5.2 Losing the boarders ...... 68 5.3 Maximum contribution by the individual ...... 69 5.4 Setting the bar for maximum number of investors per project ...... 70 5.5 Prohibition of advertising ...... 71 5.6 Prospectus and disclosure rules ...... 71 5.7 Rules for the platforms ...... 72 Conclusion ...... 74 Bibliography ...... 76

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Foreword

Before you lies my master thesis, the last chapter of my studies at Tilburg University International Business Law Program. I have written my thesis under the supervision of the International Business Law department. During my study period at Tilburg University I became especially interested in and the unique process of equity crowdfunding as a method of alternative financing model for businesses. From a personal stand point of view, I became fascinated by different problems associated with equity crowdfunding and it became in my interest to analyse who and based on what has been successful in this business. We have seen today how different countries have approached risks associated to equity crowdfunding and the same time there are several countries who have taken a step back to observe where this new sourcing model will lead to without strict regulation by the government.

This master thesis will analyse the success stories and failures regarding equity crowdfunding and gives an insight about what kind of frameworks have been introduced to regulate equity crowdfunding business financing model and at the same time gives critical overview of the possible future regulation and what are the trends in the industry.

I would like to thank my supervisor Mr Erik P. M. Vermeulen for his time and contribution for this thesis process. His constructive feedback was vital for the final result. I would also like to thank Tilburg University‘s staff for helpful stand.

Tilburg, June 2016,

Dagmar Pasovs

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Introduction

Equity-based crowdfunding industry has been rapidly growing within the past few years and has created a pile of success stories simultaneously raising a number of concerns. Equity crowdfunding can be defined as a method of financing whereby an entrepreneur sells equity or equity-like shares in a company to a group of (small) investors through an open call for funding on Internet-based platforms.1 It has become an active discussion today in venture capital industry as more and more countries are turning their heads towards regulatory initiatives and there are controversial opinions regarding restrictive measures taken. Concerning regulation there are mainly two groups of countries: those which put in place a specific regulation for crowdfunding (Brazil, or Singapore) and those which put in place ad hoc systems (France, the U.K., the U.S., Québec or Japan).2

We can see in the industry success stories such as JustPark whereas there are failures in the example of Rebus Group. This outlines that there is no success rate guaranteed in this industry and it presents possible traps and negative hidden unregulated areas of the industry. Governments are confused which lead to take- should equity crowdfunding be regulated strictly in detailed or can we take a more laid back position and let the industry grow and regulate itself but at the same time acknowledging the negative impact on the players on the market.

The purpose of this thesis is to answer the question what regulatory initiatives have been taken so far and what kind of impact and effect they have on the success stories- could these businesses do the same under any law? The thesis will give an overview on the European market along with United States regulatory initiatives. The case studies are chosen based on the success rate and it will be analysed which factors and regulations enabled the positive outcome. This can bring out trends that we should follow when forming a proper law. The thesis will focus on the legal and financial blogs and gives the opinions presented via these channels as the discussion on equity crowdfunding is mostly very community based and there

1 G. K.C. Ahlers, D. Cumming,C. Günther & D.Schweizer. Signaling in Equity Crowdfunding. 2015 p.8. See: http://poseidon01.ssrn.com/delivery.php?ID=824100098007120003105028075028005090038051063013063017 078065107109101083112123093065039020017097126100053083029064020070067064045032091044031104 083027124116031119021002039026022123091064081000114122069127066109125099027088085089001097 125094021094110&EXT=pdf 2 F.Ney. Challenges for Swiss Start-ups : Is The ―Valley of Death‖ Seeing any Rain in the Distance?. Rostigraben. 2016 http://rostigraben.ch/en/challenges-for-swiss-start-ups-is-the-valley-of-death-seeing-any-rain- in-the-distance/ 5 are a lot of valuable opinions presented that we can benefit from when engaging into future discussions.

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Chapter I: Overview on equity crowdfunding and the Master Thesis structure

1.1 The general overview on equity crowdfunding

Crowdfunding in general has become the new possibility to fund the early start ups and get the business started. Getting the businesses funded by crowdfunding is a good alternative as it can be time-consuming and rather hard to get the attention from venture capitalists, corporate venture capitalist, so-called business angels etc. Today there are many online crowdfunding platforms which help to find the necessary financial sources in order to start a business, the process can be started by any person or entity seeking for investment into their idea. The general idea lies in the possibility to be funded by multiple people or corporations and there is no general rule how much should investor invest, it depends entirely on the platform policy and local law. This enables the businesses searching for funding possibility not to be dependent on the decisions from business angels or venture capital firms but be believed in by ordinary people wanting to invest into the idea or be part of the future business. Some may even say it is the easiest source for funding the business, though a lot of risks are involved at the same time, both for the investors and the founders of the company. Usually the online platforms are the connecting point for investors seeking for opportunities to invest and when they will find a project that catches their interest they can make an investment through the online platform.

There are different kinds of crowdfunding:

1. Equity Based Crowdfunding: The investors receive a stake in the company.

2. Donation Based Crowdfunding: The purpose of investing is charity and there are no returns.

3. Lending Based Crowdfunding (also known as Peer-to-Peer lending): The investor shall make a profit over a period of time in the face of interest.

4. Reward Based Crowdfunding: The investor shall receive an item or a service in return of the monetary contribution.

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The following thesis shall focus on equity based crowdfunding. What is equity based crowdfunding and what makes it such a hot topic?

G.K.C. Ahlers (et al.) define equity crowdfunding as a method of financing whereby an entrepreneur sells equity or equity-like shares in a company to a group of (small) investors through an open call for funding on Internet-based platforms.3 Basically it can be said that equity crowdfunding is a funding opportunity where the crowd (people) can invest in an early stage unlisted company. This means that the company has not yet been listed at the and the shares cannot be publicly traded. Equity based crowdfunding belongs under alternative finance industry.

Investors that contribute cash through equity-based crowdfunding platforms indirectly or directly become beneficial owners or shareholders of the start-up company.4 In case the company will make profits in the future the investor shall receive part of the profit. Generally speaking it can be said that by becoming an equity based crowdfunding investor, one becomes a business owner. It have to be kept in mind that this does not enable the possibility to run the company or have a big saying in the decision making process but in case of profit the investor is being looked as an owner being entitled to profit. At the same time there are risks in the event where the company is not performing well then the investor shall lose his investment.

The main reason to invest is always to see the returns but how are the returns seen in equity based crowdfunding industry? It generally takes between 3-7 years for a company to sink or swim (failures usually happen earlier than successes). There are three main ways that an investor can see a return on their investment:

1. Dividends: the company sometimes pays a percentage of their yearly profits to shareholders

2. Trade sale: the company is sold to another company for a lump sum, which is divided proportionally between shareholders

3 G. K.C. Ahlers, D. Cumming,C. Günther & D.Schweizer. Signaling in Equity Crowdfunding. 2015 p.8. See: http://poseidon01.ssrn.com/delivery.php?ID=824100098007120003105028075028005090038051063013063017 078065107109101083112123093065039020017097126100053083029064020070067064045032091044031104 083027124116031119021002039026022123091064081000114122069127066109125099027088085089001097 125094021094110&EXT=pdf 4 J.A.McCahery. E.P.M.Vermeulen. Venture Capital 2.0: From Venturing to Partnering. 2016.- http:// 1 papers.ssrn.com/sol3/papers.cfm?abstract_id=2773622 8

3. Public offering: the company is so successful that it is listed on a stock exchange and shareholders can sell their shares at a price determined by public demand5

The question how to pick the most successful business for the investment is quite difficult to answer because the start-up industry has unknown outcome and even the most brilliant ideas may fail. It can be said that every investor sees a unique value in their target investment companys' product.

The potential economic impact of equity crowdfunding is significant. The global equity crowdfunding market has grown from $400 million in 2013, to $1.1 billion in 2014, and $2.6 billion in 2015 (estimated). The Goldman Sachs report which is telling us that the immediate addressable market opportunity of crowdfunding is $1.2 trillion, larger than the opportunity for payments (Square and LevelUp), small business lending (OnDeck and Kabbage), student lending (SoFi and CommonBond) and consumer lending (Prosper and LendingClub) combined.6 This is the reason 3 why the heads are turned currently to analyse equity based crowdfunding market because it has a significant potential to grow and it is influencing the entire alternative finance industry. At the same time authorities in most countries have started to regulate the industry as a new phenomenon which has created a big discussion if, why and how should the law regulate the industry. In conclusion it can be told that due to its big potential and regulatory hurdles has made it a hot topic that cannot be overlooked by anyone dealing within the industry.

1.2 Problem description Equity based crowdfunding as a new alternative finance instrument available in the market has raised many questions regarding how should the regulators initiate actions towards regulating the entire industry in order to guarantee the well-being for investors and a safe market for the players. It has become an issue that due to connecting non-sophisticated investors to companies online there are great risks involved. One of the possible risks is that company may be up to fraud because as it is easy to sign up and there is often lack of due diligence performed which means that the online environment has created a perfect atmosphere for schemes and fraudulent activities. When it comes to investors it cannot be

5 R.Feit. Equity Crowdfunding by the Numbers.. 2015 http://www.inc.com/ryan-feit/equity- 2 crowdfunding-by- the-numbers.html 6 R.Feit.Equity Crowdfunding by the Numbers. 2015 http://www.inc.com/ryan-feit/equity- 3 crowdfunding-by-the-numbers.html 9 disregarded that very often the non-sophisticated investors do not understand the risks and may lose due to little knowledge their life savings. Unfortunately, non-sophisticated investors may lack of knowledge how to recognize a good business idea and possible good outcome, even the biggest investors always divide their risks and find alternative measures to lower the risk by investing into multiple projects. In addition, usually companies funded by crowdfunding are exposed to bigger possibility of failing because they do not receive that good of an advice and assistance as companies who are funded by business angels and venture capital firms who very often help to develop the business and generate better business model because it is in their biggest interest that the company shall be successful and bring in quick returns. This leads to the question, how should we regulate the equity crowdfunding industry and how to create the best outcome for all the players in the market?

There has been a big debate in the United States that the JOBS Act Title III that was dedicated to regulate the equity crowdfunding industry is by the words of venture capitalists pretty soon be killing the entire equity crowdfunding industry. This has been said in the light of the complying with the regulation costs that were brought on. Due to JOBS Act Title III the platforms have to make a lot of due diligence that increase the costs to be a player in this market but it can be said that the initial idea of equity crowdfunding was to offer a cheap capital option and the easiest way to connect investors to companies. Speed is one of the key factors in this market. Now due to complying with the regulation the costs are higher and the initial idea can be said to be no longer there. The main question in the debate is whether we should support the easy money making process and let the crowd to decide on investments or should we restrict the industry and protect the investors from exposed risks and at the same time acknowledge the fact that it changes the entire industries initial idea.

Currently there is a lot of discussion among experts about the on-going changes. Many governments are taking the position of simply being observant and see how for example JOBS Act in the US will affect the market. Specialists express their mind through articles but also through different legal and financial blogs. Therefore there are lot of valid concerns and expert level knowledge available on these channels but there is no accurate data on how the experts in this field think about the regulation, the changes and also how they are recommending moving forward. This knowledge is valuable when it comes to assessment of the market regulation and though many governments form expert panels (experts actively involved in equity based crowdfunding) there are still those whose attention should be drawn

10 to discussions that are on-going online and media. It can be believed that a lot of valid solutions are being discussed and good propositions can be found.

1.3 Research question Aforementioned problems in the chapter 1.2 shall bring us to the topic of this thesis- what is happening on the equity crowdfunding market and what should be the way forward? The following thesis will focus on equity based crowdfunding industry in a way that it will look into what is right now happening in the legal and financial blogs and what are the experts saying about the successful crowdfunding campaigns. In addition, the government initiatives shall be analysed and compared in equity based crowdfunding industry in Europe and United States. The purpose of the thesis is to ascertain what are the initiatives that have been taken so far and how have they served the interests of different players on the given market. As a result of the research it should be ascertained whose interests are more protected and is there too much regulation or in some cases too little, also what are the pain points of the industry in the light of the equity based crowdfunding campaigns that have been successful so far. The thesis will conclude the beneficial regulatory initiatives and the supportive measures promoting equity crowdfunding industry.

1.4 Master thesis structure This master thesis shall focus on equity based crowdfunding. The first chapter is an introductory to equity based crowdfunding and shall give a short description about what is crowdfunding in general and how does the equity based crowdfunding differ from the other crowdfunding opportunities. The first chapter shall give a general idea what is equity based crowdfunding; gives a short description regarding possible risks involved; also what are the problematic figures involved and explains the purpose of the thesis. The second chapter gives an overview on the market and the benefits of using equity crowdfunding. The third chapter is dedicated to regulatory initiatives taken so far or the initiatives about to be established in the United States and Europe and answers why the research is important from alternative financial industry point of view. The forth chapter shall give the results of analysing the information available on the law and financial blogs but also gives some insight about expert opinion covered by the media. The chapter analyses the success stories and answers the question what are the supportive measures that are enabling a positive outcome. The fifth chapter will analyse the material and will conclude what is the current situation in the market,

11 where lack of regulation or over regulation is and what are the suggestions in order to improve the situation.

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Chapter II: Why is equity crowdfunding a good way forward?

2.1 What is the core of equity crowdfunding? As previously mentioned the way equity crowdfunding works is making it possible to raise money from several small investors (so-called non-accredited investors) who can choose from the online platform a company or a project they feel most attracted to invest into in exchange of gaining a little part of the company. The investors making up the ―crowd‖ shall receive a part of the venture of the company and in the future they will be rewarded accordingly to their investment (accordingly how big part of the company they are holding in the face of their investment previously made). There are several benefits that equity crowdfunding is bringing both for the investors and companies. Firstly, it can be called dumb money in the sense that compared to making pitch for VCs and business angels; the possibility to draw attention to yourself and get funded is bigger than in any other cases as there is ―crowd‖ involved. Why should we call it dumb money? It is not unknown fact that VCs and business angels have more knowledge about business and financial data, now that there is the ―crowd‖ involved there is bigger possibility to get funded by people who are believing in the idea or purpose the company is carrying and people might be more focused on the idea than looking into the company‘s financial figures and analysing the possible returns. For the companies seeking funding this so-called dumb money is blessing in the skies but at the same time this very reason is why regulators are trying to emphasize the risks involved and setting up several restrictions to non-accredited investors.

The second benefit is the speed. Getting funded and also making investment via equity crowdfunding platforms is a quicker process and serves an idea to match the possible investors and companies seeking investments the easiest way. The online process is sidestepping the traditional fundraising process that includes lengthy due diligence periods and tough negotiations over the premoney valuation and contractual terms. Also, it can be said that investors making up the ―crowd‖ are usually investing little amounts of money which means they also need less-contractual protection.7 As a result of this the process of investing and getting funded via online platform is the quickest solution.

Due to the fact that everything happens via online platforms it brings us to the third benefit of using equity crowdfunding- accessibility. It is easier to pitch the investors via online than do

7 J.A.McCahery. E.P.M.Vermeulen. Venture Capital 2.0: From Venturing to Partnering. 2016.- http:// 4 papers.ssrn.com/sol3/papers.cfm?abstract_id=2773622 13 actual pitches. It saves time as with one pitch online it is possible reach to multiple investors. Also, VCs and business angels are alternatively investing via online platforms and it is a well- known fact that face-to-face meetings are very hard to get, so it also increases the possibility to get funded by them via same instrument as in case of the ―crowd‖. The other indicator that should be mentioned is the amount- giving the possibility to freely choose how much one would like to contribute raises willingness to invest and probability to gather the necessary funds.

