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Crowdfunding - A disruptive financial innovation - May 16, 2014
 

Crowdfunding - A disruptive financial innovation - May 16, 2014

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Crowdfunding - A disruptive financial innovation - Implication for the Caribbean. A look at crowdfunding for the Caribbean and the implication for securities law

Crowdfunding - A disruptive financial innovation - Implication for the Caribbean. A look at crowdfunding for the Caribbean and the implication for securities law

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    Crowdfunding - A disruptive financial innovation - May 16, 2014 Crowdfunding - A disruptive financial innovation - May 16, 2014 Document Transcript

    • 15/05/14 www.barbadostoday.bb Page 23 A recent tweet from Sir Richard Branson about disruptive innovation in financial services caused me to ponder on recent conversations on crowdfunding for the Caribbean. Sir Richard notes that “technology is having a profound impact on so many sectors, creating opportunities, speeding up development and levelling the playing field so that leading companies can no longer take success for granted. It is an incredibly exciting time for innovation across the sector”. The question being posed by colleagues is: what are the challenges to establishing a crowdfunding platform in the Caribbean? While crowdfunding is not generally a household word in the region, it is however a buzz among entrepreneurs, especially those in the tech space, who see crowdfunding as a potential source of funding for their business. Crowdfunding describes an evolving method of raising capital that is generally used “outside of the securities arena” to raise funds for a variety of projects, products or artistic endeavours. Crowdfunding has been used to finance art-related or philanthropic projects, where the “crowd” has assisted in achieving funding goals, but the objective of these efforts is usually not to build a company or for the investor to seek a profit. Equity crowdfunding on the other hand raises capital to build a for-profit business. The company seeking investment sells equity to investors based on the premise that this investment would increase in value and the investor would eventually be rewarded. In essence equity crowdfunding involves members of the public providing capital to businesses in exchange for shares. It should be understood that with equity crowdfunding, the instrument received for the funding lack liquidity, security and control. Investors will be stuck with their investment until an external liquidity event, such as the sale of the company or a public offer, occurs. Crowdfunding is growing rapidly around the world. Globally, such platforms raised an estimated US$5 billion in 2013. One of the largest crowdfunding platforms, Kickstarter, is reported to have raised US$0.5 billion in 2013. To put this into perspective, many of the initial public offerings (IPOs) listed in the United States market during 2013 raised significantly less than this through their public offer. These securities and issuers are listed, and are regulated, by the Securities and Exchange Commission (SEC). In October, 2013, Title III of the JOBS Act created an exemption under the securities laws in the United States, so that this type of funding method can also be used to offer and sell securities without registration. The JOBS Act established the framework for a regulatory structure for this funding method. It also created a new entity – a funding portal – to allow Internet-based platforms or intermediaries to facilitate the offer and sale of securities without having to register with the SEC as brokers. The intent of the JOBS Act was to make it easier for start-ups and small businesses to raise capital from a wide range of potential investors and provide additional investment opportunities for investors. The challenge for the SEC was to establish a regulatory structure that both permits small companies and entrepreneurs to access investors in an efficient manner, while protecting investors. Securities legislation in the Caribbean by and large prohibits the offer and sale of securities without registration. Based on existing legislation, a security listed by a company from the region on a crowdfunding platform is actually an offer of a security for sale, which would be a violation of securities laws. Crowdfunding therefore should not be used as a means to offer and sell securities, because offering a share of the financial returns or profits from business activities would likely trigger the registration provisions of the securities laws relating to the offer or sale of securities. Technology is levelling the playing field, and this is changing the traditional economic model. The Internet has created a new platform through a funding portal to facilitate the offer and sale of securities, a truly disruptive innovation in financial services. Business models will continue to change and technology will continue to play a key role. Crowdfunding has the potential to help companies to raise funds from their most passionate supporters, customers, users, and interested members of the public. Through the traditional investment channels, it is very expensive and time-consuming for a company to offer shares to the public. The cost is prohibitive for most companies, so they are generally restricted to investors who were close friends and family, financial institutions, increasingly angel investors, or individuals who could prove they are sophisticated or accredited investors. Crowdfunding in the region has the potential for ordinary members of the public to invest in what is expected to be an expansive growth of companies established by entrepreneurs locally and regionally. This undoubtedly can create challenges for securities regulators who are charged with protecting investors and maintaining the integrity of the financial and investment system. The growth of equity crowdfunding is currently limited, due to prohibitive regulation of the financial sector in most countries. However, the global view is that where suitable regulations are adopted, equity crowdfunding will grow rapidly and will profoundly change the way SMEs are funded in the future. Equity crowdfunding should also be exciting for investors, as it will enable the public to invest in companies that would normally be inaccessible to them. With the emphasis on the growth of entrepreneurship in the region, crowdfunding will be particularly relevant to start-ups and companies in the early stage of their development providing them with more options to raise money. However, unless there are changes in securities laws, these companies and their securities would be subject to regulation and the expense of disclosure. It is unclear what sort of crowdfunding arrangements and opportunities would be successful in the Caribbean. Will it be a consumer-facing company trying to take advantage of loyal followers and supporters who might wish to invest a few hundred dollars, or will it have the potential to be a serious platform where larger investment in companies can be facilitated, including subsequent rounds of funding? One thing that is clear from all of the global discussion and debate on crowdfunding is that technology is changing access to capital, expertise and distribution. I am excited about how equity crowdfunding can improve access to finance for local and regional businesses while making a lasting contribution to regional economies. My advice on what to do is clearly embrace crowdfunding to ensure that our new and upcoming entrepreneurs have access to financing, as the next innovative technology solution may be under development in Massiah Street, just awaiting investment, which could be provided through crowdfunding, to assist this entrepreneur to move his idea to commercial reality. (Gregory Hinkson is principal and managing director of SAMDOR Services Limited.) Crowdfunding: helpful or not? by Gregory Hinkson Guest Column Sir Richard Branson notes that crowdfunding is having a profound impact on many sectors.