Frozen-rails-2014

Should We Celebrate Equity Crowdfunding At The First Investment Or First Exit?

Right now we're reading about how the J.O.B.S. act is going to change crowdfunding in the United States, but I think it's worth pointing out we actually have a head start on equity crowdfunding in Northern Europe. The countries in the ArcticStartup region have their own legislative quirks, but equity crowdfunding is here, there's no doubt about it. And it will be very interesting to follow what happens to the funding landscape as the public consciousness catches up and more deals are run.

A few companies actually have their own equity success case. On FundedByMe, Stockholm-based Virtuous Vodka successfully raised SKr 1,000,140 (€116,000) from 103 investors. On Invesdor, NetOutlet raised €53,000 from 15 investors, but they didn't make a big splash about it, leading me to suspect it wasn't incredibly crowdfunded. But these platforms are growing. Last night I attended the (Stockholm-based) FundedByMe event in Helsinki as they officially opened up their equity crowdfunding platform here, which got me thinking more about the movement.

Before the year rolled over in Finland, a financing round could not be marketed to the public if the round was larger than €100,000 (I'm fairly certain of that number, but I can't find a reference). Have you ever seen someone pitching their startup to a crowd and then telling people they're raising a €500,000 round? Technically that wasn't really legal. But now changes in regulations that took place on January 1st of 2013 now allow a financing round up to €1.5 million to be marketed to anyone interested in investing in startups. This makes it a whole lot easier for crowdfunding companies to operate - now they can actually put a public "price" on their startups.

Due to this, I now see now that Helsinki-based Venture Bonsai has updated their platform to become more "public facing". Full disclosure - I used to work there before ArcticStartup, but I think that one of the reasons why it hasn't hit fast growth is because you really couldn't see the big number until a couple clicks in, and only if the entrepreneur personally allowed you to.

Does more regulation follow deregulation?
Just because we have legal standing doesn't mean issues for these platforms can't come up in the future. At the FundedByMe event I spoke with Antti Hemmilä, Specialist Partner at Attorneys At Law Borenius, who seems to have quickly become Finland's go-to guy for crowdfunding insight. He has written two guest posts for us on the legal quirks around equity crowdfunding and reward-based crowdfunding for us, and yesterday spoke at two separate crowdfunding events in the Helsinki region.

Like Finland's recent regulation relaxing shows, legislation regarding share issues are beginning to become more and more updated for the modern age. It's a great thing for the crowdfunding movement, but legislators could soon become wary of how these platforms are operating.

Hemmilä points to the UK-based Seedrs, which is the first crowdfunding company to go through the steps to become a regulated financial institution - which takes a few lawyers and a sizable bankroll to accomplish. The crowdfunding companies in the Nordics are technically operating only as "matchmaking platforms" to get around legal requirements, and as long as investors and startups, and crowdfunding companies are savvy, it's a good enough system. But one misstep with how the money is handled or how shares are distributed, it wouldn't be surprising to see all crowdfunding companies have to be slapped with new regulations to become registered financial institutions, an need to come up with the bankroll quickly.

Exit issues
As equity crowdfunding grows in hype I think it's important for companies to be wide open about what types of exits their investors should expect. In the coming years it shouln't be too much of an issue - it's likely that angles will pull most of the weight in equity crowdfunding and will ask the right questions. But as the these platforms transition to more of an actual crowd-based approach, I wonder if exiting the shares will become a secondary thought.

The fact that crowdfunding is working as a mechanism is an awesome thing for new companies. The idea that you don't need to only pool money from rich folks is incredibly powerful - theres a lot more small money that's looking for a cause to support. And while I support the crowdfunding movement and am really happy to see local companies explore new funding paths, I think it will only just be an experiment until the first shares are actually exited. Are these company-crafted shareholders' agreements sound for further rounds? Do you even need a shareholders' agreement? Regardless, I'm really excited to see money flowing through new channels, but I'll hold my huge celebration for the first exit.

Crowd at concert image by shutterstock.

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