On the other hand, there are several risks involved and also with the emerging market we can see regulatory hurdles made that are not supporting the industry growth. What are the challenges and shortages of the equity-based crowdfunding model? Firstly, we are dealing with non-accredited investors which increases the possibility that people lacking of sophistication are more probably making bad investment decisions and losing their life savings. The regulatory initiatives are trying to eliminate that probability by enacting restrictive laws, the shortages of laws shall be discussed in the third chapter of this thesis.

Secondly, many companies who are seeking investments and raise money via online platforms might not be eligible to be funded after all. It has been even referred to as a last resort of getting financed, so-called trashcan of investments, meaning a probability to fail and dragging down investor capital is bigger than in any other cases. This can also be improved by legal framework by demanding more due diligence and financial audit but at the same time it creates a situation where the speed benefit and low-cost investment opportunity is vanishing. This may lead to companies turning back to VC and business angel funding.

Though there are several issues regarding equity crowdfunding market, we can see that today real winners of the equity crowdfunding market are actually the companies seeking to grow or starting up their business as equity crowdfunding enables them more recourses of funding than we have ever seen before, not to mention a huge social impact in the face of job creation process involved of expanding the small and medium sized businesses which are often referred to as the backbone of the economy.

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2.2 What are the numbers telling about the activity on equity crowdfunding market? In 2014, the top 10 equity crowdfunding platforms account for the vast majority of activity on these kinds of sites with 6 of these platforms raising over $20 million each for 343 companies raising money on their sites. Investors recognize the potential in equity crowdfunding and want to invest in the leading companies in the space - the top 10 equity crowdfunding platforms raised $100 million in investments themselves to fund their own operations.8

According to the 2015 CF -Crowdfunding Industry Report carried out by MassSolutions (the report was published 31h of March, 2015) the entire crowdfunding market had grown 167% in 2014, the figures stated that equity-based crowdfunding grew 182% to $1.1 billion. Still it must be mentioned that the growth was not as extensive as in lending-based crowdfunding (223% to $11.08 billion), hybrid-based crowdfunding (grew 290% to $487 million) or royalty-based crowdfunding (grew 336% to $273 million). The only categories that had less growth were donation- and reward-based crowdfunding that grew 45% and 84% respectively.9 The equity crowdfunding total investments were estimated to be $2.56 billion leaving it on the fourth place, the biggest crowdfunding category remains to be lending-based with $25.1 billion in total investments.10

8 Equity Crowdfunding State of the Art: Circa 2014. See: http://crowdfunding.about.com/od/ 5Placeholderrr/fl/Equity-Crowdfunding-State-of-the-Art-Q1-2014.htm 9 Massolution. Crowdfunding Market Grows 167% in 2014: Crowdfunding Platforms Raise $16.2 Billion, Finds Research Firm Massolution®.2015. See: http://www.marketwired.com/press-release/crowdfunding-market- grows-167-2014-crowdfunding- 6 platforms-raise-162-billion-finds-research-2005299.htm

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If equity crowdfunding doubles every year like the rest of crowdfunding has, then it could reach $36 billion by 2020 and surpass venture capital as the leading source of start-up funding.12 Still, the 8 figures are including right now also VCs and business angels who are actively investing through online crowdfunding platforms and therefore it cannot be fully stated if the VCs or business angels have become less or more active or if the equity crowdfunding is taking a stake out of VCs business, there is an overlap.

The year 2016 will be interesting to be followed as the equity crowdfunding market is now opened for the non-accredited investors in the United States and we could expect enormous growth in the investments in the US and it enables to estimate how could rules enacted by the JOBS Act Title III also influence other markets which are more restrictive such as -Canada and Japan- regarding allowing non-accredited investors to participate in the equity crowdfunding platforms and at the same time gives guidance to those whose regulation is

11Crowdfunding Industry Report carried out by MassSolutions. 2015. See: http://research.crowdsourcing.org/2013cf-crowdfunding-industry-report 12 C.Bernett. Trends Show Crowdfunding To Surpass VC In 2016. 2015- http://www.forbes.com/sites/ 8 chancebarnett/2015/06/09/trends-show-crowdfunding-to-surpass-vc-in-2016/3/#3c8d7a226078 16 more loose like in Switzerland and Estonia (no proper legislation regarding only equity crowdfunding has not yet been introduced).

When it comes to equity crowdfunding activity then it is the most active by far in the United Kingdom. UK based platforms with an international reach are taking the biggest stake of the market and are larger than the activity in entire other parts of Europe together. Therefore today the most important player in the field of Europe is United Kingdom and the regulation set up by the UK FCA and platforms themselves influence the equity crowdfunding market in the Europe probably the most.

2.2 Equity crouwdfunding vs Venture Capital and Business Angels Many experts have proposed that Venture Capitalists and Business Angels also benefit a lot from equity crowdfunding as they are also participating in the funding rounds through platforms. This shows that crowdfunding money is also coming from so-called competitive market. Therefore the VCs and business angels actually support the emerging equity crowdfunding industry.

The experts have proposed that for the smaller companies $1 million limit under the JOBS Act Title III is enough to get them started though in Europe we see companies targeting larger sums. It is said that the larger companies looking to attract VCs or Angels can use Title III- regulated equity crowdfunding as a starting point and raise pre-seed rounds simply to prove that their company is of interest to a larger audience and, subsequently, worth the larger investment.13 This way we can say that the industries are actually either supporting each other or from VCs and business angels‘ part we can say that equity crowdfunding is simply fulfilling the gap- companies not given funding by them or loans from the banks are the biggest beneficiaries of the equity crowdfunding. This funding method simply carries an enormous impact for the growth of small and medium sized enterprises and targets the market that is not being served by the VCs and business angels.

The benefit of using equity crowdfunding over venture capital and business angels was already previously mentioned- preparing the pitch is much easier than actually getting a meeting and presents the pitch to possible investors. The process of getting a meeting takes time and even then it is very slight opportunity that the investor actually recognizes the business idea as something worth to invest into. Regarding equity crowdfunding as a method

13 J.Cline. To Raise or Not to Raise...Pursuing Equity Crowdfunding Under Title III. 2016 See: https://www.linkedin.com/pulse/raise-raisepursuing-equity-crowdfunding-under-title-iii-josh-cline 17 used nothing guarantees that the target investment will be acquired but as the idea may be more acceptable by the general crowd than by a single investor. Also, online pitch targeted for the crowd may receive the attention from business angels and VCs as well as by many smaller investors. This tendency shows that by launching a pitch via online platform gives advantage to target more possible investors and does not require individual pitch. Acting through online platform is therefore less time consuming and may have better outcome eventually for receiving the target investment. Also, successful cases such as JustPark show that the company may acquire bigger investment than initially targeted.

The second benefit is losing the boarders. As meeting with VCs and business angels it requires personal meeting and is localized. Using equity crowdfunding enables to target foreign investors depending of course if the legislation is allowing foreign investors to invest via local platforms. Again we see the beneficial side of using equity crowdfunding over individual investors. This serves also the start-ups that are based in a geographic location where there is lack of funds or financial barriers to start a company or develop it.

The downside still exists. As VCs and business angels are familiar with the business landscape they possess vital knowledge for business developing, market analysis, how to get further funding and develop the service or the product, they also possess a lot of beneficial contacts for the future. Therefore, if using equity crowdfunding one may lose a very significant support that only VCs and business angels may provide. VC and angel investors also create credibility for the company and build trust for further investments. As we see in chapter IV in the successful campaigns launched, many of companies already had previous funds raised from VCs or angels and one success criteria was mentioned to be previous investments- crowd tends to follow accredited investors and are more willing to invest as they predict better outcome.

The following chart presents the comparing data on funding by the VC, business angels and crowdfunding in general:

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Though the data includes all types of crowdfunding it still presents trends and importance of crowdfunding when it comes to different types of funding opportunities and trends in competing with angel investors and VCs.

There have been controversial opinions regarding equity crowdfunding whether it is taking a stake from VC and angel investors and raises competitiveness or there is little or no influence. VC Jeremy Liew said that he does not see equity crowdfunding or AngelList Syndicates as anything super-new. By his words it is an amplification of something that was already happening in the start-up ecosystem and that several years ago we started to see an increase in ―super angel‖ or individual-led seed rounds and the so-called party round. Liew also explained that it would be highly unlikely for most high-quality investors to use an equity platform for making an investment. This is due to the fact that in his opinion investors would like to own a bigger stake in the company and have more saying in the business.14 This is still only representing some more aggressive and hands on VC investors and not all VCs are extremely interfering with the processes in the company.

On the other hand, we see different opinions. Rory Eakin from CircleUp comments that equity crowdfunding puts pressure on VCs, because unlikely before, now one of the three major components of the VC model is being undercut by new services and one factor is equity

14 J. Liew, Lightspeed Venture Partners giving an opinion in the article: L.Kolodny. AngelList And Beyond: What VCs Really Think Of Crowdfunding. The Wall Street Journals. 2013 See: http://blogs.wsj.com/venturecapital/2013/10/08/angellist-and-beyond-what-vcs-really-think-of-crowdfunding/ 19 crowdfunding platforms. By his words VCs traditionally offered their investors access to proprietary , investment acumen, and ―value add‖ to their portfolio through the life of the investment but equity crowdfunding and the new rules about general solicitation fundamentally change the proprietary-deal flow piece. He pointed out that companies can now advertise they are raising capital to a wide range of actors including VCs. This definitely has an effect on the VC industry somehow.15

In conclusion, it can be said that equity crowdfunding does have some form of impact on VC and angel investors industry. One main factor is that they are not losing an opportunity to invest as they can perfectly act via platforms themselves and this is why we do not have entirely proper statistics how many small and so-called non-sophisticated investors we have acting in the equity crowdfunding market. Also, it is good that the competitiveness has raised and platforms are simply fulfilling the gap in the investment industry. As equity based crowdfunding is still an emerging market it can be established after few years what is the real impact on the overall industry as there are currently regulatory barriers and lack of trust involved preventing this industry from living up to its potential.

2.4 How do platforms manage ownership of the shares? There are different approaches to ownership of the shares on the platforms. Some crowdfunding sites are applying the direct ownership structure; in this structure the individual investors are independently responsible for their shares. The other opportunity is to go with the nominee structure, in which the company behind the equity investment platform manages the investors‘ shares on their behalf. 16

Very often we can see a common trend in equity crowdfunding platform that the investee companies, they usually do their own initial evaluation before the campaign, this enables more clear view on the business and about the possible outcome and also serves clarification purpose what can investors and the company expect out of the investments and business.17 There is a different approach as well that is using the ‗wisdom of crowds‘ theory, the valuation is set automatically during the bidding process and is determined by the level of

15Rory Eakin from CircleUp giving an opinion in the article: L.Kolodny. AngelList And Beyond: What VCs Really Think Of Crowdfunding. The Wall Street Journals. 2013 See: http://blogs.wsj.com/venturecapital/2013/10/08/angellist-and-beyond-what-vcs-really-think-of-crowdfunding/ 16 Reseach Report. Equity Crowdfunding in the UK: Evidence from the Equity Tracker. p.7. See: http://british- business-bank.co.uk/wp-content/uploads/2015/03/230315-Equity-crowdfunding-report-final.pdf 17 ibid 20 investor interest. Some of the more established crowdfunding platforms are branching out into other areas, alongside their core activities. This is used by SeedsUp for example.18

There is an opportunity to use Limited Partner as a structure for shareholders. In this case the investors can invest using and acting through limited partner. This is used by who has set up a venture fund, managed by Braveheart Investment Group. Similarly to CrowdCube, Seedrs offers the option of investing in a fund or an incubator programme, both ways of spreading the risk across a group of companies that are chosen by more experienced investors.19

18 Reseach Report. Equity Crowdfunding in the UK: Evidence from the Equity Tracker. p.7. See: http://british- business-bank.co.uk/wp-content/uploads/2015/03/230315-Equity-crowdfunding-report-final.pdf 19 ibid 21

Chapter III: The changing landscape of equity crowdfunding regulation

The following chapter shall give an overview why are we in need of regulation in equity crowdfunding and also gives an insight on equity crowdfunding rules and regulations in the United States and Europe. In Europe, there will be several countries analysed but not all of them due to the language barrier that was hit during the research. In many countries there is little data available in English and the researches made and articles written come mostly in the native language. Therefore the thesis shall give an insight as much as possible but the fact has to be acknowledged that information will not be as complete as initially planned. The following chapter therefore uses mostly reports and articles rather than actual regulation text to give an overview of these countries regulation.

3.1 Why do we need regulation after all?

One of the biggest failures of the equity crowdfunding campaigns might be a pitch made by the Rebus Investment Group in which the company raised over £800,000 through Crowdcube platform. This case shows us how easy it is to lose investments due to poor conditions. 20

Rebus' management promised investors "between 6.4 and 10.6 times their cash invested" and said it was working towards a 2018 exit. Investors in the Crowdcube fundraising are now facing a probability never seeing a dime from their investment made. The following screenshot is a pitch on the Crowdcube crowdfunding platform.21

20 O. Williams-Grunt. Britain's biggest crowdfunding failure is accused of misleading investors — its chairman says that's not true. Business Insider. 2016 21 ibid 22

The company brought in restructuring experts Resolve in 2014 because of "difficulty in generating the required cash to continue to trade. The company failed to disclose the issues regarding cash flow and the restructurer is only mentioned on administration documents.22 It is clear that that the full business financial data that actually could have had an effect on the investment decision were hidden and willingly not disclosed. There was clearly lack of due diligence made and though some experts may claim that the risk is on people investing but in this case it can be argued whether there should be more information to be disclosed and also more extensive due diligence to be made. It was also mentioned in the light of this catastrophic failure that equity based crowdfunding investments are not falling under Financial Services Compensation Scheme in the UK that leads to the results investors losing the total amount of investments made. This raises a question should it fall under this category and why are these investments treated differently from the traditional types of investment schemes. There are several problems regarding the entire equity crowdfunding industry, bearing the risks for start-ups themselves and investors making a contribution to the company.

Whilst some countries current regulatory environment is less restrictive for companies raising capital – such as Switzerland‘s law that is allowing equity crowdfunding perfectly to serve the market – others are much more restrictive in raising capital via online offerings and regulatory issues need to be solved via establishing new regulation that approaches more problems.

Also, there are countries that have not yet taken real steps towards regulating equity-based crowdfunding industry. It cannot be said that the regulation is entirely absent but there might be general rules to be applied coming from other regulations that are targeting investor protection, investment amounts and other issues. Still, the main idea is that the entire activity is done online and in some cases there might be lack of surveillance or poor conditions set up by the platforms. This may lead to lack of due diligence made and enables white-collar crimes such as running scams and schemes because there might be little investor protection and no obligations for the online platforms or anybody else in that matter to perform due diligence. Therefore, regulatory initiatives have to be set in order to control the activity on the market, to serve the best interests of investors, secure the honest marketplace being run by the online platforms who bear the necessary knowledge but also to set some financial boundaries and audit for companies seeking for investments because it is in everybody's interest that only companies that actually have a valid business plan and necessary capacity to run a business

22 O. Williams-Grunt. Britain's biggest crowdfunding failure is accused of misleading investors — its chairman says that's not true. Business Insider. 2016 23 shall enter this market. Otherwise, we will face situations where ordinary people shall lose money due to poor regulation as there is nobody liable for poor investment decisions.

