The Role of Platforms in Crowdeconomies

Political and socioeconomic background

The Austrians Federal Economic Chamb WKO estimates that in 2012 more than 1.1 million campaings worldwide and across all crowdfunding modellls were raised. The cumulative volume amounted 2.7 billion Dollar. In the following year the doubling of this ratio is expected.

Crowdfunding in the US - The JOBS Act

Crowdfunding´s rising importance in the capital market was only recently given notice through the legislation of the JOBS (Jumpstart Our Business) Act in the United States of America, signed into law on April 5th 2012. So far, crowdfunding has been regulated in the Securities Act of 1933 and therefore has only been accessible for accredited investors, i.e. those who meet a certain level of wealth defined by the US Securities and Exchange Commission - SEC. The SEC is the US capital markets regulations authority.

Title I and II of the JOBS Act were designed to ease restrictions on capital-raising, from IPO´s to start-up seed financing. It enables businesses to solicit securities-based funding from the general public.
Regulations are with the SEC, and they are currently delayed in rulemaking. One of the last provisions that are still missing to be implemented is equity based crowdfunding for non accredited investors:
Title III of the JOBS Act wants to democratize equity based crowdfunding by providing an online mechanism that allows non-accredited investors to participate and invest online into private companies, in small amounts. On September 23rd 2012, the proposal was implemented by the SEC, but has not been legalized until November 2014.

The SEC is heavily delayed with the rules, as they were supposed to be finalized within 270 days. So far, only a 585-pages rule proposal exists. The reason for the delay is that the SEC is in a conflict with two of its core missions: the protection of investors and the promotion of capital formation.

Crowdfunding Platforms and the JOBS Act
The motivation on side of US crowdfunding platforms like crowdfunder.com or circleup.com - which currently are doing crowdfunding for accredited investors only - has naturally been very high and a lot of wellknown names can be found on the supporters list. The team of crowdfunder.com, for example, got involved in crowdfunding legislation and regulation early on in November 2011, as the first crowdfunding legislation was introduced to the House of Representatives and has since then, been engaged with leadership in Congress, the SEC and the White House. Now, platforms are waiting for Title III of the Jobs Act to get legal, in order to facilitate non-equity based crowdfunding with non-accredited investors. Crowdfunder.com CEO Chance Barnett is even “thrilled at how swiftly the SEC picked up crowdfunding rulings”. He is waiting for the “Democratization of Crowdfunding” and sees his company as part of a historic movement.

Many suppporters of equity based crowdfunding, i.e. also many crowdfunding platforms, are talking of a revolution in investing, a victory against sexism and racism, the democratization of capitalism and other predictions that go out on a limb.
On the contrast, critical voices are warning of too much expectations of equity based crowdfunding. First, crowdfunding will not increase the supply of investment capital in a substantial amount. Besides, the so far proposed regulations are very complex: they seem to be to heavily regulated for businesses to use and still earn money and too weak to protect investors. The SEC estimates that it would cost $39.000 to pay accountants, lawyers and the crowdfunding portal to raise only $100.000 new funds.

Key Points of the Crowdfund Act under The JOBS Act, as listed at crowdfunder.com

• A company will be able to crowdfund up to $1 million over a 12 month period.
  
• Individuals with annual income or net worth of less than $100,000 may invest up to $2,000 or 5 percent of their annual income or their net worth, whichever is greater, over a 12 month period.
  
• Individuals with annual income or a net worth of $100,000 or more may invest up to 10% of annual income or net worth, capped at $100,000 maximum aggregate amount, over a 12 month period.
  
• Investors can fund one company or several companies as long as they remain within these annual limits.
  
• Minimum Review & Checks: Companies that seek to crowdfund a securities-based round must have background checks done on all principles with 10% or greater ownership in the company and provide full and adequate disclosures with a business plan and a full description of their ownership and capital structure.
  
• Crowdfunding portals, alongside the legally required background checks, must do a full review of the company, disclosures and the raise in order to approve a company prior to fundraising.
  
• An investor must wait a minimum of 12 months before selling her/his securities unless the sale is to a family member, the issuing company, or an accredited investor, in addition to other restrictions normally placed on the transfer of securities.
  
• A crowdfunding round does not prevent a company from raising capital through other legal channels.
  
• Companies crowdfunding will be exempt from the 500 shareholder cap pursuant to rules and regulations of the SEC.
  

All in all, one can suspect that only companies really in need of money would use non-accredited investor crowdfunding. And even those will try out every other option first. This is why non-accredited investor crowdfunding needs better regulations in order to work and benefit both investor and company and subsequently the platforms.

