Small Business

New Regulations Needed for Crowdfunding

Equity crowdfunding has tons of potential, but how regulators interpret it will be a big issue

Written by Staff

Worldwide crowdfunding volumes reached $2.66 billion in 2012, up from $1.47 billion the previous year, according to a survey by Massolution, a research and advisory firm specializing in the sector. That followed growth of 64 percent in 2011.

Massolution predicted $5.1 billion would be raised via crowdfunding platforms in 2013, with a greater shift towards funding new businesses and small firms rather than social projects, which are currently the most popular category.

North America accounts for the bulk of activity, with $1.6 billion raised there last year, a 105 percent increase on 2011.

As crowdfunding is relatively new, there is no data yet on failure rates or average returns on equity investments.

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“It can be difficult to make returns investing in early stage businesses, but crowdfunding adds flexibility as it opens companies up to a broader base of investors who may not be investing solely for a return,” Liam Collins, policy advisor at Nesta, a charity which promotes innovation, told Reuters.

Reuters reported this month that Wall Street’s industry-funded watchdog, the Financial Industry Regulatory Authority, is working with the Securities and Exchange Commission (SEC) to draft crowdfunding rules and has asked websites to voluntarily register with it as a first step. The SEC will need to adopt rules before small businesses can sell securities to investors through crowdfunding.

“Equity crowdfunding has tons of potential but how regulators interpret it will be a big issue,” said Collins. “You will see a step change in the growth once regulation is introduced in the United States.”

Britain is also looking at how best to regulate the sector. Two equity crowdfunding sites, Crowdcube and Seedrs, have already been approved by the financial regulator, while lending sites will be regulated from April next year.

With files from Kylie MacLellan, Reuters

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