Investor protection is one of the main concerns in case of equity crowdfunding, especially the non-accredited investors. In some countries equity crowdfunding is only available for more sophisticated investors but for example in the US it is now enabled for everybody. The above shown case tells us that companies can easily mislead investors if there are not enough disclosure be demanded or little due diligence. In addition, little supervision and under regulation enable possibility for a fraud.23 The problem is not only regarding non- sophisticated investors but all investors for that matter who act via online platforms and whose money is on the stake.

The above mentioned issues serve the idea why do we need regulation after all. The venture capitalists are arguing that the regulation may ―kill‖ the initial idea behind equity crowdfunding but already in problem statement section we could see the risks involved cannot be left unnoticed. Also, the idea behind the regulation is never to restrict or prevent something beneficial from happening but the opposite, the risks involved are over weighting simply the idealistic forecast of non-accredited people making little investments and by that becoming wealthy overnight. The industry bears a lot of traps and demands a sophisticated knowledge on financial understanding and businesses; therefore in order to prevent investors from overly enthusiastic investments legal framework has to be established.

The following map will show how far we are currently in the sense of the world with regulating the entire industry:

23 A New York based company AIG has started to offer for investors investing through equity crowdfunding platforms. Investors who are concerned to become victims for fraud by making investments via online platforms and gaining a stake in a company should be then more confident making an investment and the AIG believes that they can build more trustworthy community. The product is named ―Crowdfunding Fidelity‖. The insurance will be available for certain platforms only that have fulfilled some criteria demanded by the company as there are many not trustworthy platforms where fraud may easily occur. As of 24th May 2016 the insurance is firstly available for UK and Canada based platforms, they will expand to other countries when necessary legislation and other criteria are fulfilled.- ―AIG Launches a New Equity Crowdfunding Insurance Product to Protect Investors‖. BusinessWire. 2015 See: http://www.businesswire.com/news/home/20160524005941/en/AIG-Launches-Equity-Crowdfunding- Insurance-Product-Protect 24

24

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24 Global Chronology of Equity Crowdfunding. See: http://www.crowdready.com.au/updates/ 25 ibid 25

3.1 JOBS Act in the United States This subsection will give an overview on legislation in the United States regarding equity crowdfunding. The key factors in the JOBS Act Title III shall be listed and commented. It must be emphasized that there are many details regulated in the law but in this thesis the key factors will be discussed only.

3.1.1 What is JOBS Act Title III? On April 5, 2012, the Jumpstart Our Business Start-ups‘ (JOBS) Act26 was signed into law by President Barack Obama. The Act required the Securities and Exchange Commission to write rules and issue studies on capital formation, disclosure, and registration requirements.27

Under the , the offer and sale of securities must be registered unless an exemption from registration is available. Title III of the JOBS Act of 2012 added Securities Act Section 4(a) (6) that provides an exemption from registration for certain crowdfunding transactions. The JOBS Act makes it possible for certain eligible companies to raise capital accordingly to the rules. The new rules went into effect on 16th of May 2016.28

It must be geared in mind that crowdfunding platforms must be registered with the SEC and there are several compliance rules set up and regulations to be met for these online platforms. The rules require companies raising money to disclose certain information about their business and , limit how much individuals can invest based on their income and net worth, and creates a new regulatory framework for the crowdfunding portal intermediaries facilitating crowdfunding transactions. This has been established in order to serve the interests of the investors in order to lower the risks involved- to set the equity crowdfunding framework in a way that less people could face tremendous financial losses due to poor investment decisions.

As previously mentioned the biggest winners of the Title III regulations are companies that can now gather necessary funds in order to start up their business. Still, the law has been criticized because it should serve a purpose of promoting equity crowdfunding but experts see

26The Regulation Crowdfunding adopting release is available at http://www.sec.gov/rules/final/2015/33- 9974.pdf. The staff has also issued a small entity compliance guide concerning registration of funding portals, which is available at http://www.sec.gov/divisions/marketreg/tmcompliance/fpregistrationguide.htm. 27 Jumpstart Our Business Startups (JOBS) Act. 2015. See: https://www.sec.gov/spotlight/jobs-act.shtml

28 Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers. 2015 See: https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm 26 the regulation bringing down the entire industry. Next we will analyse the main changes JOBS Act Title III is making to see what kind of effect it really has on the industry.

3.1.2 Investor limitations The biggest change that Title III is making is allowing after decades of denying the possibility for non-accredited investors to invest into crowdfunding offerings. Now both- accredited and non-accredited investors- are playing a role of investments in the equity crowdfunding industry. Also, it is important to mention that foreign investors can also participate. This helps to boost up the start-up businesses and allows a total economic growth as the regulation enables millions of dollars to be pumped into building up companies. Still, there is a restriction that the investment made will be available only based on the investors‘ income and net worth. The non-sophisticated investors are allowed to invest over a twelve months period considering their annual income. The total amount may not exceed the limit of $100,000- this applies for over a twelve months period and this amount considers all the investments made by the individual investor through all crowdfunding offerings. 29

The individual investors can invest as follows:

1. If either their annual income or net worth is less than $100,000, than the greater of $2,000 or 5% of the lesser of their annual income or net worth. 2. In case the annual income as well as the net worth are equally to or more than $100,000, investors are allowed to invest up to 10 per cent of the lesser of their annual income or net worth.30

The rates shall be changed in every 5 years accordingly to the Consumer Price Index.31 Additionally there is regulation regarding reselling of purchased securities:

1. Securities purchased in a crowdfunding transaction generally could not be resold for one year. Holders of these securities would not count toward the threshold that requires a company to register its securities under Exchange Act Section 12(g) if the company is current in its annual reporting obligations, retains the services of a registered transfer agent and has less than $25 million in total assets as of the end of its most recently completed fiscal year.

29 D.Pricco,SEC´s new JOBS Act Title III crowdfunding rules: overview and initial thoughts. 2015- http://crowdexpert.com/articles/new_jobs_act_titleiii_rules_overview_first_thoughts/ 30 ibid 31 SECURITIES AND EXCHANGE COMMISSION. Crowdfunding. Final Rule. 2015 p. 18 see: https://www.sec.gov/rules/final/2015/33-9974.pdf 27

2. In addition, all transactions relying on the new rules would be required to take place through a SEC-registered intermediary, either a broker-dealer or a funding portal.32

Certain companies cannot make use of the exemptions though. Ineligible companies would include companies not initially based in the US, Exchange Act reporting companies, certain investment companies, companies that are subject to disqualification under Regulation Crowdfunding, companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.33

The investor protection is fairly understandable especially from the point of view that non- accredited investors are exposed to bigger risks as their investment decisions are not as advanced and may not be based on financial data available simply cause of lack of knowledge to understand what are the prognosis and possible returns based on that data. Also, at the time when VCs, business angels and CVCs are mitigating risks by investing several projects and industries, non-accredited investors may invest into one project and end up easily losing all their money. It is known fact that 90% of start-ups fail34 and due to that previously mentioned accredited investors have big diversity in their investment portfolios.

On the other hand, it is questionable whether the limitations are justifiable also in case of more advanced accredited investors. The initiative states that during the creation of the Title III there were opinions in favour and against classifications. In this case, it would be still justifiable as we are talking about individuals investing money and even if in other cases it would be considered too restrictive then taking into account the novel model of equity crowdfunding it is too risky in every level and more protection is probably better option than too little protection. With these limits it is still guaranteed that start-ups shall remain the access to capital and risks for investors are kept lower.

The problems are occurring at a different level, how are we making sure that the investors are not exceeding this limit? Right now there are no measures to ensure that investors shall not

32 SEC adopts rules to permit crowdfunding See: https://www.sec.gov/news/pressrelease/2015-249.html 33 ibid 34N. Patel. 90% Of Startups Fail: Here's What You Need To Know About The 10%. Forbes. 2015. http://www.forbes.com/sites/neilpatel/2015/01/16/90-of-startups-will-fail-heres-what-you-need-to-know-about- the-10/#e6139f055e19 28 invest more than they should, so we could ask why introduce a law that cannot be served properly and should there not be a proper framework beforehand. There are simply too many platforms offering equity crowdfunding and there is no proper mutual database or control. This is a shortage of the law though it may serve a good cause. Some experts have suggested that the aforementioned problem could be solved by introducing different regulation- set a limit to the investment made per project e.g. 500 dollars per project, so we could mitigate risks of losing big investments with one project. The second option would be to introduce the mutual system in order to track investments made, but at the same time this will lower the cost efficiency of equity crowdfunding as a capital raising option.35 Once again the regulation would make the cost of using equity crowdfunding too high and there would be bigger advantage to make use of other funding opportunities. The regulation should promote the usage of equity crowdfunding but complying with rules like mentioned above will back fire and result in the opposite.

3.1.3 Disclosure and issuer requirements One of the main drawbacks of the JOBS Act Title III is the mandatory disclosure of certain data for the companies trying to raise money and also file certain forms with the Commission. The issuer has to file a form with the SEC; notable is the fact that no further approval is necessary, simply the registration is necessary.

Firstly there are financial reporting requirements. GAAP Financial statements of the company that, depending on the amount offered and sold during a 12-month period, are accompanied by information from the company‘s tax returns, these have to be reviewed by an independent public accountant, or audited by an independent auditor taking into consideration the amount to be raised via platform. The requirements are as follows36:

1. Under $100k – Internal financial statement review 2. $100k-500k – CPA reviewed financial statements 3. 500k-1M – 3rd Party audited financial statements by an independent accountant, independent from the company and CEO

35 TITLE III WHY DOES THE FUTURE HOLD PREDICTABLE FAILURE? (Guest post-editorial). 2016. See: http://www.crowdsourcing.org/editorial/title-iii-why-does-the-future-hold-predictable-failure/60661 36 D.Pricco. Title III overview: First Thoughts. 2015 See: http://crowdexpert.com/articles/new_jobs_act_titleiii_rules_overview_first_thoughts/ 29

4. First time crowdfunding issuers offering more than $500,000 would be permitted to provide reviewed, rather than audited, financial statements.37

The main reason for categorization comes from the cost efficiency perspective. There is no reason to make companies seeking little investments to comply with big compliance and auditing costs and it is reasonably expected that enough review will be made. This is considered in a way that there is enough due diligence regarding the amount and threat for the investors. For larger sums raised again we can justify that there is more at stake for the general public and that demands more due diligence and external auditing.

There are also the following rules:

1. The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount 2. Data regarding the financial data and conditions of the offering 3. A company offering in the range $500,000-$1 million of securities relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements. This is in case unless the financial statements of the business are prepared and made available, also only if they have been audited by an independent auditor 4. The overview and description about the company and business and the purpose of the offering meaning how will the company use the proceeds from the offering38 5. Data regarding officers and directors, also about the owners that own 20% or bigger stake of the target company 6. Certain related-party transactions. In addition, companies relying on the crowdfunding exemption have to file an annual report with the Commission and make it available for the investors. Annual reports are exempt from being audited or reviewed.

37 D.Pricco. Title III overview: First Thoughts. 2015. See: http://crowdexpert.com/articles/new_jobs_act_titleiii_rules_overview_first_thoughts/ 38 In case the company do not have a specific plan of use but has a variety of options they are to be give a full list of possible usages and alternatives. See: Final Rule Crowdfunding. p. 53. http://www.sec.gov/rules/final/2015/33-9974.pdf 30

7. An issuer will be required to disclose information about its president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer and any person routinely performing similar functions39

From the stand point of investors this information is justifiably made available but there is a privacy issue over the fact that this information must be shared publicly through SEC- regulated broker-dealers and portals. This extremely delicate data is due to compliance rules available for competitors, customers, partners and other parties during the on-going process of raising the capital.40 Therefore it is questionable if these excessive disclosure requirements will make some investee companies turning away from equity crowdfunding and turn the preferences to VCs and angel investors. Some companies may actually be made to disclose data that could harm their competitiveness and therefore they will definitely seek alternatives where business ―secrets‖ shall remain undisclosed.

There are rules also for the target offering deadline and amount. The final rules include that if an issuer reaches the target offering amount before the initial deadline that was announced in the offering description, they are allowed to close the offering prior to the deadline if it provides at least five business days‘ notice prior to that new deadline. Also, investors may cancel an investment commitment until 48 hours prior to the deadline identified in the issuer‘s offering materials.41

It is required that issuers disclose the target offering amount. Also, it must be determined in the offering description whether the issuer is accepting investments exceeding the initial target amount also; if it would it the maximum amount acceptable must be disclosed. At the commencement of the offering, the issuer has to disclose how shares in oversubscribed offerings would be allocated. 42 There is also requirement to disclose possible risk factors of the business that has to be determined by the business itself. 43

39 Final Rule Crowdfunding. p. 46 See: http://www.sec.gov/rules/final/2015/33-9974.pdf 40 J.Cline. To Raise or Not to Raise...Pursuing Equity Crowdfunding Under Title III. 2016. See: https://www.linkedin.com/pulse/raise-raisepursuing-equity-crowdfunding-under-title-iii-josh-cline 41 Final Rule Crowdfunding. p. 53-54. See: http://www.sec.gov/rules/final/2015/33-9974.pdf 42 ibid 43 idib 31

Regarding the risk factors, it can be said that as every company knows its risks the best way and also there is quite difficult to set certain ground rules for all types of businesses what has to be disclosed exactly, it can still be seen that SEC is enforcing businesses to disclose as much as risks as possible. By leaving the regulation some sort of loose, the companies are trying harder to comply with rules in order to avoid possible liability. If company fails to foresee or disclose some risks, it might become more easily liable. It also raises costs regarding trying to ascertain the possible risks involved and raising overall compliance costs which is concerning and again bears an overall negative effect on the industry. From the investor perspective again is justifiable.

Companies are made annually submit the reports including financial reports certified by the principal executive officer of the issuer. It is believed that data reliable and complete in all material aspects.44 The report has to be filed with the Commission no later than 120 days after the end of the fiscal year covered by the report. The annual report also has to be submitted on the website (the requirement of physical copy delivery was fortunately scratched from the law as it would have also added cost of time and money for the issuer).45 46

As a comment it can be said that complying with the reporting obligations and launching an initial pitch the compliance rules are very costly and even though there are exemptions for companies raising less funds it still makes a large monetary burden on the company.47 Some may even say that the compliance costs are building such a barrier that little and medium sized businesses will not take advantage of Title III as there is too much rules to comply with and financially it does not pay off. It can be suggested that if the company seeks only capital

44 Final Rule Crowdfunding. p. 122. http://www.sec.gov/rules/final/2015/33-9974.pdf 45 ibid p. 119-120. 46 There are still some exemptions from filing an annual reporting. See: Final Rule Crowdfunding. p. 124-125. http://www.sec.gov/rules/final/2015/33-9974.pdf 47 There is also A+ Primer regulation that is significant way of raising mone (up to USD 50 million) but also the cost included is proposed for the issuerissuer due to conducting offering USD75.000 (depending on the cost of financial audit) and at the same time for Title II it can be merely USD5000-10.000. There is clearly a big difference and not many are willing to put in such a large sum as it is not clear whether the target sum will actually be acquired. Also, the annual reporting cost for the issuer is approximately USD 20.000 and at the same time using Title II there is no cost. We can clearly see the tendency that unfortunately the legislation is trying to make crowdfunding costly and unappealing in every way. 32 then it can as well use Title II and raise money easier from the accredited investors and if a lot of capital is needed from non-accredited investors one may just as easily use Title IV.48

M. Roderick suggests that the cost for starting raising funds under Title III might be $7,500 of legal and accounting fees for the issuer, maybe even less once everything is automated. The main question is how much will the Title III portal charge? Will they need to charge high fees up front, or can they make money taking financial interests in issuers and charging fees that are contingent on the success of the offering?49 These are questions that count towards final cost.

