Equity Crowdfunding Eco-System
Like any new business sector you need to look at the entire eco-system to understand how it works. Back in 2003 I had the pleasure of been given a great education from one of the leading VC firms about eco-systems. During the meeting the VC expressed an interest in our opportunity but provided us a scenario as to why he would not invest in our company. He walked us through all that would be needed to build a billion dollar company, and money was only just one point. He explained that a company is part of a eco-system and all of it needs to be there for it to succeed (customers, suppliers, investors, educations, workforce, research, etc..). Since that day each business I begin I build an eco-system to make sure I am on the right path.
Equity Crowdfunding has an eco-systems and its very important that everyone understand all the pieces and how they work together.
The following image provides an overview of the equity crowdfunding eco-system (investors, issuers, 3rd party providers, equity portals, regulators).
Let’s examine this eco-system.
The first important understanding is that Equity Crowdfunding works in a highly regulated environment determined by the country or state/province involved.
Securities Commissions are charged by the local government to implement laws providing detailed regulations, monitor and provide oversight and intervene when necessary with fines, penalties and sanctions. In short, to keep things on the straight and narrow – to regulate who can invest and how a qualified company (issuer) can participate. The primary goal is to protect investors and ensure a straight forward market place.
A great example is the Jobs Act Title II & Title III in the United States. It provides a clear path who can invest, how to invest, how an Equity Crowdfunding portal needs to operate and how the issuer can access capital.
There are two types of investors that can invest in equity crowdfunding:
Accredited investors are those investors deemed by the securities commissions to be high net worth individuals who would not be catastrophically impacted financially if an investment in a company seeking funds through Equity Crowdfunding fails. Each country has its own parameters but roughly the top 3-5% of a country’s population would qualify. Typically, issuers and the Portal must confirm qualification with the local securities rules.
Non-Accredited investors are the “rest-of-us”, the rest of the country’s population that do not meet the requirements to be registered as an accredited investor.
Equity Crowdfunding portals bring companies and investors together in a secure cloud computing platform. There are portals providing investment opportunities for accredited investors and non-accredited investors. Equity Portals will also vary on size of offerings and vertical industry sectors.
Issuers (i.e. the company) exchanges shares (securities) for investors’ money via a selected equity crowdfunding portal. Currently in most North American jurisdictions only accredited investors can invest in Equity Crowdfunding (with some exceptions).
In a nutshell, equity crowdfunding is a new method of seeking financing that allows companies of all sizes (including startups) to raise funds through secured online platforms, giving them access to large numbers of qualified investors.
Equity Crowdfunding gives companies (issuers) an attractive option for raising funds, and provides investors with the possibility of a return on their investment.
Jason Futko is co-founder and chief financial officer for KoreConX. Prior to KoreConX, Futko co-founded Crowdfunding Alliance of Canada. In addition he was managing director of an Exempt Market Dealer and Chairman of a public investment vehicle in the United Kingdom. Jason has vast experience in financing businesses globally. He has extensive knowledge of international know your client (KYC) and anti-money laundering (AML) regulations.