Crowdeconomies and the Dynamics of the Market

Crowdfunding as a new webbased funding modell has a relative short history. At a closer look the phenomena crowdfunding often seems nebulous. It seems that the sheer spectrum and diversity of the crowdfunding plattforms offers a suitable projection screen for quite different interests.
Some financial newspapers see positive trends within some sectors whereas other papers write about the decline or even the disappearence of plattforms. Very otfen during the research also the facts seem vague and unclear: forecasts often second hand informations. But very often they tend to speculation and hype.

The sheer mass of forecasts for the capital market make one thing clear: the economy recognized the potential of the new financial model. In the background enormous sums are flowing. In the year 2012 the crowdlending-based credits worldwide totalled $1.2 billion. It`s the interest and the speculative nature of the markets which are changing the concept of crowdfunding (since there ever was one concept) substantially.
New markets are discovered and market places are shifting also geograhically. Since the highrise of the lending-based crowdfunding in the US in 2006-2008 as a indirect reaction of the banking crises the economic markets recovered and the banks are looking for strategies for regaining the territories. But not only banks – some plattforms are sold to listed public limited companys with clear economic interests.

Often the looks are only focused on the initiator of the crowdfunding campaign or the investors mostly consisting out of anonymous internet users – whereas the influence or the interest of the plattform itself is overlooked. The information of the economic interest of the plattform is cryptic and hidden under the catchwords of creativity and engagement.
The follow closer look at the plattforms shall make aware of the structures behind the plattforms. For a general overview we point out that we made a distinction between crowdsourcing and crowdfunding portals since the plattforms itselves constitute genre specific behaviour. If they take fees and how much is often not so obvious.

One has to find for the hidden risks and guidelines that are the base of this newly grown industry, carefully.

Crowdfunding in Europe

The EU´s regulating framework so far leaves too much space for interpretation on the national level. There is no crowdfunding directive and no financial instrument for use on a cross-border basis without facing compliance costs for meeting the various regulations in the different countries. This results in an investor-unfriendly environment where every platform operates in a different transaction model, depending on the country where it is based.

United Kingdom

Germany
2011 can be considered as the starting year of crowdfunding in germany. The first realized campaigns were film projects: Hotel desire from the firm Brainpool funded 175000€ through donations, followed by the planned film stromberg, originally a widely known tv serial, which raised the predefined 1 000 000 euro within one week.
The raised money is for the specific purpose of the particular action, for the process of crowdfunding no specific statotory basis exists. Contrary to this the funding through stocks is regulated by a specific stock markets law. Whereas in the US with Obames signing of the Jobs act common base was exists.

Austria
Crowdfunding is legal in austria but legal restrictions exist. Sometimes the legal situation is not fully cleared. Since crowdfunding is not yet so popular in austria the federal institutions work slower.
Usually new financing modells and especially new crowdfunding plattforms were proved by the Financial market authority (FMA). But a licence or a seal doesn`t exist. So the Austrians Federal Economic Chamber (WKO) generally suggests to question the Status of potential crowdfunding partners. Especially within the „Crowdlending“-modell certain restrictions exists and show the legal limit of the modell in correspondance with the existing law nowdays. For example the FMA only accepts subordinated credits which means that the credits can be alienated if a company is getting financial difficulties through that transaction. The FMA accepts just Crowdlending - platforms that are co-working with banks, so they are obliged to do so. If a company has no financial - trading license, they are not allowed to crowd - lend in austria.
The Austrians Federal Economic Chamber estimates that the typical Crowdinvestor is male and about 40 years. he has a good income, ready to take risks and to invest between 5000 and 50000 euros. Very active crwodinvestors begin to establish crowdinvestment portfolios and work on 3 or more plattforms to spread the risks. They use crowdfunding as an alternative investmentform, says the WKO. The base of the evaluated data here is not quite clear.
The first austrian platform www.respekt.net in 2010 and in 2012 the first crowdinvest-platform (wwww.1000x1000.at). In the meantime more platforms with all kind of focus exist that raised estimated 1.5 million euros until now

Ethics and Consumer Protection

In 2014 the Austrian Working Chamber analysed 18 different crowdfunding plattforms from Austria, Germany, UK and from Switzerland. The different analysed platforms also represented different crowdfunding modells in order to get an overview of the manner how the sites represent themselves and checked concering consumers protection rights:

• risks
  
• costs
  
• right of withdrawal
  
• modalities of cancellation
  
• terms and conditions
  
  

The conclusion reporting several faults resulted in a (yet unfullfilled) list of demands:

• determine information standards:
  