Larger companies may also see VC funding with more upsides in this light for a reason that VCs may have more to offer than simply financial support and eventually the company benefits more from alternative funding methods than equity crowdfunding. Complying with Title III rules are scratching the speed and easiness of raising necessary investments. In Europe, we see that launching a pitch and complying with rules is less restrictive and serves fewer burdens on the company.

The other factor included as a restrictive measure is the fact that issuers are not freely allowed to run a campaign everywhere they want and say anything what they want. This basically means that on the online world the issuers are permitted to advertise freely but not when it comes to physical paper- it serves the idea that everybody needs to have the same access to the information and that is only guaranteed by using online sources available for everybody. Also, the issuer is only allowed to present information that they are launching a pitch, their company name (also website) and the terms of the offering. This leaves the only way that people actually need to reach the platform and see what is being offered. For crowdfunding one actually needs the crowd, meaning that Title III is making reaching the crowd quite difficult for the issuers. This bears a big downside for the overall outcome to be sure.50

48 M. Roderick. Title III Crowdfunding: Outline For Portals And Issuers. p. 12. 2015 See: http://www.flastergreenberg.com/assets/htmldocuments/Title%20III%20Primer.pdf

49 ibid p. 12. 50 M. Roderick. No Demo Days For Title III Issuers. 2016 See: https://crowdfundattny.com/2016/04/25/no- demo-days-for-title-iii-issuers/

33

Also, the problem regarding having made previous offer to possible investors has been raised in a way that the ―offer‖ is described in a very vague and abstract way, meaning that the issuer in order to comply with the rules should not have mentioned anybody that they are launching a pitch and seeking an investment for the company as this can also be interpreted as a way of offering, advertising or soliciting. This has created a difficult situation for the platforms as well as they need to make sure that they have made reasonably sure that the issuer is complying with the rules. This means a lot of questions are being asked before allowing the issuer on the platform and the company may easily be turned down as the platform might face losing its accreditation and be taken out from the market for failing to comply with the rules. Also, for the issuers the legislation may not be entirely be understandable and what it means actually be complying with the rules under Title III. This leads us to the situation where every company even before having an idea for a business should contact a lawyer to be interpreted what Title III actually requires them to do and how to act.51

To go further with the advertisement rule, if the company shall actually meet the investors beforehand there is no one who could determine that the initial meeting was not about making an offer under Rule 506 (c) and if that one ―did not work out‖ company decided to think about possibility to make an offer under Title III which is perfectly legal. This again shows that the rules may serve a good initial thought but in the reality it is impossible to enforce them.52

51 M. Roderick. No Demo Days For Title III Issuers. 2016 See: https://crowdfundattny.com/2016/04/25/no- demo-days-for-title-iii-issuers/ 52 ibid 34

3.1.4 Rules for Intermediaries (crowdfunding platforms)

The initial rules that were proposed were not as strict as the final rules of the Title III regarding platforms (intermediaries in whole). Title III presents several restrictions for the platforms and also puts many burdens and rules to comply with.

53

53 M. Roderick. What ―Solicit‖ Means Under Title III. 2016. See: https://crowdfundattny.com/2016/02/22/what- solicit-means-under-title-iii/ 35

Title III makes it mandatory for the crowdfunding platforms to register with the Commission on new Form Funding Portal, and become a member of a national securities association. Companies need to act exclusively via one platform only.54

Platforms are prevented from giving investors any advice or recommendations regarding offerings. On the other hand they are to serve an educational purpose and have to give information regarding the process for investing on the platform, the types of securities being offered and information a company must provide to investors, resale restrictions, and investment limits.55

Secondly, the platforms are responsible to perform due diligence in a way that they can possibly prevent entrance of the companies that may commit fraud or there is bases to believe that there might be concerns for the investors. The regulation sets a restriction that a platform cannot have any financial interest in a company that offers or sells securities on its platform. The exemption is under the circumstances when the platform or a broker receives the financial interest as compensation for the services, subject to certain conditions. Title III prevents platforms from compensating any person for providing the platform with personally identifiable information of any investor or potential investor .56

The questionable situation is definitely regarding preventing fraud from happening. The problem is that actually all the data may be even in accordance with what is prescribed by the law but the actual fraud is always happening after the campaign has launched. Though there are requirements for companies to provide information regarding how will the funds raised being used and also to keep reporting the due diligence by the platforms is a simple initial step that overall may not prevent fraud from happening. As we saw in the case of Rebus, even very large companies may cleverly hide harmful data and in the end we cannot enforce extensive rules when it comes to disclosure of information. We have to recognize this ―financial vetting process‖ simply as a standard procedure that cannot entirely prevent unsuccessful outcomes and fraud.

54 Press release by U.S. Securities andExchange Commission. SEC Adopts Rules to Permit Crowdfunding Proposes Amendments to Existing Rules to Facilitate Intrastate and Regional Securities Offerings. 2015. See: html 55By Crowdexpert. SEC‘s new JOBS Act Title III Crowdfunding Rules: Overview and First thoughts. 2015. See: http://crowdexpert.com/articles/new_jobs_act_titleiii_rules_overview_first_thoughts/ 56 Press release by U.S. Securities andExchange Commission. SEC Adopts Rules to Permit Crowdfunding Proposes Amendments to Existing Rules to Facilitate Intrastate and Regional Securities Offerings. 2015. See: html 36

Title III also prevents platforms from directly holding, possessing or handling investor funds or securities. The platforms are responsible for organizing communications and need to provide channels for communication in order to allow discussions regarding offerings taking place on their platform. In addition, they are made responsible for disclosing the information timely (at least 21 days before the securities will be sold on the platform information is provided by the company seeking for investment. The platforms also have to release the information to the public during an on-going offering.57

The platform has to provide investors information regarding the service cost for using the intermediary services and what they receive. When it comes to investors then the platform have to make sure to acceptable extent that the investor will comply with the investment limitations set by the regulation and also platform can only accept investments after they have opened an account in order to make sure that the investments are traceable and no possibility for exceeding the limitations is given.58

Regarding running the platform other factors that have to be taken care of include for example among other things providing investors notifications about their investment commitments and also sending confirmations at or before they complete the transaction. In addition, they need to comply with maintenance, transmission, completion, cancellation and reconfirmation of offering requirements.59

These rules can be seen as quite heavy on the platforms but at the same time it is better if the regulation makes the platforms deal with more than the issuers and investors because it makes the actual users of equity crowdfunding more willing to use it. Also, if we look how much the platforms benefit from running their business it is acceptable that they should carry more liability and actually help the companies and investors proceed. The profit the platforms are making should serve bigger effort than they are putting in now, therefore making platforms run due diligence and organizing the process in a more secure way is justifiable by the regulator.

Another quite intriguing regulation regards the possibility to accept equity as a service cost. There is a upside for the issuer, as they can enter the platform without actually paying

57 Press release by U.S. Securities andExchange Commission. SEC Adopts Rules to Permit Crowdfunding Proposes Amendments to Existing Rules to Facilitate Intrastate and Regional Securities Offerings. 2015. 58 ibid 59 ibid

37 anything and not carrying the cost immediately at least, but as for the platforms we can only imagine taking into consideration how many start-ups fail that they are certainly not happy accepting equity from most of the companies. This is definitely a downside for platforms as they might end up receiving no service fee and no returns. In addition, as they are the ones who are performing the due diligence and should look the companies in a way to prevent fraud, can it influence the process if the company offers equity and the platform is simply not interested in the equity? Can the overall outcome be that platforms allow only these companies in that they see as a potential positive outcome for themselves? If so, then we are facing a big problem that equity offering that issuers are benefitting is also back firing in a sense that companies who are not able to comply with service fees simply cannot start their business. Though initially the idea might seem good the final result may be the opposite, it depends how the platforms will react and how they view this opportunity.

Via Crowdsourcing there were two quite a bit intriguing but at the same time very interesting propositions regarding the platform management when it comes to dealing with public money and management issues. The following was introduced:

1. Introduction of regulations that mandate issuers to set up a (Sub) escrow bank account for proceeds to be transferred to for issuers with withdraw restrictions to bill pay only with future API scrape facilities for public investors viewing of use of their proceeds. 2. Introduction of regulations for Banks and credit unions to mandatory offer direct (Master) Escrow Management Services to Regulated Portals offered now to other industries for high volume management and visibility of financial transactions.60

This might be seem as a solution to some extent but at the same time it is quite hard to imagine to be applied as there are already several regulatory hurdles and heavy load for the platforms, this would also raise the platform runner costs and cost for the equity crowdfunding users.

60 Crowdsourcing.org by Guest User. TITLE III WHY DOES THE FUTURE HOLD PREDICTABLE FAILURE?. 2016. See: http://www.crowdsourcing.org/editorial/title-iii-why-does-the-future-hold-predictable- failure/60661 38

3.1.5 Rule for companies regarding maximum sum to be raised via platforms JOBS Act Title III allows companies to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period via a registered broker-dealer or registered crowdfunding portal. Certain companies would not be eligible to use the exemption. The companies include are non-U.S. companies, Exchange Act reporting companies, certain investment companies, companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.61

There is a significant problem regarding the maximum sum allowed to be raised. When we look at the successful cases in the UK for example, we can clearly see that the target sum can easily be exceeded and there are companies that could benefit enormously from regulation that allows bigger maximum amount. The following chart will give an overview about the median sums that were raised in 2013:

62

Though the average is still under allowed USD 1 million, it has to be emphasized that this is only the average (also by today the numbers are higher and getting probably higher even more year by year), leaving many companies without the possibility for bigger targets and bigger growth, resulting in possible less returns for the investors and restricting the growth of the companies and disabling the possible faster economic growth. Also, the problematic side will

61 By Crowdexpert. SEC‘s new JOBS Act Title III Crowdfunding Rules: Overview and First thoughts.2015 See: http://crowdexpert.com/articles/new_jobs_act_titleiii_rules_overview_first_thoughts/ 62 J. Sandlund. Investment Crowdfunding: Average Transaction Sizes. 2013. See: http://www.thecrowdcafe.com/investment-crowdfunding-average-transaction-size/ 39 be if VCs and business angels invest through equity crowdfunding with larger sums and blocking the crowd from entering. We can see the tendency in the UK that single investments per pitch can reach up to 1 million pounds. If the US is only allowing under Title III to raise as little as 1 million we are facing a restrictive and blocking regulation. On the counter argument we can say of course that companies always have possibility to raise capital via regulation A (that includes VC investors etc.), meaning there is a possibility to get additional funding but this cannot be seen as the initial idea of Title III, it should allow bigger participation from the crowd.

3.1.6 Conclusion In conclusion, there were several problems that JOBS Act Title III has today. First of all, the necessary framework needs to be established to guarantee that investors will not exceed the limit allowed for the individual investors to be contributed without any loop holes. Secondly regarding the amounts allowed to be invested, it can be said these rates are too low and might not enabling the possibility to raise necessary funds as many people are also not eligible to invest under these rules. The regulation could give possibility to play on-accredited investors on the market even if their annual income is low because the crowdfunding platforms are allowing investments as little as 10 USD.

Secondly, the compliance costs for issuers are too high, the main key to solve the problems lies behind the price of raising funds- how could we bring down the cost of equity crowdfunding? Today regarding all the regulatory burdens set on the platforms and the fee they can charge along with compliance cost it is clear that raising funds under Title III can easily be switched doing the same fund raising under Title II or Title IV and less regulatory requirements and cost applies. This is ―killing‖ the initial idea of equity crowdfunding as the main companies benefitting are small and medium sized enterprises who are facing too many regulatory rules to overcome to reach the target investment.

Regarding investor protection it is not clear how one could prevent fraud from happening though several obligations were put on the platforms and issuers. This is still not guaranteeing a positive outcome and preventing fraud from happening. Therefore, eventually the investors are still exposed to risks in a very large extent.

40

Also, one of the main issues is the amount allowed to be raised per project. This is not helping to live up to possible potential of the company and still makes companies turning to VCs and angel investors eventually, meaning they might not even try to raise capital under Title III in the first place. We can see many success stories and also tendencies in Europe that the amount should be much higher to have a positive effect on the growth of the company and economy in whole. (The more companies are expanding, more jobs will be created, more returns for the investors etc.)

There is also problem regarding advertisement of the campaign, apparently there are strict rules applied meaning no advertising can be made which will definitely effect negatively the final outcome of the campaign. One actually needs crowd to do equity crowdfunding but crowd cannot be reached unfortunately, regulators have made it impossible under these rules unfortunately.

It must be acknowledged that equity crowdfunding is a novel model on the market and crowd does not understand the risks involved, therefore all the protective measures are applauded. Still, we need to face the fact that in Europe crowdfunding has been working without that restrictive measures and it is the characteristical feature of investing- there are losses and victories- less regulatory restrictions would be acceptable as nothing can really prevent companies failing and the crowd will face losses no matter what.

41

3.3 What is happening in Europe? In Europe there are mixed rules to be followed as there is member states national regulation but also regulation coming from the European Union regulations. The following table shall give a slight overview on where is the national regulation in each member state today:

63

63 Survey „Current State of Crowdfunding in Europe―.The following chart is available on CrowdfundingHub and they launched a survey that was answered by each countries experts. The index focuses on divergences (positive 42

Today we are seeing a very different approaches in the European countries which is overly concerning as there should be one clear market with the same rules for all the players, as European Union should serve the same safe and equal rules for everybody. Right now there are national laws present alongside with the EU regulations that are creating misunderstandings regarding which laws should be applied in one case or another. In case, if the issuer, investor and equity crowdfunding platform are all situated and originate from a different country it is complicated to determine which countries regulation should be applied.

Steven Maijoor expressed that equity crowdfunding can already be regulated within the existing regulation framework, MIFID. The regulation covers the areas preventing the fraud and the most important part is that it creates transferable securities and provides the basis for secondary markets. This is vital from the consumer protection angle.64

As an example, where regulated by local regulation, the simplified prospectuses required for equity crowdfunding may vary in length from 2 pages in Austria to 3 pages in Germany, 5 pages in Italy and 10 to 12 pages in France. Also when it comes to the maximum amount that is allowed to be raised using the simplified prospectus the limits vary from €100,000 euros according to EU law to €1 million euros in France, €1.5 million in , €2.5 million in the Netherlands and €5 million in Italy and the UK. If a UK company wants to raise funds from a Finnish investor on a German equity crowdfunding platform, it is quite unclear which of these limits will apply. 65

Investment Services Directive (ISD) enables crowdfunding platforms to operate all over European Union making use of the so-called passport that allows all investment services companies regulated in one member state provide services to investors and issuers from other member states as well.66 The ground rules have been set and there is currently no rush to harmonization of the rules between member states, even though there are significant problems present as previously mentioned regarding applying the national laws in cross-border transactions.

or negative), if the answer is true the darker green is used but if there are regulatory or other burdens lighter green is used. The Index gives mixed overview on the crowdfunding industry and equity based crowdfunding is also included. See: https://drive.google.com/file/d/0B7uykMX1rDrWN1Ywamh2Sy1kQ3M/view 64 T.Thorris. It‘s a Long Way to European Equity Crowdfunding Regulation. 2015. See: http://www.crowdfundinsider.com/2015/10/76509-its-a-long-way-to-european-equity-crowdfunding-regulation/ 65ibid 66 ibid 43

Tanja Aschenbeck-Florange, partner of Osborne Clarke commented the situation as following:

―Many believe that rescue will come from more EU regulation, but they will be disappointed because a crowdfunding-specific EU regulation would only add more layers on top of local regulations. What is needed is agreement on exemptions from EU regulations such as MIFID.‖67

We can see that though the equity crowdfunding should fall under European Union regulation the member states are using the internal regulation and national law will be applied to govern the equity crowdfunding market. Therefore, it is important to see how national regulations look like to give the basic overview on the different approaches and see the benefits of these different approaches.

