The European Question
One problem Equity Crowdfunding campaigns in Europe sometimes face is the limitation to a certain jurisdiction and therefore a reduced market exposure. For example, a project may be very promising but having to limit it to a national market because the platform running the project only allows investors from that are nationals of the country where the platform is based, could mean that the required funds cannot be collected. Extending it to other jurisdictions though in the “best” case scenario results in running multiple campaigns at the same time. For those that have gone through the arduous process of running a crowdfunding campaign, it is clear that it is simply not possible unless you have close to limitless resources at your disposal (something that start-ups usually don’t). Other than the practical aspects of managing a campaign – the liaising with investors, the constant interaction with the public, while having to focus on everyday business at the same time, too – there could well be regulatory obstacles to overcome. Equity crowdfunding is regulated on a national level rather than on the EU level despite various initiatives and documents that aim to harmonise the single market in that regard as well.
The UK as the dominant European market place for equity crowdfunding is home to platforms that are also open to investors from other countries in the EU/EEA (Crowdcube/Seedrs). If and how this is going change in the light of Brexit is a question we don’t have deal now, but should find out about in next two years. Obviously, if the UK hadn’t access to the single market anymore it could well be that UK platforms would have to dial back on their openness to other jurisdictions.
Platforms in other countries like Companisto (GER), Invesdor (FIN) or Symbid (NED) have followed suit, opening up – at least according to their own statements – even beyond that internationally (with limits though), but always excluding a US and Canadian investors (the reference to Canada is sometimes not so apparent, but it appears that things north of the border are equally complicated from a regulatory standpoint).
Equitise is a trans-Tasman operation founded in Australia in 2014, but only open to the general public in New Zealand while in Oz it is limited to sophisticated investors. Its offering also blurs the lines between traditional Equity Crowdfunding and Syndicates as it allows for that sort of investment, too. For more on the subject and the differences between both, check out our dedicated post. This article focuses on Equity Crowdfunding, but for the purpose of understanding, Syndicates have an experienced lead investor for each campaign with, at least at most platform, backers in the form of sophisticated investors only.
The Elephant in the Room
One jurisdiction, however, causes (potential) investors, start-ups and platform providers more headaches than others: the US. For starters, despite several new regulations that aimed to put a framework for Equity Crowdfunding (and other forms of alternative finance) in place, the situation is not clear. First, let’s look at the setup between non-US start-up and US investors: There are some that say that actually it should be possible for an US investor to put money into the project of, let’s say, a UK startup that advertises on a UK platform as long as the following requirements are fulfilled:
- Neither the platform nor the start-up itself may conduct any form of selling efforts, e.g. by email, advertising, phone calls, etc., regarding the fundraising in the US or to any person the issuer or platform know to be located there.
- The fundraising is made on a platform operating in compliance with the Platforms local rules for platforms and rules or custom with respect to documentation and procedures.
- Every investor in the USA is required to affirmatively agree, as part of the investment process for each investment, that they fully understand that the registration and disclosure provisions of the jurisdiction where the platform is based apply, and that the protections provided to investors in US will not apply.
So much for the theory of things. In practice though platforms in Europe, for instance, stay clear of US investors, either explicitly by informing potential investors that all are welcome but US (and in some cases we’ve seen Canadian) investors or more discreetly by simply not making it possible to sign up.
Why is that though? There are (at least) two reasons: Firstly, even if platforms cannot market their projects, they still have to “onboard” the investors, even if they are not accredited investors, which is more complicated in relation to US investors than investors from their home countries. If we’re talking about a sophisticated or accredited investor, platforms have to make sure they comply with Rule 506 of Regulation D. This means that the company has to demonstrate that it has taken reasonable steps to verify that its investors are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like. On top of this, platforms may have to answer the question how, in contrast to Rule 506(b) (“The company cannot use general solicitation or advertising to market the securities”), it attracted these investors at all.
Secondly, even if – like Syndicate platforms – only accredited investors from the US take part in fundraising, it still constitutes selling securities, which makes it subject to federal and state antifraud law, and open to lawsuits from both regulators and investors. The bottom line is that unless you’re very comfortable with US securities law (or are willing to pay out the fees for the people who are), you better stay clear of it and that must be the conclusion all platforms that have considered it have come to.
The other way round
What about the other way round though, i.e. international investors putting their money into projects promoted on US crowdinvesting platforms? Well, again it is not entirely clear but the final rule of the SEC on Regulation Crowdfunding seems to indicate that it’s possible: “We have considered the comments and believe that the final rule appropriately takes into consideration the need to provide more choices for U.S. issuers seeking to use intermediaries or access investors outside of the United States, while meeting the challenges associated with supervising, examining, and enforcing rules regarding activities of intermediaries based outside the United States.” The entanglement of the different laws and regulations that need to be considered and might make it still impractical to pursue foreign investors become apparent in a passage shortly after the above in the same document: The SEC highlights that it believes that “AML obligations for funding portals are better addressed outside of the rules that we are currently adopting in this release, and that it would be more appropriate to work with other regulators to develop consistent and effective AML obligations for funding portals.” So, platform still need to make sure they are in compliance with the respective AML rules (for starters) of the investor’s country on top of the already challenging setup in their home country. The result is likely to be the same as outlined above regarding US investors abroad.
Should we abandon all hope for global crowdfunding campaigns in an otherwise globalised society? Not necessarily. Another example from financial services regulation shows that there is always a way: foreign broker-dealers that engage in certain specified activities involving U.S. investors like Soliciting and effecting transactions with or for U.S. institutional investors may do so under the exemption from registration in accordance with Rule 15a-6 under the Securities Exchange Act of 1934. Again it is a burdensome process, not only because of the need for chaperoning through a US registered broker-dealer. However, the fact that there is an exemption and an obvious business case for it shows that – if only there is a strong enough business case for cross-border equity crowdfunding to and from the US – regulation is likely to offer a way to do so.