• obligatory and distinct notes about the risks
  
• to ensure the duties of grant and requirements of trade
  
• obligatory registration
  
• no untightening of the duty of grant
  
• no perforation of the EU prospectus lawgiving
  

Crowdfunding

Reward based platforms

Reward-based Crowd funding platforms are especially used in the field of creativity works such as music, literature, film, theatre, games, product and graphic design. It attracts a large number of people because these platforms can make an entrepreneur, a designer, a producer out of everyone who possesses a computer with Internet access, a bank account and has the time and skills to serve a camera and to run social media work. Customers also need a sales talent because they are going to advertise their products by their selves. Of course it already appeals if it’s known that the creator who stands behind the product is a person like you and me or even an acquaintance of yours. Further it makes someone thinking that if anyone can do it, I should try it too. That makes it a rather successful concept. In general a new customer of the platform with the idea of a prototype or the wish to produce a record of music runs through several phases to reach the final aim, which means the needed financial support for the production. Users of the prevailing platform or other people attracted by the customers advertising work prepay a certain amount of money to get some goodies often related to the product or the final product itself. The prepaid money belongs for the most part to the creator to realize the desired product, but only if the defined total was reached. Thereupon supporters get their rewards. Otherwise their money will be returned to their bank accounts.

Lending based platforms

investigated platforms

1. Zopa (UK)

2. Lending Club (USA)

3. Ratesetter (UK)

4. smava (Germany)

5. auxmoney (Germany/Austria)

6. bankless24.de (Germany)

7. ThinCats (UK)

8. Zencap (Germany)

9. Finmar (Germany)

10. Lendico.at (Germany/Austria)

Description

Lending based crowdfunding is structured like a bank credit. There are three actors involved: The Borrower, The Lenders, which means people (the so called crowd) who are investing their money, and the platform. Usually, when there is a discussion about crowdfunding or peer2peer lending, there are just the two actors: Borrower and Lender under the highlights of researchers. The interests, that the platform itself and its subcontractors have, is neglected. But if you take a closer look, there is a lot to discover about their involvment.

Lending based Crowdfunding works like that:
You register to a platform, either as a person with an idea, for which you want to get money from a crowd, or as a person who wants to invest his/her money in a start - up project; and get it back with interest rates between: 5-12 %. The Lender has to reach the fixed amount, in a certain time window; if not the Borrowers get their money back. If he or she reaches the stipulated amount, the Borrower hast to pay back the money in a given time to a given interest.
The Legal background is not always that clear. Most Peer2peer Lending Platforms cooperate with ordinary banks, to verify the accounts of the assigned people and to check the credit worthiness of the registered Borrowers. The Platforms are just agents that bring together people with different interests, but the involvement of the bank is usually not promoted or even hidden.

Registry and privacy policy

Personal Data
Due to the legal base of the country, the platform is launched in, there are as many different conditions. But in General you could say, that all platforms work with registration.
For Crowdlending they need very sensitive Data and you have to present those to the platform. Required forms require not only your gender, your age, your name but also your earnings, your debts and your wealth. But also where it comes from, how much expenses you have per month and so on. The platform gives this information to the cooperative bank, who will check your credit-worthiness. But to get a Loan from the Public, you also have to publish a lot of these data on the platform itself, so ,that the crowd can check your trustworthiness and think about their investment properly.
This is something, that needs to be considered when creating a internet - ID, since the Lending - websites cannot guarantee for the most secure keeping of your data, which they say explicitly in their website policies.
That is not the biggest problem, since a lot of banking business is done in the internet nowadays, but what if the platform is not so careful with that data. If their money is short, and they spare in terms of security and encryption of data. And the next thing, that needs to be considered is, that behind the platform is the bank, that gets your files anyway.

Cookies
The second thing about data security that is important. Every platform listed here, uses Cookies. They are tiny pieces of codes, that report, what a website user does and how his click - and surf - behaviour is. This information is in most cases researched by Google Analytics, a Google - daughter, that informs the website about your interests and movements, so that they can specialize and personalize the ads and if necessary change the website in the interest of the customer. ;;;;;;; Or at least the platforms argue with the interest of the customer. What Google Analytics does with all that freely collected data is to sell it. You can easily forbid your browser to use Cookies, but as a result of this, in most cases you cannot use most websites properly. The information that is collected about you, is big business for some companies, if you are ok with that or not is another question.

Who is adressed

Appearance of the platforms

Since Crowdlending stands for Big Business and innovative Financing Systems, most of the websites are designed really dignified. They appear as trustworthy and clean, but still stylish and modern. Usually there are videos, where the company let a start up or an investor talk about their experiences with crowdfunding, and how they were successfully using this new system. Most website work with pictures of successfully looking young buisness achievers between 20 and 40 year, whereas Lending club has just comics, when other use real photos.