3.1.1 Legislation in the United Kingdom In 2014 new rules went into effect that are targeted to regulate the pain points of equity crowdfundig industry. Though the market has always been regulated, the laws were meant to govern more traditional transactions. Financial Conduct Authority's ("FCA") approach was to acknowledge the permissibility of investment-based Crowdfunding as a valid business model operating under the existing regime, with minor amendments.68

The FCA has set up new rules regarding investors who are allowed to participate on the equity crowdfunding platforms. Firstly, from the aspect of retail investors the criteria enabling the possibility to participate is confirming that the investor will invest less than 10% of their net assets in this type of security and the other criterion in this case is that the investor has to take regulated advice. The firms have to make sure that investors who are not taking regulated advice understand the risks involved therefore the firm is the one who the burden is put on. Regarding sophisticated investors one can participate if the investor qualifies as a high net worth or sophisticated investors.69

67 T.Thorris. It‘s a Long Way to European Equity Crowdfunding Regulation. 2015. See: http://www.crowdfundinsider.com/2015/10/76509-its-a-long-way-to-european-equity-crowdfunding-regulation/ 68Report by the CrowdfundingHub. The Current State of Crowdfunding in the UK. 2016. See: http://www.crowdfundinghub.eu/current-state-of-crowdfunding-in-the-uk/ 69 FCA. A review of the regulatory regime for crowdfunding and the promotion of non-readily realisable securities by other media. 2015. P. 2-3 https://www.scribd.com/doc/254572697/Financial-Conduct-Authority- Crowdfunding-review-February-2015#fullscreen 44

This approach is positive as it makes sure that non-sophisticated investors will receive information regarding risks even in case they are not taking regulated advice. The current approach serves the best interests of the investors for that matter. Also, by setting the limitation for the investment contribution, it is assured that investors are not overly enthusiastically investing, still leaving the possibility to make bigger investments to those who are acting in the scope of accredited or high net worth investors.

According to the FCA presented data 38% of investors surveyed by Nesta and the University of Cambridge (Nesta 2014) were classified as professional or high net worth individuals (average portfolio over £8,000). 62% described themselves as retail investors with no previous investment experience of early stage or venture capital investment (average portfolio £4,000).70 This data clearly states that there are many retail investors acting on platforms as well who need further protection though the portfolio size might not be that big.

In the UK a platform has to get authorisation from the FCA. In order to get the authorisation the firm needs to submit a business plan that covers the main risks involved and planned activities, also disclose financial condition and resources regarding personnel, systems and capital. It is required that the personnel have the necessary knowledge and suitable background to run the platform. Also, the firm needs to have enough monetary funds available to conduct the platform. The firms need to have a website that is either up-and- running or at a suitably advanced stage to demonstrate how it will operate should the firm be authorised.71 The process is not difficult but still needs advice when covering the parts on financials and also the fact that platform site already has to be in the testing stage means that cost has to be made in advance before knowing if actual accreditation will be received. It can be said that the rules and disclosure requirements are fair.

The new regulation also sets forth that FCA is actively monitoring the equity crowdfunding platforms and that a screening process must be in place to sort sophisticated and non- sophisticated investors. Additional regulations concern the communication of the offers, the fairness, language and clarity of description used to describe these offers and the awareness of the risk associated with them. Mostly the campaigns are not targeting sums that reaching to the requirement of issuing prospectus and therefore most offers do not have to comply with

70ibid p.5 71ibid p.6 45 rules set in the EU Prospectus Directive prospectuses. Still there have been campaigns launched that did issue a prospectus to enable larger sums to be raised.72

The platforms need to provide enough information for the investors in order to make a decision based on that information whether to invest or not. The information cannot be misleading and has to disclose all relevant and important aspects of the offering and securities offered. 73

Compared to many countries the rules set by the FCA are covering the main areas that are characteristic for the equity based crowdfunding platforms. The systemic risks involved are reduced at least to some extent e.g. investor limitations and surveillance of the platforms. Also, the regulation is not overly costly and does not put too many obligatory actions needed to be taken on any party contrary to JOBS Act Title III.

3.1.2 Legislation in Austria The Alternative Financing Act (Alternativfinanzierungsgesetz – AltFG) came into effect in Austria on 1 September 2015. It is the foundation for the wider establishment of alternative forms of financing, in particular crowdfunding. Therefore, equity crowdfunding is regulated accordingly with the other crowdfunding types. Since enforcement of the law, the obligation to publish a complete capital market prospectus will first apply starting with an issue volume of €5 million. The company is exempt from preparing the full prospectus and simplified prospectus can be taken advantage of in case the issuer is issuing in the range of €1.5 million and €5 million.74

This is very agreeable term as it puts fewer obligations on the issuer and makes it less costly fortunately. This enables more companies seeking investments through online platforms. Also, compared to the US the target maximum sum can be higher and that helps the growth companies more.

Regarding investor restriction, individual investor can invest up to €5.000 per project. The investor is allowed to invest double of the net salary in case he earns more than €2,500 per

72 Report by the CrowdfundingHub. The Current State of Crowdfunding in the UK. 2016. See: http://www.crowdfundinghub.eu/current-state-of-crowdfunding-in-the-uk/ 73 FCA. A review of the regulatory regime for crowdfunding and the promotion of non-readily realisable securities by other media. 2015. p. 8. https://www.scribd.com/doc/254572697/Financial-Conduct-Authority- Crowdfunding-review-February-2015#fullscreen 74 Report by CrowdfundingHub. The Current State of Crowdfunding in Austria. 2016. See: http://www.crowdfundinghub.eu/the-current-state-of-crowdfunding-in-europe/current-state-crowdfunding- austria/ 46 month.75 This may seem too restrictive measure by the government as it is definitely not helping the growth and it is questionable whether it enables enough amounts of funding to fulfil the funding gap and supports the medium and small enterprises. Probably this prevents the equity crowdfunding to live up to its potential. On the other hand, from the investor protection part in is justifiable as we have already previously established the number of risks involved in the industry.

In the US, the allowed investment per individual was tied with the annual income and the highest bar was set for all individuals uniformly, but this regulation is better in a way that people earning more can contribute more, also this means that no actual limit is not set and person earning (so called rich investor) e.g. 10.000 euros can invest 20.000 euros per month. Still, the downside is the fact that per project there is still limitation, meaning that investors are prevented from making big investments and are forced to mitigate the risks by the law. This might result companies seeking investments not to reach the target investment though there might be individual investors who are willing to contribute to the campaign in larger scale. From the investor protection it is good as person can still have a big portfolio and are not prevented from actually investing, the portfolio is simply larger. Also, this might be actually beneficial for the companies in a way that investors might choose more projects to invest into, projects they initially would not invested if made only one big investment into one project.

Internet platforms must provide certain information regarding issuers (nature of their business, how they were selected for participation on the platform, and any fees or remuneration received from issuers or investors). The investment is made with the issuing SME or via crowdfunding platforms.76 Most platforms in Austria are exempt from the Prospectus requirements and therefore work as a silent partner; those who are within the scope are falling under Banking Law and have to get a license. Certain investment services might require a license of the Financial Market Authority in the sense of the Federal Law on the Supervision of Securities.77

75 ibid 76Report by CrowdfundingHub. The Current State of Crowdfunding in Austria. 2016. See: http://www.crowdfundinghub.eu/the-current-state-of-crowdfunding-in-europe/current-state-crowdfunding- austria/ 77 Interpretations of existing regulations concerning crowdfunding in Europe, North America and Israel. 2014. P.75. See: http://www.osborneclarke.com/media/filer_public/61/fe/61fe40e6-5790-41d0-b181- bb2065bca9a8/ecn_-_review_of_crowdfunding_regulation_2014_3.pdf 47

The Federal Law on the Supervision of Securities regulates the investor protection. In order not to become liable of the operator of a Crowdfunding platform for investors‘ possible losses, no investors‘ false expectations should be raised.78 This is actually a very vague and wide definition, but not very hard to accomplish. The rules of the platforms therefore should be not to recommend any projects and provide necessary warnings and risks involved, emphasising also the failure possibility and provide information on business risks associated. The definition ―not raising false expectations‖ can be interpreted also in a way that if a reasonable person is provided with information regarding risks involved and made clear that success is not guaranteed, the criteria should be fulfilled but of course in that wide definition it is a case by case interpretation.

Generally it can be said because the operator of a Crowdfunding platform is not raising funding from investors for his or her own business; it is not qualified as Fund.79

3.1.3 Legislation in Switzerland In Switzerland we can see also growth in the equity crowdfunding (crowdinvesting) though there was a decline in 2014. As the potential growth is predicted it will be more likely that regulatory initiatives will be established specifically meant for crowdfunding soon. Currently, Switzerland does not have a specific crowdfunding ruling established but there is an on-going discussion regarding possible initiatives. Right now the entire crowdfunding and therefore also equity based crowdfunding is falling under banking law.80 The experts call the most difficult regulation to be established especially in the area of equity crowdfunding.81

78 ibid p.14

79Interpretations of existing regulations concerning crowdfunding in Europe, North America and Israel. 2014. p.18. See: http://www.osborneclarke.com/media/filer_public/61/fe/61fe40e6-5790-41d0-b181- bb2065bca9a8/ecn_-_review_of_crowdfunding_regulation_2014_3.pdf 80 A.Pages. Crowdfunding in Switzerland. FundersRaft. 2015. See: http://fundersraft.net/crowdfunding-in- switzerland/ 81 Survey „Current State of Crowdfunding in Europe―. p.62 See: https://drive.google.com/file/d/0B7uykMX1rDrWN1Ywamh2Sy1kQ3M/view 48

Regulation is currently enforced mainly via individual rulings between FINMA and the platforms. Most platforms are voting in favour of a moderate legal framework and the associated legal certainty. For potential regulation, it would be desirable if the partially fundamental differences in the business models were to be assessed in a differentiated matter, given that a standardised approach could cause substantial problems for certain platforms. One concern regards holding the investment in the meantime until the payment is processed, this is mainly discussed among platforms and regulators because a platform should obtain a banking license in case it holds funds, but to avoid falling under regulation one should refrain from holding any funds. It should only act as an intermediary.82

Regarding licensing the platforms, FINMA has reviewed the platforms one by one and though there are several criteria that could place them under regulation the rule is most will not. This creates a situation where there is no real idea what are the platforms generating and there might be also lack of due diligence made when allowing issuers on the platform. As already established above, there is lack of investor protection.

The equity crowdfunding may become subject to different laws, e.g. Swiss Code of Obligations for the contractual relationships, the Swiss Civil Code for the legal form of the company, the Banking Act for the possible activity of banking, etc.83 We can see that there are no specific regulation regarding equity crowdfunding therefore there are again several gaps in

82 Interpretations of existing regulations concerning crowdfunding in Europe, North America and Israel. 2014. p.216. http://www.osborneclarke.com/media/filer_public/61/fe/61fe40e6-5790-41d0-b181-bb2065bca9a8/ecn_- _review_of_crowdfunding_regulation_2014_3.pdf 83F.Ney. Challenges for Swiss Start-ups : Is The ―Valley of Death‖ Seeing any Rain in the Distance?. 2016. See: http://rostigraben.ch/en/challenges-for-swiss-start-ups-is-the-valley-of-death-seeing-any-rain-in-the-distance/ 49 the law as traditional transactions do not have the same features and risks involved as equity crowdfunding and the laws crowdfunding is falling under were meant to govern traditional investment transactions.

For individuals there is a risk of a lack of transparency. The consumers may find themselves powerless if they never get what they invested for. Swiss law doesn‘t provide for the possibility of bringing class actions. Therefore, such individuals are unlikely to take legal steps to claim something worth a hundred bucks. In case of crowd investing, it should be recalled that there is no legal protection of investors as it is the case for collective investment schemes with the Collective Investment Schemes Act or the upcoming Financial Services Act (expected to come into force in 2018).84

In conclusion, it can be said that there are no restriction for individuals investing, nor are there rules for platforms as they can easily ―escape‖ from falling under any regulation in particular. Therefore, the system is very flexible and regulating itself and the protection and rules come only set up by the platforms themselves.

3.1.4 Legislation in Italy On February 24, 2016, the Italian securities market regulator (Commissione Nazionale per le Società e la Borsa, Consob), updated the regulations for equity based crowdfunding and the rules went into effect on 5th of March 2016. New rules should simplify the regulatory framework, in the face of bringing making it more cost-efficient to raise money via online platforms, also to expand the range of subjects able to invest money into innovative business ventures and enable safe process online for equity crowdfunding offers. 85

The law enables the offering of securities in the face of equity crowdfunding by allowing limited liability companies offer stake of the company to the public. The innovation start-up companies are almost all limited liability companies; ordinary limited companies are not allowed to make equity offerings to the crowd. The amount to be raised cannot be more than 5 million euros and are successfully concluded only if 5% of their amount is underwritten by a

84 ibid 85 A. Ravanetti. New Rules for Equity Crowdfunding in Italy. 2016. See: http://news.crowdvalley.com/news/new-rules-for-equity-crowdfunding-in-italy 50 professional investor.86 The rate is very welcomed as it enables equity crowdfunding to live up to its potential. In many countries we see too restrictive measures towards target maximum amounts to be raised. As the cases in chapter IV are telling us the maximum should be higher. Of course a fact needs to be acknowledged that in case of fraud there is more crowd that suffers significant losses.

Portals have to be registered with the Consob and the full list of authorized portals is available on the Consob. According to the law, the portals have to be authorized by the Consob to be able to offer platform services and banks and investment firms who are acting as intermediaries and have already been authorized have to provide investment services noted in the special section of the Consob register. 87 The regulation is definitely not loose as there is strict supervision from the government, they can ask different sorts of data and documents, also audit and carry out inspections on the platform. Still, the regulation is not as strict as for the traditional intermediaries. When not complying with the rules, the platform may be faced with deregistration and may be subject to penalties.88 The strict rules and supervision from the Consob might be burdensome on the platforms but as it has already been previously emphasized then from the possibility to prevent fraud and also carry out the best investor protection the supervision is the key factor and applying multiple obligations on the platform is one of the key factors helping to create a better and safer environment.

