What’s New in the World of Crowdfunding Regulations?
In a recent post, we provided an overview of the various crowdfunding types, and shared insight on the bright future of crowdfunding. However, as more financial technology (fintech) products, like crowdfunding and mobile money services, continue to attract users by the droves, regulation has been identified as the biggest impediment to growth time and time again. In fact, regulators themselves are struggling to keep up with the fast pace of innovation. Some of the biggest issues include ambiguity and confusion on what regulatory agencies govern what industries, which rules apply to specific aspects of financial services, and whether or not startups are expected to navigate the highly complex regulatory environment.
Nonetheless, there are regulations that are beginning to take shape in many countries, and it is important that crowdfunding companies and their users take note of which ones apply to them.
What is the current regulatory landscape like for crowdfunding? Let’s take a look at six different key markets.
At the end of October 2015, the Securities and Exchange Commission (SEC) adopted final rules that allow startups to raise money by equity crowdfunding. These rules came about as a result of the SEC voting its approval to implement Title III of the Jumpstart Our Business Startups (JOBS) Act signed into law by President Obama in 2012.
Under these rules, a company a raise a maximum of $1 million through equity crowdfunding campaigns during any 12-month period. During the same period, individual investors are limited to the amount that they can contribute to no more than a total of $100,000 through all crowdfunding campaigns.
In addition, companies engaging in equity crowdfunding must file certain information with the SEC, such as the fundraising target amount, financial statements, and a description of the business and how the proceeds will be used. Crowdfunding platforms will be required to register with the SEC and become a member of the national securities association, the Financial Industry Regulatory Authority (FINRA).
There are currently no other regulations in the U.S. for other forms of crowdfunding.
The Financial Conduct Authority (FCA) in the UK takes a somewhat different approach to regulating crowdfunding. Although it does not regulate donation or rewards-based crowdfunding, it does regulate both equity and debt crowdfunding.
In March 2014, the FCA outlined its revised rules regarding crowdfunding. Equity crowdfunding platforms must verify that their users who are not considered sophisticated or high net-worth investors are investing no more than 10 percent of their investible assets, and they must also provide clear and fair information regarding users’ activities. Common to both equity and debt crowdfunding are the requirements for a 14-day cooling off period, access to a financial ombudsman in case of disputes, full disclosure regarding risk, and clear separation of funds between the company and investors.
Only equity crowdfunding is regulated in Canada. This is due to the fact that equity crowdfunding involves issuing securities, which is regulated, whereas other forms of crowdfunding do not.
Unlike many other countries, Canada does not have a national securities regulator. Therefore, it is up to each individual province and territory to oversee the securities industry within their own jurisdiction. In May 2015, securities regulators in six provinces issued a multilateral notice announcing exemption orders specifically for startups seeking to raise money through equity crowdfunding. These orders exempt startups from the requirement to issue a prospectus as well as register as a securities dealer.
The exemption does come with strings attached, however. A startup is restricted in the maximum amount that it can raise in an equity crowdfunding campaign and can run campaigns no more than twice per calendar year for up to 90 days at a time. There are also limits on the amount that investors can contribute per campaign.
At the end of January 2016, another multilateral notice was issued by six provinces concerning equity crowdfunding for startups. This set of regulations also introduced exemptions for registration and issuing a prospectus, but a key difference is that the monetary limits for fundraising and contributions by investors are higher than those of the previous notice. These limits are more in line with those in effect under Title III of the JOBS Act in the U.S.
Australia presently lacks any legislation surrounding crowdfunding, but that is gradually changing. In February 2016, the House of Representatives passed a bill that would amend the Corporations Act 2001 to include provisions to regulate equity crowdfunding in the country.
In its current form, the bill would limit equity crowdfunding to unlisted public companies. Critics of the legislation pointed out that this would require a startup to file papers to become an unlisted public company in order to be eligible for equity crowdfunding. This could potentially offset any savings from disclosure costs by introducing new costs for going public.
The Crowd-sourced Funding Bill, as it is commonly known, is now being studied by the Australian Senate with further amendments to the bill expected.
In New Zealand, crowdfunding is classified as a type of financial market service covered by the Financial Markets Conduct (FMC) Act. The Financial Markets Authority (FMA) is responsible for regulating crowdfunding. Similar to most other jurisdictions examined in this article, only equity crowdfunding falls under regulatory oversight.
Under the FMC Act, companies can raise funds up to limits comparable with those imposed by the SEC in the U.S. Similar to certain Canadian provinces, companies engaging in equity crowdfunding are exempt from disclosure and having to issue a prospectus.
A rule that is unique to New Zealand is that equity crowdfunding must be carried out through a licensed crowdfunding platform in order to take advantage of the less stringent disclosure requirements. The licensing standards are very thorough and cover areas such as operational infrastructure, financial resources, and governance.
The Securities Association of China, a self-regulatory industry organization, issued draft regulations on equity crowdfunding in December 2014. The tentative rules provided a definition of an accredited investor, or someone who is eligible to invest in an equity crowdfunding campaign. Investors must invest more than $150,000 in a single project or have a large amount of net assets and a high annual income.
The initial eligibility requirements for equity crowdfunding investors may seem prohibitive for all except a select few in China. In a public statement released in January 2015 by the China Securities Regulatory Commission (CSRC), the government regulator hinted at the possibility that the proposed minimum threshold invested in any single project could be lowered.
At a press conference held in August 2015, the CSRC announced that it would oversee equity crowdfunding in the world’s most populous country. According to the CSRC spokesman, the regulator is inspecting equity crowdfunding companies in China with the aim of minimizing economic risks and ensuring that crowdfunders are complying with existing regulations. The CSRC is expected to enforce limits on the maximum number of investors as well as ensure that stock shares are not being illegally issued as part of equity crowdfunding campaigns.
With such a wide range of regulations for crowdfunding, it pays for crowdfunding platforms to do their research to ensure that they are in compliance wherever they are operating.
“As crowdfunding continues to rise in popularity, the rules surrounding the industry will also continue to evolve and change,” said Jon Jones, President at Trulioo. “These regulations are essential to protect consumers from fraud, scam artists, and to ensure that safety and trust are at the heart of the community.”
Who is handling compliance requirements at your company? Is it ever too soon to have someone on your team to ensure you’re up-to-date with current legislation and legal obligations?