The Equity Crowdfunding Experience
The Equity Crowdfunding Experience in the UK and Sweden: Implications for Angels
Seventeen states and the District of Columbia now allow non-accredited investors to invest in startups located in their state. As more states follow suit, it is useful to look at data detailing other countries’ experiences. Both the UK and Sweden have experimented with “equity crowdfunding” for non-accredited investors for a number of years now. Their experiences so far have been interesting, as have the implications for the UK and Swedish angel communities.
A 2014 report estimated that equity crowdfunding grew by 201% in the UK in 2013-2014, with an average amount raised of £199,095. Thirty-eight percent of investors were professional or high net worth individuals, who tended to have a larger average portfolio size (£8,000). For retail investors the average amount was only £4000.
A key lesson from the UK relates to information provided by equity crowdfunding platforms. A study conducted by the UK Financial Conduct Authority noted that the material on some of the platforms was misleading, especially in terms of how shares would be treated in the event of a buyout. The platforms implied equal treatment when in fact they would be diluted in the event of a VC round. This issue will become more important as crowdfunding grows. In order to make crowdfunded investments more appealing to later investors, an increasing number of deals in Europe have pre-negotiated clauses specifying that crowdfunders will be bought out at a set price in a later funding round.
Interestingly almost 95% of the funded deals were eligible for the country’s angel tax credit programs, providing significant income tax relief and no capital gains tax on stock held more than three years.
Although tax credits have proved useful in stimulating angel investing in the US, it is unlikely that they would be able to be used concurrently with crowd investments. As seen below, some states require a minimum investment well above the average crowdfunded amount. Others are open only to accredited investors or have almost impossible filing requirements for the business. This difficulty could be exacerbated when the SEC finalizes rules for Title III of the JOBS Act, allowing interstate investment along with in-state programs. For instance, the business is required to file investor details with the state tax authority. Since only some investors would be in-state, this quickly becomes burdensome. States also require different holding periods for equity, which would mean the business would have to keep track of which investors were allowed to sell and which were required to hold. Of course, a federal angel tax credit could quickly alleviate many of these issues. For full issue in ACA click here