The Role of Platforms in Crowdeconomies

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Political and socioeconomic background

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. [1]

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: [2]
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. [3]

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. [4]

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. [5]

Key Points of the Crowdfund Act under The JOBS Act, as listed at crowdfunder.com [6]

  • 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.

So 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. In conclusion, non-accredited investor crowdfunding needs better regulations in order to work and benefit both investor and company and subsequently the platforms.

Crowdfunding in Europe

Kristof De Buysere, Oliver Gajda, Ronald Kleverlaan, Dan Marom: A Framework for European Crowdfunding. URL: http://www.crowdfundingframework.eu/summary.html

Crowdsourcing

Knowledge-based-platforms

Idea-based-platforms

Skill-based-platforms

Crowdfunding

Donation based platforms

Reward based platforms

Equity based platforms

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 look closer there is a lot to discover.

Lending based Crowdfunding works like that:
You register to a platform, either as a person, who has a idea and wants to get money from a crowd for it, or as a person who want to invest his/her money, and get i 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 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 and check the credit worthiness of the registered Borrowers. The Platforms are just agents that bring together people with different interest , but the involvement of the bank is usually not promoted or 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.

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. 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

Who is behind the platform=

Risks and criticism

DIY platforms

Links

Crowdlending

References

Political and socioeconomically background

  1. ↑ The US Securities and Exchange Commission: Accredited Investors. http://www.sec.gov/answers/accred.htm. Download on November 2nd, 2014
  2. ↑ Deborah L. Jacobs: SEC Proposes Crowdfunding Rules. In: Forbes Online 10/23/2013, URL: http://www.forbes.com/sites/deborahljacobs/2013/10/23/sec-proposes-crowdfunding-rules/. Download on November 2nd, 2014
  3. ↑ Mary Juetten: JOBS Act And Crowdfunding: Will They Finally '#ReleaseTheRules'?. In: Slate 08/13/2014, URL: http://www.forbes.com/sites/maryjuetten/2014/08/21/jobs-act-and-crowdfunding-will-they-finally-releasetherules/. Download on November 2nd, 2014
  4. ↑ Chance Barnett: JOBS Act Title III: Investment Being Democratized, Moving Online. In: Forbes Online 10/23/2013, URL: http://www.forbes.com/sites/chancebarnett/2013/10/23/sec-jobs-act-title-iii-investment-being-democratized-moving-online/. Download on November 2nd, 2014
  5. ↑ Jim Saksa: “Kickstarter, but With Stock”. In: Slate 06/23/2014, URL: http://www.slate.com/articles/business/moneybox/2014/06/sec_and_equity_crowdfunding_it_s_a_disaster_waiting_to_happen.html. Download on November 2nd, 2014
  6. ↑ Crowdfunder.com: Crowdfunding Law. URL: https://www.crowdfunder.com/blog/knowledge-center/crowdfunding-law/. Download on November 2nd, 2014

Crowdlending

  • Beck, Ralf Prof. Dr.: Crowdinvesting. Die Investition der Vielen. Kulmbach: Börsenbuch Verlag 2014.
  • Luddabeh, Jens: Horizonte Crowdfunding. Die Masse macht's. in: Technology review, 10/2012, 10, S.32-38.


Crowdsourcing

Crowdfunding

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