Lending Club as they present themselves

Zopa, the biggest Crowdlender in the UK

Who is behind the platform=

Risks and criticism

Links

Crowdlending

• http://www.zopa.com/
  

• https://www.lendingclub.com/
  

• http://www.ratesetter.com/
  

• http://www.smava.de/
  

• https://www.auxmoney.com/
  

• https://www.bankless24.de/de
  

• https://www.thincats.com/Apps/WebObjects/thincats-pfp.woa/ra/Website/14624/14625/index.html
  

• https://www.zencap.de/
  

• https://www.finmar.com/

• https://lendico.at/
  

References

Crowdlending

• Beck, Ralf Prof. Dr.: Crowdinvesting. Die Investition der Vielen. Kulmbach: Börsenbuch Verlag 2014.
  

• Bertoni, Steven:" No hedge funds aren't hijacking peer to peer loans" says lending club. in: Forbes Online, 05.12.2014, URL: http://www.forbes.com/sites/stevenbertoni/2014/05/12/no-hedge-funds-arent-hijacking-peer-to-peer-loans-says-lending-club-ceo/, Download vom 26.11.2014.
  

• Creighton, Tabitha: 5 reasons to add Crowdlending to your Fixed Income Portfolio. in: Investnextdoor, 20.10.2014,URL: https://www.investnextdoor.com/blog/tag/crowdlending-2/, Download vom 26.11.2014
  

• Evans, Judith: Peer to peer Isas expected to be delayed. in: Financial Times Online, 21.11.2014, URL: http://www.ft.com/cms/s/28be0c30-70e5-11e4-85d5-00144feabdc0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F28be0c30-70e5-11e4-85d5-00144feabdc0.html%3Fsiteedition%3Duk&siteedition=uk&_i_referer=http%3A%2F%2Fsearch.ft.com%2Fsearch%3FqueryText%3Disas#axzz3KexakUTs, Download vom 01.12.2014.
  

• Herbold, Astrid: Projektfinanzierung. Das leise Sterben der Crowdfunding Plattformen. in: Zeit - online, Zeit Verlag Hamburg, 29.8.2012, URL: http://www.zeit.de/digital/internet/2012-08/crowdfunding-plattformen-deutschland/, Download vom 26.11.2014.
  

• Juetten, Mary: Jobs Act and Crowdfunding: Will They finally "#Release The Rules?".in: Forbes - online, 8/21/2014, URL:http://www.forbes.com/sites/maryjuetten/2014/08/21/jobs-act-and-crowdfunding-will-they-finally-releasetherules/ , Download vom 26.11.2014.
  

• Kühl, Eike: Crowdfunding. Die Crowd die nicht misstraut. in: Zeit - online, Zeit Verlag Hamburg, 22.10.2014, URL: http://www.zeit.de/digital/internet/2014-10/crowdfunding-betrug-anonabox-scampaign, Download vom 6.11.2014.
  

• Luddabeh, Jens: Horizonte Crowdfunding. Die Masse macht's. in: Technology review, 10/2012, 10, S.32-38.
  

• Pfluger, Bettina: Ein Kredit von mir zu dir. in: Der online - Standard, Standard Verlagsgesellschaft m.b.H, Wien, 14.3.2014, URL: http://derstandard.at/1392688178228/Crowdlending---Ein-Kredit-von-mir-zu-dir, Download vom 09.11.2014.
  

• Rom, Daniela: Crowdlending. Neuer Anbieter für Kredit aus dem Netz. in: Der online - Standard, Standard Verlagsgesellschaft m.b.H., Wien, 19.03.2014, URL: http://derstandard.at/1395057097760/Crowdlending-Neuer-Anbieter-fuer-Kredit-aus-dem-Netz, Download vom 09.11.2014.
  

• Simon, Ruth; Loten, Angus: Frustration Rises Over Crowdfunding Rules. Critics Say Two-Year-Old JOBS Act, Intended to Help Entrepreneurs Attract Investments, Requires Major Revisions. in: Wall Street Journal Online, 30.04.2014, URL: http://online.wsj.com/articles/SB10001424052702304163604579532251627028512, Download vom 24.11.2014
  

• Stevenson, David: A crowded market, but promising. in: Financial Times Online, 21.11.2014, URL: http://www.ft.com/cms/s/0/ff908562-6e3d-11e4-afe5-00144feabdc0.html#axzz3Key7ywde, Download vom 01.12.2014