There are more and more rumors that the United States Securities and Exchange Commission will not finalize the rules of equity crowdfunding until well into 2013. Many sources do not even expect that the SEC will establish rules by the first quarter of 2013. As a result of the wait and the uncertainty, many US crowdfunding platforms are either shifting away from equity crowdfunding (like Kickstarter announced recently), or moving ahead without it (like Fundable.com, which only lets accredited investors participate).
The UK Equity Crowdfunding Superstar
While US crowdfunding platforms try to practice patience, UK equity crowdfunding platforms thrive. The poster child for success is the website Crowdcube, which launched in February of 2011. Crowdcube is able to sell shares, aka equity, in the companies that choose to use it for raising capital.
This is not just shoestring budget startup money: Crowdcube has raised over £3.9m as of August 2012. Even with figures like that, only about 10% of Crowdcube projects reach their funding goals. The remaining 90% of projects never see a dime: If a project is not fully funded on Crowdcube, all the money goes back to the investors.
US Versus UK Securities Laws
So what’s the difference between US and UK securities law that makes US firms wait while UK firms move ahead? To understand that, it’s best to know that both countries have very similar securities laws: The primary goal of each set of rules is to protect investors by requiring detailed disclosure.
Those disclosures, done for IPOs, typically cost tens of thousands of dollars in legal documents and expertise. Fortunately, there are exceptions for very small public offerings, and even the maximum Crowdcube donation of £100,000 actually qualifies as a “small” offering.
For small offerings, the responsibility lies with the fundraisers in the US – the company owners who are giving away equity. But in the UK, responsibility for the disclosure falls to the intermediary, which in this case is the equity crowdfunding platform. So, for as long as Crowdcube or Seedrs or GrowVc or any of the other UK crowdfunding platforms are willing to vouch for their projects, then those projects can be legally crowdfunded through equity giveaways.
If you’re adverse to fees, though, take note: Crowdcube charges a 5% fee on all funds raised, plus an extra £1,750 for all the paperwork and legal disclosures. That’s definitely cheaper than doing an IPO, but it clearly means that businesses looking for shoestring funding of several thousands pounds or less need not apply.