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Comparing Crowdfunding and CSEF Regimes Abroad

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With the prolific growth of the startup scene and the varied investor market developing in response, Crowd Sourced Equity Funding (CSEF) is emerging as an increasingly high priority regulatory issue. In particular, three jurisdictions stand out for their proactive stance on CSEF, those being the United States, the United Kingdom and New Zealand. This article explores crowdfunding and crowd sourced equity funding in these three countries.

US System

The CSEF regime in the US is governed by the Jumpstart Our Business Startups Act 2016 (USA) (JOBS Act). This regulation is monitored by the Financial Industry Regulatory Authority for compliance. This regulatory scheme enables startups to market securities to retail investors directly via online CSEF portals. Investment is limited to these portals and online broker dealer platforms.

However, certain restrictions are placed on investors. For instance, investors with a net worth and annual income lower than $100,000 within any 12 month period, are permitted to put in $2000 of the higher figure and 10% of the lower, so long as the total investment does not surpass $100,000.

Moreover, individuals with a combined net worth and annual income of $100,000, can invest up to 10 percent of either their net worth or annual income depending on whichever is lower. The investment itself cannot exceed $100,000.

NZ System

With an established CSEF regime in place since August 2013, New Zealand implemented wide-ranging amendments to its Financial Markets Conduct Act 2013 (NZ) which greatly facilitated CSEF.

In particular, changes were made concerning market caps, which were limited to $2 million capital raising within a 12-month term. This change does not ultimately restrict the sum investors can invest in CESF securities.

Somewhat akin to the United States system, New Zealand’s scheme revolves around the regulation of investor CSEF portals. Under the regime, proprietary companies can promote share offerings through these portals to both wholesale and retail investors as opposed to solely the latter.

It also has an assigned body, the Financial Markets Authority (FMA), responsible for ensuring regulatory compliance and issuing licenses to providers. With the oversight of the FMA’s regular checks, providers are required to adhere strictly to the same standards as covered them when initially licensed and are obliged to assist investors in sourcing background information before the investment is made.

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UK System

Due for review in 2016, the UK’s Financial Conduct Authority (FCA) introduced additional CSEF rules announced in the 2014 PS14/4 Policy Statement, to work in conjunction with the pre-existing legislation, which classified CSEF as a “regulated activity”. Crowd-funding platforms have to seek approval from the FCA, with a typical waiting period of around six months. As recorded in late 2015, there were 15 authorised in the UK.

Rather than follow the US and implement new legislation, the UK revised its rules within the FCA handbook. These rules outline that making an investment is contingent upon the appropriateness of the investment for clients.

This test takes into account circumstantial factors such as the investors prior and current investing activities as well as their professional expertise and perceived understanding of the advice given by the platform.

There are however certain exemptions to this appropriateness test, namely, when the investor has classified as a high net worth, sophisticated or restricted investor

Key Takeaways for CSEF Regimes

The NZ, US and UK CSEF regulation provides valuable insights as to the approach Australian regulators might take to CSEF, notably regarding managing compliance costs, reducing regulatory burden and improving the flexibility of capital raisings. These will further be explored in the accompanying pieces regarding the current state of and CSEF opportunities for Australia.

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