Portal managers are prevented from providing any financial advice and recommendations about the offerings. Portals are prevented from detaining sums of money belonging to the investors, they cannot directly carry out orders for underwriting the financial instruments offered on their portals, but must transmit them exclusively to banks or brokerage firms.89

The portals are made responsible for testing the suitability of the investors. For that the investment suitability test is carried out which was previously in the capacity of the banks to verify the investor level of knowledge, now it is less burdensome in that sense. The key is to provide information regarding all the possible risks involved.90 It is becoming a trend for

86 Investor Education Important things to know before investing in innovative start-ups through a portal. p. 4. p 11. See: http://ec.europa.eu/finance/general-policy/docs/crowdfunding/140925-equity-croudfunding-italian- investor-education_en.pdf 87 ibid p.4 88 ibid p.7 89 Investor Education Important things to know before investing in innovative start-ups through a portal. P. 7. See: http://ec.europa.eu/finance/general-policy/docs/crowdfunding/140925-equity-croudfunding-italian-investor- education_en.pdf 90 A. Ravanetti. New Rules for Equity Crowdfunding in Italy. 2016. See: http://news.crowdvalley.com/news/new-rules-for-equity-crowdfunding-in-italy 51 regulators to make platforms responsible for making sure if the investors are sophisticated enough or whether they bear the necessary knowledge, we can see the same approach in the US where platforms were also enforced to act as educational source of information. Platforms are on the best position to carry out the activity and therefore it is justifiable that government is forcing them to perform investor examination.

There is still exemption in some circumstances regarding examining and providing warnings etc. This is for investor or individuals who are investing €500 per deal and €1000 annually and for companies in case of investment in range of €5.000 per deal and €10.000 annually.91

In addition, the law obligates portals to act as a channel through which investors are receiving information regarding offers and final outcome, issuer background and business plan, also information regarding costs charged for the investors, information regarding platform manager, measures taken to prevent fraud and also what will be done in case of the campaign failure.92 There is more information that the portals have to pass on, the previously mentioned are the key factors.

Retail investors have been entitled the right to withdraw from the offer within seven days of the date of the on-line adhesion to the offer providing no reason and carrying no cost for doing that.93 This is good regarding the investor protection but creates uncertainty for the companies raising capital.

No limitations regarding investment amount has been introduces regarding both retail and professional investor. Investors are therefore free to invest without limit, provided that his/her risk profile matches with the kind of investment under MIFID criteria and current regulation; it‘s a case by case analysis and is surprising as in most countries the regulation prevents retail investors from investing overly active.94 This poses the biggest threat actually from the perspective of investor regulation, though there can be measures taken regarding educating and examining the investors, this can still lead to unknown. It can be only hoped that people are taking the risks seriously and are not overly enthusiastically making the investments. In

91 Report by CrowdfundingHub. The Current State of Crowdfunding in Italy. 2016. See: http://www.crowdfundinghub.eu/current-state-crowdfunding-italy/ 92 Investor Education Important things to know before investing in innovative start-ups through a portal. P. 8. See: http://ec.europa.eu/finance/general-policy/docs/crowdfunding/140925-equity-croudfunding-italian-investor- education_en.pdf 93 Investor Education Important things to know before investing in innovative start-ups through a portal. P. 13. See: http://ec.europa.eu/finance/general-policy/docs/crowdfunding/140925-equity-croudfunding-italian-investor- education_en.pdf 94 A.M.Lerro. Italy Updates & Improves Equity Crowdfunding Rules.2015. See: http://www.crowdfundinsider.com/2015/01/61941-italy-updates-improves-equity-crowdfunding-rules/ 52 most countries we see restrictions and limitations and this is for clear reason- in equity crowdfunding industry we see most start-up companies failing and thus most investors are losing money. Not establishing limitations into the law is very unusual but at the same time gives more personal freedom when dealing with financials. Also, not setting limitations per project gives ability to invest into one project with high amounts, regarding cases analysed this gives opportunity for angel investors also to act via those platforms and guarantees bigger cash flow for the companies.

In Italy, under the Growth Decree bis it is forbidden to distribute profit as a start-up before four years, all the profit has to be reinvested in the company to allow growth and maximum economic benefit.95 Therefore, for the investors the possible returns are locked up for a long period which may lead for investors not wanting to invest as their investment becomes illiquid for a very long period. Even in the VC industry we see today very short lockup periods (use to be 1-2 years now also common 6 months for taking an exit) as it promotes investors investing more as investing for that long period makes investors rethink as in case of need they cannot cash their shares. Due to that fewer investments might be made and the lockup period prevents growth though the initial idea was the opposite. On the other hand, for companies there is a benefit that they can use the capital for a fixed period and do not have to take an exit as quick as possible. Overall, the investors are also benefiting as allowing further and longer growth they are possibly seeing higher returns. On the other hand, a lot can go wrong within four-year period, the company may be successful in the meantime but as there is always a market change in the air, the investors may be prevented from selling the shares in the most profitable moment.

3.1.5 The current regulatory framework in other parts of Europe There are several countries that have not yet enacted proper legislation regarding equity crowdfunding platforms, investors and issuers. In these countries, the activity usually falls under existing laws such as banking laws, securities laws and investor related laws. Still, it is challenging to fit the entire activity under already existing law as equity crowdfunding needs further protection for the investors by setting the limitations for example, also performing due diligence for the companies issuing the securities. These sides of the equity crowdfunding are not usually covered without enacting specific law.

95 Investor Education Important things to know before investing in innovative start-ups through a portal. P. 15. See: http://ec.europa.eu/finance/general-policy/docs/crowdfunding/140925-equity-croudfunding-italian-investor- education_en.pdf 53

For example in Estonia we see that the entire equity crowdfunding falls under existing law. The structure of equity-based platforms in Estonia could be shaped by the investment services regulation set forward in the Securities Market Act. This requires registration and getting a license from the Estonian Financial Supervision Authority (EFSA). The license is only needed for tradable securities and in Estonia in case of private limited companies the shares are often not transferable securities due to the pre-emptive right of other shareholders under the Commercial Code. Therefore, if the shares sold are from issuer who is acting in the form of private limited company or as no license is needed with EFSA.96 Currently there are no restrictions regarding limitations per investor or certain criteria about the information that has to be disclosed. But this is unless the offering remains under 100.000 euro. Financial law stipulates that public offering of securities cannot be over the limit of €100.000 without issuing a prospectus. (The Nordic average is €1.5 – €2 million.) This is very restrictive as the issuance of prospectus clearly raises the funding cost for the issuer. There is currently lobbying in order this amount to be raised very soon. The problematic is the situation also regarding foreign investors- they are required to have a securities account at an Estonian commercial bank to invest if the shares are registered at the Estonian Central Register of Securities. 97 This prevents foreign investors from investing but hopefully this shall be solved by Estonian e-residency initiative. Until then this is definitely disabling the equity crowdfunding market from growing and companies seeking investments not to reach the possible target (though currently the target amount bar is so low when issuing without prospectus that the target is reached easily but it will change when the rates will be increased).

In Finland the situation is similar when it comes to governing law, as there is no specific law established, but this is currently in the progress and by the end of 2016 we can see probably new law going into effect. The industry is governed by several laws: Companies Act, Securities Markets Act, Act on Investment Firms, and Act on Credit Institutions. MiFID is being applied in Finland, the equity crowdfunding platforms should fall under MiFID regulation and therefore are heavily regulated. Still, there are platforms that are not obtained MiFID license and are still active players on the market but no regulation is restricting or governing their activity. Both public and private limited companies can raise money from the

96 Interpretations of existing regulations concerning crowdfunding in Europe, North America and Israel. 2014. p.75. See: http://www.osborneclarke.com/media/filer_public/61/fe/61fe40e6-5790-41d0-b181- bb2065bca9a8/ecn_-_review_of_crowdfunding_regulation_2014_3.pdf 97 Report by the CrowdfundingHub. The Current State of Crowdfunding in Estonia. 2016. See: http://www.crowdfundinghub.eu/current-state-of-crowdfunding-in-estonia/ 54 public through crowdfunding. Prospectus is not mandatory to be issued in case the amount to be raised stays below 2.5 million euros.98

In case of Finland, we can see the standard chaotic situation where there should be law that enforces everybody to obtain the same license and set the same ground rules but without proper framework and interstate legislation it is impossible and though there is MiFID that should govern the industry uniformly this is not the reality. As some players on the market are very willing to comply with the rules then there are simultaneously opportunity to stay exempt or simply disregard the rules and disregarding does not bring any sanctions along in case of several countries. On the other hand, we see a positive side of being exempt from the prospectus regulation once again as it increases cost for the issuers and has decreasing effect in the equity crowdfunding growth.

In Germany the equity crowdfunding industry is regulated by the ―Kleinanlegerschutzgesetz‖ that became enforce in 2015. Platforms need to get a permission for actively participate in the market according to §34f Gewerbeordnung (GewO) for ―Vermögens- und Finanzanlagen‖. Projects that are seeking an investment that are not exceeding €2.5 million are exempt from issuing a full prospectus. In this case a ―financial assets information leaflet‖ has to be submitted with the Federal Financial Supervisory Authority. The length of it can be up to 3 pages. The law prescribes individual investor (natural person) up to €10.000. But when investing more than €1.000, the investor needs to assure that he holds disposable assets of at least €100.000 or assure that he is not exceeding the limitation of investing more than twice of the monthly net salary. From the investor protection side there is a possibility to withdraw from the investment within 14 days. From the platform side, every project needs to present a warning sign regarding risks involved. It is prognosed that the law will be amended by the end of 2016.99

Again we can see a good initiative regarding prospectus. Along with this from the investor protection part it is positive that limitations are set but they are not as high as they could and the requirement of disposable assets is something that other laws have not suggested so far. The questionable side is how will it be determined in case if the spouses have shared assets and also it might be seen as too restrictive in order to make an investment overall. As many

98 Report by the CrowdfundingHub. The Current State of Crowdfunding in Finland. 2016. See: http://www.crowdfundinghub.eu/current-state-crowdfunding-finland/ 99 Report by the CrowdfundingHub. The Current State of Crowdfunding in Germany. 2016. See: http://www.crowdfundinghub.eu/current-state-crowdfunding-germany/ 55 people have mortgages on their assets the question raises whether one need to determine how big part of the mortgage has already been paid and what the investor is left in case when wanting to liquidate the assets. In this case still the situation is more protective and justifiable than in Italy where there are no restrictions regarding investment limitations, the same can be said regarding Swiss regulation.

Regarding prospectus regulation in Belgium we see a different approach. The rules are set as in case the issuer wants to raise below €100.000 they are exempt from issuing a prospectus and there is no limits on amount per investor. In case the amount to be raised be in the range of €100.000-300.000 the exemption from the prospectus still remains but there will be applied a limit of €1k per investor per company and above that amount the issuer is not anymore exempt from issuing a prospectus.100 Therefore, in Belgium we see heavier regulation regarding prospectus and also there is investor protection included in a way that in case a company will fail then investors facing a loss are diversified and this will make them manage more their portfolios as well.

In Spain, we see investor limitations in a way that the investors are categorised and based on category the amounts allowed to be raised are set. Qualified investors have a total income of more than €50.000 per year or a financial asset of more than €100.000 and investors belonging to this category are allowed to exceeding the amount of €3.000 and making investment in the same project or investing more than €10.000 in the same platform per year. Unqualified investors are those whose income per year shall remain under €50.000 and they are allowed to invest less than 3000 € per project.101

Platforms in Spain have to be registered with the CNMV (the agency in charge of supervising and inspecting the Spanish Stock Markets) or at the Bank of Spain in order to develop their activities. Also, they must possess a capital stock totally disbursed of €60.000 as well as comply with the rule of obtaining liability insurance.102

Spanish regulations are providing necessary framework to have overview of the platforms and also via that ensure the safer playground for the investors. The investor limitations can be seen at the first restrictive but the actual total sum that is allowed to invest has not been set.

100 Report by CrowdfundingHub. The Current State of Crowdfunding in Belgium. 2015. See: http://www.crowdfundinghub.eu/current-state-of-crowdfunding-in-belgium/ 101 Report by CrowdfundingHub. The Current State of Crowdfunding in Spain. 2015. See: http://www.crowdfundinghub.eu/current-state-crowdfunding-spain/ 102 ibid 56

The investors simply need to diversify their portfolio companies and risks are mitigated by this way, Spanish law has really set a pile of rules that enforces diversification of the investments which is actually very beneficial for the investors. The classification is justifiable as well and in enables the necessary funds for the start-ups but is mitigating the risk simultaneously for the accredited investors as well.

3.1.6. Conclusion In conclusion, it can be said that member states are applying very different rates and methods of investor limitations in order to guarantee some extent of investor protection. Also, there are significant differences regarding platform requirements and authorisations and as in most cases the platforms are not keeping any funds they can escape from registration in several countries. Controversial to this, we can see countries that have taken serious steps towards platforms such as Australia and UK.

Regarding investor limitations the common ground is that there is usually either maximum amount allowed to be invested that is tied with the net salary either per annum or per month, second approach is investments per project or per platform, the most limiting regulation is definitely the one setting common rules for everybody. The best approach is by far setting the reasonable amount allowed to be invested per project and also use the classification of investors when setting the highest amount so the angel investors and sophisticated investors could invest more and not be treated as the regular investors.

Unfortunately the EU legislation is not covering characteristic features of the equity crowdfunding and so do not the national laws that are meant to govern traditional transactions of the investment and financial market. Concerning is the situation where there is mostly cross-boarders transactions involved but there is no agreement regarding governing law and as the limitations for the issuers, rules for the platforms and limitations for investors are varying from member state to member state in case of litigation or dispute there is no clear line which law should be enforced. The concerning part is governments ignorance towards equity crowdfunding industry we can just now see that governments are awakening and start issuing specific regulations which is vital from investor protection part but as there are barriers for issuers then these should be lost in order to help the market grow.

The following years will be interesting to see how will European Union react and how are governments not enacted legislation yet will do that and if some laws will be changed in countries that have already passed an equity crowdfunding specific law.

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Chapter IV: What are the success stories of cases telling us about the industry?

During the past few years since equity crowdfunding platforms have grown rapidly we could see real success stories, such as JustPark, among the line with big failures, like Rebus Group. It raises the question why are some campaigns more successful than others and is it more to do with the business plan that lies behind the campaign, the rules that platforms have set up or is there influence from government set up regulations that help and promote the possibility to launch a successful campaign. The next chapter shall list some of the success stories and analyze the possible success behind it based on the information available on the crowdfunding blogs and media, in order to see what experts have said. As a result we can conclude the role of regulation for promoting and making equity crowdfunding more successful.

4.1 JustPark JustPark launched a campaign on Crowdcube and raised £3.7 million from 2916 investors purchasing 15.61% equity in the firm in 34 days though the initial goal was to raise just £1 million for 4.6% equity. As a result of the campaign the maximum amount allowed for SMEs under EU regulation was raised and it is also the biggest overfunded campaign, making it at the same time one of the largest and most successful campaigns in the UK. According to Crowdcube, investors came from around the world including Hong Kong, Costa Rica and Monaco. Among the investors about 30% were already using the product.103

When usually the campaigns are funded by hundreds of investors then in case of JustPark they so-called broke the rule by including 3000 individual investors. The single largest investment in the crowdfunding round was £500,000 and the smallest was £10. The interest in JustPark was not a surprise as the company had already received funding from the leading venture capital firms.104

The company said that the business model is excellent as it helps to raise money for users who are living in the area difficulty with parking. They claimed that for example a church in

103 J.D. Alois. JustPark Breaks Crowdfunding Records on Crowdcube, Hits £3.7 Million. http://www.crowdfundinsider.com/2015/03/64530-justpark-breaks-crowdfunding-records-on-crowdcube-hits-3- 7-million/ 104 ibid 58

London generated over £180,000 with their application and individuals have risen over £3000 per year.105

First and foremost it is definitely a brilliant business plan that aims to fix a social pain point as the idea speaks to many people who have problems parking in the cities packed as London. Also, as the business was already backed by venture capital firms it gained more trust and became more appealing to invest in.

