‘Crowdfunding’ for economic growth and competitiveness

crowdfunding

 

Recently the European Commission has launched a consultation programme (between the 3rd October to 31st December 2013) to explore the costs and benefits of ‘crowdfunding’ as an alternative form of finance. Contributions are sought from competent authorities, crowdfunding platforms, entrepreneurs and individuals who launched crowdfunding campaigns. Stakeholders are invited to share their views about crowdfunding opportunities and to help in the design of an optimal policy framework which will untap the potential of this new form of financing. Crowdfunding entails the collection of funds through small contributions from many parties in order to raise capital for a particular project or venture. This alternative source of financing has the potential to bridge the equity gap many start-ups face. It is hoped that this initiative stimulates entrepreneurship amid different regulatory, supervisory, fiscal and social structures of the European Union. Evidently, the European Commission is delving through extant national legal frameworks to understand better how businesses can raise their capital through such open forms of financing. Whereas some crowdfunding campaigns are local in nature, there may be others who are benefiting from easier access to financing within the single European market.

Certain safeguards may be necessary to maintain the stakeholders’ trust and engagement. The ultimate objective of the European Commission’s consultation is to gather data about the needs of market participants and to identify the areas where there is an opportunity for the sustainable growth of enterprises though debt-based or equity-based crowdfunding. The consultation covers all forms of crowdfunding; ranging from donations and rewards to financial investments. Everyone is invited to share their opinions and perceptions, including citizens who might contribute to crowdfunding campaigns and entrepreneurs who may launch such campaigns. National authorities and crowdfunding platforms are also encouraged to reply.

In a similar vein, the United States’ Securities and Exchange Commission (SEC) is currently considering crowdfunding as it was featured in “Jumpstart Our Business Startups Act” (JOBS Act). It is very likely that the proposal for crowdfunding will bring a major shift in how small U.S. companies can raise their money in the private securities market. Alternative sources of finance which are already secured via the internet include; monetary contributions in exchange for rewards, product pre-ordering, lending and / or investment. With crowdfunding now there’s the possibility that smaller businesses will be able to raise up to $1 million a year by tapping unaccredited investors. Any type of project with a promising ROI may soon opt for crowdfunding. Hopefully, it will be the micro entrepreneurs and researchers who will be capable of soliciting such ‘crowdfunding’ opportunities.

These plans can be successful only if the regulatory costs are kept as low as possible. Otherwise, small enterprises may not be intrigued by such a financing proposition. From the outset, crowdfunding may still seem a bit unclear at this stage. There are many companies including startups that can take advantage of these rules. Probably, one of the main causes of concern will be any reporting requirements for small companies to file their annual financial statements. For instance, SEC’s crowdfunding proposals may suggest certain disclosures, such as; “information about officers and directors, how proceeds from the offering will be used, and financial statements”. It transpires that the crowdfunding proposals are limiting how much money an unaccredited investor can contribute each year. The proposal says that investors with a net worth and income of less than $100,000 can contribute only $2,000 or 5 percent of their net worth or income, whichever is greater. Those with a net worth or income of more than $100,000 can contribute more. In an effort to reduce burdens on companies and portals, SEC’s plan would not explicitly force them to take steps to verify income levels and the net worth of investors in crowdfunding. At the same time, SEC would require companies using crowdfunding to release financial statements and other information that could prove costly.

No doubt that the most experienced entrepreneurs and their intermediaries will have no difficulty in meeting such crowdfunding rules and regulations. Perhaps, it is the first-time entrepreneurs who may require further support. At present the smaller businesses earning revenues (and profits) below a certain threshold are not legally obliged to provide audited financial statements. Moreover, small enterprises may not always have historical financials. This means that financial services authorities will find it quite difficult to determine how small companies are true and fair in their financial reports. According to the US proposals, the businesses who consider crowdfunding as a source of finance will have to audit their accounts.

By the end of this year the European stakeholders would have consulted about this ‘new’ source of finance. It is hoped that any discourse in this regard will translate into facilitative, soft-law measures leading to legislative action. If the crowdfunding proposals will be implemented; more capital will be unlocked for start-ups, investments and projects. This capital finance will surely help to spur economic growth and competitiveness.

More information is available here:

http://ec.europa.eu/internal_market/finances/crowdfunding/

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