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

1. 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.