Secondly, the case tells us that the minimum of investment that could be made was only 10 pounds. It is not surely established how many investors went for a minimum investment but it clearly gives an opportunity for more people to invest, also raises the possibility for a company to receive necessary funds. Also, as the highest investment was 500 000 its shows that there are individual investors who are willing to invest larger sums, they might be still VC companies or business angels acting through the platform but it clearly shows that limiting the sum of investment allowed to be made is not wise as it is hindering the possibility of success rate of the campaign as well as possible better economic growth for the company. As JustPark was raising money to expand the business and launch a service app that would help the company grow, it can be said that limiting the possible sum of investment will restrain the growth and as a result company will not be as successful resulting in smaller returns for the investors as well. On the other hand, JustPark had a brilliant business idea and not every company‘s idea seeking funds will speak to people in this way.

It was also mentioned that JustPark hit the sky, meaning they received the highest investments that is allowed by the EUs regulations. This clearly shows that there are companies that public has so big interest in that maybe the amounts allowed to be raised via online platforms should be raised. At the same time they were not seeking for such a big investment but when comparing to the US regulation this campaign could not be launched according to JOBS Act Title III in there today. When comparing the restrictive measures taken in different countries then definitely the regulation has a big impact on the success stories of the campaigns.

Foreign investors were allowed to invest into JustPark which enabled the possibility to launch successful campaign. In case we are restricting the participation of foreign investors it would clearly affect the final outcome and success rate.

105 ibid 59

The founder of JustPark described the success of the campaign as a result of carefully planned steps. They created a survey whether existing customers are interested to invest and after getting good feedback they turned to the media to target best moments and reach out to possible investors. He emphasized the importance of timing as one of the main key factors that played a role. Eskinazi also brought out the excitement by the people recognizing it as a good company to invest in, also the possibility to be part of something special, to take the journey of building up this company together.106 By that we can clearly see that both investors and the founders share the vision and via that the success is more likely to occur. These factors have nothing to do with the regulation or laws, it simply means the outcome of a campaign is not determined by laws, regulation simply gives the framework within one needs to act.

4.2 Chilango

The Mexican fast food chain raised the capital of £3,433,010 through Crowdcube platform with almost 1500 participants. The final offering of equity was 8.72% of the company. The company used two different rounds of crowdfunding campaigns- one in 2014 (bond) and the second round in 2015 (equity). In equity crowdfunding round the biggest investment came from an individual investor participating with £400,000 and the smallest amount allowed was £10 in the equity crowdfunding offering. The purpose of capital raising was to expand the business in the UK and internationally. In first round when offering the „burrito bonds― it raised £2m in June and attracted investments from the executives at Carluccio's, Domino's and Costa Coffee.107

With the bond, the entry bar was £500 so it was accessible to less investor, but it still caught the attention of nearly 700 investors. According to the founder they are pleased with the return on their investment following two dividends.108

In this case we can see that the crowd was also offered initially bonds of the company and the success for this campaign definitely affected the equity crowdfunding offering. With the previous campaign the founders showed the successful returns for the investors that

106M. Jenkin. Record-breaking crowdfunding campaign turned JustPark's fortunes around. The Guardian. 2015 http://www.theguardian.com/small-business-network/2015/sep/14/crowdfunding-campaign-justpark-small- business-showcase 107 L. Davidson. The 15 biggest equity crowdfunding rounds of 2015. The Telegraph. 2015. http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/12068605/The-15-biggest-equity- crowdfunding-rounds-of-2015.html 108 M. Dunsby. £3.4m crowdfunding investment for burrito brand Chilango. Startups. 2015 http://startups.co.uk/3-4m-crowdfunding-for-burrito-brand-chilango/ 60 significantly made the equity offering more appealing. The founders commented that people love the food of Chilango and therefore the costumers themselves are willing to invest into the business- if people love the product it has significant impact on the success rate as they are already users and believe the possibility of business growth.

4.3 Sugru Sugru raised £3.388.150 by selling 12.43% of the company‘s equity on Crowdcube, though the initial target was only to raise £1 million. Sugru is a company that sells mouldable glue that is design to glue pretty much everything, coming in different colours as well.109The product was also named as one of the top 50 inventions lately made.

The company managed to include 2700 investors from 68 countries. The biggest single investment of £1 million came from individual business angel after meeting with the founders. This also broke the record for the single investment made so far in the equity crowdfunding platforms.110

The founder of Sugru said in one of the interviews: „It has been a huge frustration for our US community that because of the regulatory restrictions, they haven‘t been able to get involved. In all countries except the US, Canada, and Japan, individuals can invest in Sugru while the campaign is open from as little as £10, the only barrier is understanding and connecting with the idea of owning shares in a company to help it grow.―111

The interesting side of business development of Sugru is the fact that it might be seeking further investments through equity crowdfunding in the US. The experts have suggested that the way platforms like Crowdcube are not properly examining the financials of the companies allowed to raise money and they are now waiting if Sugru is eligible in the US and if additional data will be discovered that was improperly presented in the UK.

109 Sugrus Initial Pitch on Crowdcube. See: https://www.crowdcube.com/investment/sugru-19593 110JD. Alois. Epic Sugru Funding Round Closes Over £3.5 Million on Crowdcube. 2015 http://www.crowdfundinsider.com/2015/07/71049-epic-sugru-funding-round-closes-over-3-5-million-on- crowdcube/ 111 Beyond : The Rise of Equity Crowdfunding. Fixing that thing with Sugru. http://makezine.com/2015/06/17/beyond-kickstarter-rise-equity-crowdfunding/ 61

4.4 Assetz Capital Assetz Capital that is active in peer-to-peer lending industry that raised £3,179,750 from 731 investors through the Seedrs platform. 112

The business idea of Assetz capital: ―It was the first platform to take tangible security on every loan, and has pioneered the sector with new product launches and developments including P2P bridging loans, residential investment mortgages and an underwriting model which has allowed it to issue some of the industry‘s biggest P2P loans. For investors outside of the UK looking to benefit from unguarded returns of up to 12% pa before taxes, Assetz Capital is one of the few to allow and welcome such interest from individuals and investment funds.‖113

The capital was meant to double their team in loan origination and credit particular and also to develop their marketing to involve more borrowers but also many other areas to strengthen and develop the company.

Similarly to Assetz Capital other peer-to-peer lending companies have raised money via Seedrs platform and by the words founder of Assetz Capital Seedrs represent good investor protection policy and help the investee company simultaneously to grow. It was also mentioned that the reach of the platform and respectability are important factors for a successful campaign and the founder emphasized that this is the main reason why Seedrs was chosen as a platform to act through.114 Therefore it may be concluded that the way platforms regulate investment process has impact on how both investors and investee companies choose their platforms via which they act through and as a result it affects the final outcome. Due to poor platform conditions investors may turn away and seek alternative investment opportunities despite the fact the pitch may be worth the investment.

The conditions set by the platform are also regulated by the law, so we can tie the attractiveness to make an investment with regulatory background. If the companies need certain amount of freedom and support but on the other side the investors seeks for secure platforms with higher investor protection the regulatory effect is enormous. There has to be balance between everyone‘s interests but as we see now in the US it raises the cost of equity

112 Assetz Capital Raises Over £3 Million Through Seedrs. 2015. See: http://www.mondovisione.com/media- and-resources/news/assetz-capital-raises-over-3-million-through-seedrs/ 113AltFi Global Summit 2014. http://www.altfi.com/events/altfi_global_summit_2014/sponsors 114JD. Alois. Assetz Capital Celebrates 2 Years of P2P Lending, Raises £ 3 Million on Seedrs. 2015. http://www.crowdfundinsider.com/2015/04/66350-assetz-capital-celebrates-2-years-of-p2p-lending/ 62 crowdfunding in a way that investee companies are turning away from the equity crowdfunding.

4.5 1Rebel 1Rebel raised capital of £1.542.660 via Crowdcube platform offering finally 33.79% of the stake in company in 2014. The biggest single investment was made by an individual investor who contributed £575,000 in the funding round. There were in total 304 investors participating in the round. The purpose of the campaign was to rise capital to launch a chain of contract-free ‗high intensity‘ boutique gyms in London, which allow members to book classes online and via an app on a pay-as-you-go basis.115 The second round took place in 2015 where approximately 460 investors participated with final amount of £3,000,000, attracting the largest single investment of £300,000.116 The second round was intended to expand the business and establish new features.

4.6 Camden Town Brewery Camden Town Brewery launched a campaign in 2015 receiving total investment of £2.750.860 from 2173 investors. The equity on stake was 5.73% of the company. The initial target was to raise £1.5 million making the campaign overly funded by 183%.117

The campaign is noteworthy also in a sense those eight months after the campaign the company took an exit and was acquired by one of the leading brewer on the market- AB InBew. The deal was valued approximately for £85 million but it is a speculation as the final value was not disclosed. Camden Town is investing up to £18 million in building a new brewing site in Enfield, North East London, and upgrading its North London headquarters in Camden. As part of the deal, AB InBev is becoming one of the investors.118 This can be evaluated as a real success story because via equity crowdfunding campaign the business was launched successfully and by taking an exit they returned the investments and added real value for the investors, but by launching a new business we can see real effect of the equity crowdfunding.

115 JD. Alois. Fitness Venture 1Rebel Tops £1.5 Million Equity Crowdfunding. 2014. http://www.crowdfundinsider.com/2014/09/48263-fitness-venture-1rebel-tops-1-5-million-equity-crowdfunding/ 116L. Davidson. The 15 biggest equity crowdfunding rounds of 2015. 2015. http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/12068605/The-15-biggest-equity- crowdfunding-rounds-of-2015.html 117 Camden Town Brewery Pitch on Crowdcube. 2015. https://www.crowdcube.com/investment/camden-town- brewery-17825 118 O. Williams-Grut. Camden Town Brewery is getting taken over by the biggest beer maker in the world. Business Insider UK. 2015 http://uk.businessinsider.com/ab-inbev-buys-camden-town-brewery-2015-12 63

One investor announced that he received 68% return for his investment for acquiring 851 shares for £550 per share. The shareholders were given the following options:

119

4.7 eMoov Emoov launched a campaign through Crowdcube platform in 2015 raising capital of £2.622.360, 262% of the initial goal. The pitch attracted 765 investors and the biggest investment made by an individual investor was £575.000 and the smallest investment was £10. As a result participating investors acquired 12.13% of stake in the company. Several VC firms participated in the offer including, Episode 1 Ventures, Maxfield Capital Partners and Startive Ventures in Switzerland. eMoov has informed investors of its intent to either do an IPO in 2016 or private sale in the ―next few years‖ 120

This again shows us that VCs and angel investors are actively using the platforms. Also, the other trend we see is that setting too big barriers for investors that can take part of the process is simply ―killing‖ the initial idea that what equity crowdfunding really is- building a community by letting the users of the service and product actually have a stake at the

119JD. Alios. Updated: Crowdfunded Brewery Camden Town Acquired by InBev.2015. http://www.crowdfundinsider.com/2015/12/79124-crowdfunded-brewery-camden-town-acquired-by-inbev/ 120 JD. Alios. EMOOV Closes at £2.6 Million, 2.5X Over Initial Crowdfunding Goal.2015 http://www.crowdfundinsider.com/2015/10/75525-emoov-closes-at-2-6-million-2-5x-over-initial-crowdfunding- goal/ 64 company and tie them with the business by letting them have a piece of the success of the company.

Also, the number of investors states the possibility of foreign investors as well, so we should not build boarders online and take away the biggest advantage the platforms are serving today.

4.8 Seedrs Seedrs, one of the largest equity UK based crowdfunding websites, listed itself on its own platform and raised £2.500.008 million by offering 8.3% stake of the company.121

In case of Seedrs there were no specific key figures involved that have not previously mentioned, such as enabling foreign investors participation and restrictive measures would also include investor limitations and maximum amount allowed to be raised.

4.9 Other success stories Other success stories that will be also taken into consideration in the conclusion:

 Hybrid Air Vehicles; Hybrid Air Vehicles raised a capital of £2,196,870 million on Crowdcube by selling 6% of equity. More than 900 investors were reached and the biggest single investment made was £275,000. 122  Adzuna: Adzuna raised £2,112,916 million via Crowdcube. Adzuna is a job search engine and the initial target was to receive £1.5 million but they eventually they managed to raise 140% of its initial target. The largest single investment was £200,005 but the total number of investors participating in the round was 481 people.123  Hochanda: Hochanda managed to raise £1,962,744 million via Crowdcube. The company offered 16.8% of its equity in return in 2015. The Peterborough-based business established a TV shopping channel on Sky and Freeview.124

121 L. Davidson. The 15 biggest equity crowdfunding rounds of 2015. 2015. http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/12068605/The-15-biggest-equity- crowdfunding-rounds-of-2015.html 122 ibid 123 ibid 124 ibid 65

Conclusion In conclusion, we saw some trends that could be applied to most of the cases. Firstly, there were extremely large crowd targeted- hundreds and even thousands of investors reached. Successful cases have a big audience applauding in the background and laws should not limit the number of investors therefore. The second trend was that there are almost always foreign investors participating as well which enables the positive outcome. It is not disclosed in total how big the contribution of foreign investors is but as there was mentioned in some cases 68 different countries represented then it has to be quite significant.

The limit of the target amount has the biggest influence as the success stories were not that successful when enforcing low amounts allowed to be raised.

Platforms were mentioned only once by the Assetz Capital as an important figure due to investor protection and high standard they believed that this is also reason why more investors were willing to participate in the round. Investor protection policy therefore may have positive outcome to attract them to invest but at the same time may have controversial effect as Seedrs is high cost platform in a sense that they are complying with high regulatory obligations and cost is higher.

The following chapter V will give an overview on how the law affects the success rate and the equity crowdfunding industry.

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Chapter V: What are the cases telling us and what role has the law to play in this?

5.1 Maximum amount allowed to be raised by the issuer One of the key factors is definitely the amount of money allowed to be raised. For example in the United States JustPark (raised £3.7) and Chilango ( raised of £3,433,010 ) could not happen under Title III, this does not mean that it could not happen at all but using the simple crowdfunding regulation (not making use of Title II or Title IV) we can clearly state that raising this amount would be prevented under the JOBS Act rules due to maximum amount allowed to be raised , in case of JOBS Act the amount has been set on 1 million USD per project- this limitation prevents successful campaigns where actual crowd- non-sophisticated investors- can participate. Therefore, it can be clearly stated that amount limitations prevent companies‘ growth and the possibility for more positive outcome for the investors.

The maximum sum has been discussed as obstacle for equity crowdfunding this may result in companies seeking alternatives if they need to raise more money. In the US they can turn to Title II and Title IV regulations and in Europe companies use alternatively angel investors and VC funding as well. At the same time there are several countries whose law allows this kind of outcome such as United Kingdom and Switzerland. The problem in Europe is not that significant as the maximums are very high in some countries e.g. 5 million Euros in Italy and UK; €2.5 million in the Netherlands and €1.5 million in Finland125 but at the same time in the US it is only 1 million USD (881.000 euros).126

In Europe, there is role for the European Union law as 5 million euros is set as maximum under EU law, maybe otherwise Italy and UK would also allow higher amounts, though it is questionable if higher amounts are necessary and wise. This has been said from the perspective of risks involved with this funding method for the investors and the maximum amounts should now satisfy the necessities of small and medium sized enterprises. In this case JustPark is a rare case to bring as an example and to take lead only by their success rate.

Every country that is not enforcing overly little amount allowed to be raised is in fact enabling bigger growth- businesses can develop their operations and expand more quickly if they

125 T.Thorris. It‘s a Long Way to European Equity Crowdfunding Regulation. 2015. See: http://www.crowdfundinsider.com/2015/10/76509-its-a-long-way-to-european-equity-crowdfunding-regulation/ 126 Press release by U.S. Securities andExchange Commission. SEC Adopts Rules to Permit Crowdfunding Proposes Amendments to Existing Rules to Facilitate Intrastate and Regional Securities Offerings. 2015 67 receive more money. Companies such as Chilango who have now expanded their business significantly would have had more modest business growth in case they could not have reached that target amount. Also, as economy is depending on equity crowdfunding in a way of fulfilling the funding gap, there should be bigger amounts allowed to be raised in the US and France as well. The more businesses grow, the more jobs will be created- in the case of Chilango it was mentioned that by expanding the business 600 jobs may be created.127

It must be emphasised that by no means should there be limitless opportunity to raise funds as the crowd can and probably will face significant losses. The fraud risks and failure risks are high and due to that the conclusion should be that limits are necessary but in some countries they are too low and are not complying with the expectations of fulfilling the funding gap. Investor limitations should be set instead of too low maximum amounts.

5.2 Losing the boarders The second factor that is definitely vital for a successful outcome is the fact that foreign investors are allowed to participate and invest via online platforms. Otherwise we could not see that big of sums targeted. In the case of Sugru the investors came from 68 different countries, though there were not actual laws detected that are preventing foreign investments it is a very vital factor to enable successful campaigns. Even under JOBS Act Title III, foreign investors are allowed to invest.

Regarding the main characteristic of investment-based crowdfunding, it loses the borders and builds a bridge between the companies and investors regardless where they are localised. Reaching big crowds quickly via online platforms with only one pitch is the unique value of equity based crowdfunding today.

The platforms are facing some barriers regarding getting licensed in some countries. Therefore they will lose investors due to regulatory issues. The founder of Sugru expressed his concern during the campaign that they can reach every investor besides Japan, Canada and the US, but today US is already enabled the possibility.128 The platforms need to comply with rules still in the US as the local ones and the main concern is the litigation part- this means

127 E.Eversham. Chilango to start expansion after smashing latest crowdfunding target. 2015. See: http://www.bighospitality.co.uk/Business/Chilango-to-start-expansion-after-smashing-latest-crowdfunding-target 128 Beyond Kickstarter: The Rise of Equity Crowdfunding. Fixing that thing with Sugru. http://makezine.com/2015/06/17/beyond-kickstarter-rise-equity-crowdfunding/ 68 that company has to be reachable in the US for litigation purposes and also provide SEC with necessary documentation.129

This is fairly understandable from the investor protection part; it will be interesting to see in case of failure of the companies will there be class actions brought against platforms or issuers. US is known for heavy litigation therefore we will soon see how will courts interpret the rules of Title III as there is liability for several actions but enforcing the liability will be tricky- it was already mentioned in the section regarding previous offers- directly making an offer to possible investors by saying it was meant as a Title II offer and then deciding to use Title III, who will win the battle?

5.3 Maximum contribution by the individual investors In most cases, we see how important is the role of maximum amount that is allowed to be contributed by the individual investor and also that the lowest bar has a meaningful impact as well. In case of 1Rebel the biggest single investment was £300,000 which could not be made in case we limit the amount per person or per project by one individual investor. When it comes to regulation in several countries the limitations are set uniformly, like in the United States and Austria. The first and most restrictive tendency is to regulate every individual investor by the same rules- meaning every investor can contribute the same limited amount regardless the level of sophistication. This unfortunate measure is leaving still a funding gap, because accredited investors should definitely be allowed to contribute more than retail investors. Angel investors are known to be contributed as much as 1 million pounds as we saw in the case of Sugru, showing us that there are many investors that regulation is holding back and investee companies are losing the possible investments.

The classification of the investor is far more reasonable approach as it leaves companies with bigger chances to raise the necessary funding and also angel investors, VCs acting through platforms and sophisticated investors can contribute as much as they wish. Sophisticated investors should be left with more freedom and law should not be set in a way to limit an amount allowed to be made per project and set the bar on the same level for everybody.

129 M. Roderick. Title III Crowdfunding: Outline For Portals And Issuers. 2015. p.7. See: http://www.flastergreenberg.com/assets/htmldocuments/Title%20III%20Primer.pdf 69

The most positive outcome for investors and projects should be the solution where the law sets quite high limitations for the individual investors that they can invest per annum but make the limit per project and per platform, therefore the law obligates the investor to diversify its portfolio, the companies will not then lack of funding and the risks for investors will be mitigated. Of course a per project contribution should not be overly small or high but law should take the middle reasonable road.

Positive example is the UK where investors are to be taken an advice on investment risks and other factors, there the law is enforcing educational factors and allows therefore higher contributions which is also agreeable approach. But today still limits for non-sophisticated investors should remain.

5.4 Setting the bar for maximum number of investors per project In all of the successful campaigns we see hundreds and even thousands of investors participating. Therefore, the law should not be restrictive or set any further barriers for targeting a larger amount of investors. The restrictive laws that put extra burden on the companies that have more shareholders are also influencing the industry. In case further obligations are set for companies dealing with more investors, the issuers probably want to keep the limit of the shareholders as minimum as not be subject to extra regulatory burdens. In case of JustPark there were 2916 investors130 and in case of Sugru it was approximately 2700131, the investors are now shareholders and these companies have had a major success, it would be overall loss for the industry when introducing regulation that would prevent targeting the crowds. JustPark was said to hit the so-called limit of the maximum investors.132 Maximum investor regulation should also not be introduced as the lowest bid may be 10 pounds on UK platforms, in case all the investors would want to invest the lowest bar then the company would end up before hitting the maximum investor bar than maximum amount allowed to be raised.

130 J.D. Alois. JustPark Breaks Crowdfunding Records on Crowdcube, Hits £3.7 Million. http://www.crowdfundinsider.com/2015/03/64530-justpark-breaks-crowdfunding-records-on-crowdcube-hits-3- 7-million/ 131 JD. Alois. Epic Sugru Funding Round Closes Over £3.5 Million on Crowdcube. 2015 http://www.crowdfundinsider.com/2015/07/71049-epic-sugru-funding-round-closes-over-3-5-million-on- crowdcube/ 132 J.D. Alois. JustPark Breaks Crowdfunding Records on Crowdcube, Hits £3.7 Million. http://www.crowdfundinsider.com/2015/03/64530-justpark-breaks-crowdfunding-records-on-crowdcube-hits-3- 7-million/ 70

5.5 Prohibition of advertising Another success factor is no doubted the campaign that is launched. Most founders of the companies acknowledged the importance of campaign advertising in targeting the crowd. It has been said that one has to have a wide social network and team behind the pitch have to be extremely careful about how they are launching the campaign, what channels are they using and other key factors in the campaign have enormous effect on the outcome. In the analysed cases we saw founders talking about meeting with the possible investors and letting the people know about their campaign.

This brings us to acknowledging one extreme problem in the JOBS Act Title III, the law restricts the channels that can be used and limits it to the online based channels, which is overall not disaster though takes away media and leaving only social media and internet space but the law is also restricting the content that can be forwarded to minimum. This is the point where it must be said that it is overly restrictive as not even allowing to present the idea behind the offering. Crowdfunding cannot happen without the crowd and if law prevents catching the attention of the possible investors it has enormous negative impact on the final outcome and amounts raised. It can be argued that the link is provided within the advertisement but it is a common knowledge that this is not very eye-catching it is the idea that has to be presented in order to raise interest in people. Therefore it is a big downside of the JOBS Act Title III and the issuers and overall economy shall lose potential growth due to initially recognised as a small restriction.

Regarding JustParks campaign, the founder shared that before they made the campaign they met with users, possible investors and made surveys whether there is an interest to invest into the company via equity crowdfunding- this activity is prohibited under Title III. The previous activity can also be test marketing as they simply made their research, the fact that it also targeted investors and that they shared their vision does not count as an offer or advertising directly but under Title III it is prohibited as the definition is wide and one may become liable and breaking the rules.

5.6 Prospectus and disclosure rules Regarding the prospectus issuance it does not have effect on the campaign itself but it has a far bigger effect- it may end up preventing companies from using equity crowdfunding in the first place. As it has already previously discussed the cost of prospectus issuance and initial disclosure made mandatory for the companies are boosting up the final cost in a way that

71 companies shall rather not comply with these rules. It is extremely beneficial that JOBS Act Title III is asking less disclosure and financial audit by the companies for the initial disclosure but at the same time the on-going reporting obligations are too costly and investors will turn away from equity crowdfunding under Title III. The key question we should ask is how we could bring down the cost of equity crowdfunding. The probability that solutions are out there is big, we just today do not know the best way to do it yet.

Also, in Europe we see that many countries are setting rules for the companies raising small amounts to be exempt from prospectus requirements or have established rules by allowing taking advantage of small prospectus which is more or less like a fact sheet covering main areas of the business.

In the US we see very extensive disclosure requirements, that is costly and is also harmful data will be available also for the competitors. These rules are burdensome and bear a negative impact on the companies that may turn to Title II or Title IV because the otherwise the disclosure is not paying off and under Title II they do not have to disclose anything. In Europe, it is very welcomed as companies benefit from being exempt from issuance of full prospectus ad can take advantage of the reduced prospectus. This is definitely boosting up the equity crowdfunding market as the companies do not have to comply with huge costs.

When it comes to reporting obligations, again US is applying too heavy rules on the issuers that have negative outcome for the usage of Title III. In Europe we do not see that tendency.

5.7 Rules for the platforms Regarding the framework for platforms, in the case of Assetz Capital the founder emphasised the importance of the platform conditions. Assetz Capital managed to raise £3,179,750 from 731 investors through the Seedrs platform.133 It was established that investors are more willing to invest in case there is bigger investor protection guaranteed by the platforms. They brought out the Seedrs policies that are complying with high standard rules helped them attract more investors eventually. Investor protection and platform policies are vital factors to make investors more comfortable to invest. Though there are multiple obligations and

133 Assetz Capital Raises Over £3 Million Through Seedrs. 2015. See: http://www.mondovisione.com/media- and-resources/news/assetz-capital-raises-over-3-million-through-seedrs/

72 mandatory actions platforms need to take in this case, the outcome for investee companies is better.

It is very hard to draw the line and determine how much should a platform perform due diligence, how much should investee company disclose and investor carrying risk so in the end for everybody being equally and proportionally liable for their actions and so the system would be balanced. As there is today no identical approach by any country we simply have to face the fact that dealing with novel and growing market can be frustrating at the beginning. Some rules have made equity crowdfunding far more appealing for the companies and are helping to fulfil the funding gap- the investor protection and prospectus exemptions are definitely one of them.

In Europe, UK for example the FCA can ask documents in the surveillance procedures and also in other countries companies are made an obligation to submit any documents to the local financial authorities in case they fall under the regulation in any way as an intermediary. The problematic is the case when platform is not falling under any regulation e.g. in Italy and Switzerland platforms are exempt mostly from the regulation. This is harmful for investor protection as investors can only relay platform conditions. This has a negative impact on overall participation of investors and therefore final outcome for the success rate of the cases. Some ground rules and certain limit of investor protection should be guaranteed by the regulators, they simply should not be as heavy as under Title III. We see clearly that too little and too much regulation has both negative impacts. Unique central way is available and it should be applied, UK is a good example as the regulation targets most difficult issues but still is flexible.

The concern is that speed and easiness are the key factors of why companies would like to use equity based crowdfunding, the fact that regulation is enforcing extensive legal rules to comply with is decreasing the initial value for all the players on the market and issuers may turn back to traditional funding methods. We can see the developments probably in the next few years as all the equity crowdfunding specific laws are very recently came into effect ad has not yet shown full impact.

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Conclusion

Equity crowdfunding as a new novel method for fulfilling the funding gap for small and medium sized enterprises has created a significant discussions in many countries. In this thesis we looked into the regulation of some European countries and also the law of the United States. Also, there was case studies analysis made in order to understand what kind of factors are playing a role in the success rate and does law has a significant impact on it.

As a result of the thesis it can be said that law has a significant role to play in the outcome though it is only setting the legal framework it is still seen that restrictive measures by the law prevents the growth of equity crowdfunding and are preventing different players from taking part of this. The main issues that were targeted as too restrictive and bearing negative impact on the outcome were setting too low maximum amount that is allowed by the issuer to be raised, low amount of contribution allowed to be made by individual investors, too heavy reporting and disclosure requirements for the issuers and heavy obligation for the platforms. Other issues concern the investor protection and

All the cases that were analysed came from the United Kingdom and therefore we saw the maximum amount that was allowed to be raised 5 million euros which is also the highest amount that European Union allows today. Whereas only one company acquired the highest amount then most countries are enforcing lower maximum amount that is allowed for the issuers. The lowest we see today is in the United States with only 1 million dollars. This bears a negative impact on the growth of the companies and does not allow fulfilling of the funding gap in the economy. Recommendation would definitely to allow in the European Union the current approach (maximum of 5 million) as it guarantees the necessary funding for companies.

The second characteristic approach taken by the governments was setting very low amounts allowed to be made by individual investors. In some countries it leaves the investors wanting to invest but it is simply disabled. A positive approach is to set limits per annum and per project, therefore investors are made to mitigate their risks by diversifying the portfolios and investor protection is still guaranteed. Also, this approach guarantees necessary funding for the companies.

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Additionally, in many European countries we saw companies made exempt from the prospectus requirements and there were little or no later reporting obligations which lowers the cost of equity crowdfunding. At the same time in United States we detected too many burdening rules. It is concerning how it will affect the usage of equity crowdfunding. The companies should not be asked to disclose overly harmful or too many information, a basic information regarding business, financials and business plan should be enough in this model. Therefore, in order to allow success issuer requirements should not be extensive as in this case equity crowdfunding will not be used and alternative funding methods will be taken instead. This leaves the crowd as well without beneficial and easy opportunity to invest.

The positive factor in Europe is that there is little or no restriction regarding solicitation and advertisement for the campaigns. Meeting with possible investors and using different channels to advertise the product or service launched has enormous effect on the final outcome. By meeting with the investors beforehand helps to attract bigger investments, we saw cases were single investment of million pounds was made after meeting with the founders. Unfortunately, the United States has taken approach today where they are restricting advertising and soliciting to a minimum extent. It will be interesting to follow how will it affect the final outcome.

The one overly positive factor is that foreign investors are allowed to participate also the European passport helps to be easily active in several countries in Europe. Therefore issuers can target larger crowd and we see foreign investments flowing into domestic economy that help our economy to grow in the face of growth companies that are in the meanwhile creating jobs and are new tax payers.

We need to preserve the speed and easiness of equity crowdfunding as this is the main key for a success and what keeps parties attracted for using this method. The potential is huge and necessary measures have to be taken in order to support it.

In the next few years to come we can probably see a lot of different regulatory approaches taken. As there have been very rare cases of litigation and problems so far as the industry is novel and still emerging then the real pain points have not revealed themselves yet. We can of course see the main problems but new industries have a tendency to surprise regulators therefore we have to be ready to acknowledge there are loopholes we are not aware of yet.

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