Regulators Eye Corporate Crowdfunding

With traditional lenders facing stricter liquidity requirements as a result of the global financial crisis, crowdfunding is becoming an increasingly appealing source of financing for corporates.

The latest projection on the global crowdfunding market reported by research firm MASSolution puts it at $34.5 billion in 2015. It has more than doubled in each of the previous two years.

At this rate, notes Chance Barnett, CEO of Los Angelesbased equity crowdfunding platform, by 2017 it might overtake the venture capital industry (which EY tags at around $87 billion for 2014).

“I believe in the next five years crowdfunding will become the largest source of funding for small and medium-size enterprises, at least in the United Kingdom,” says Emanuela Vartolomei, managing director of All Street Research in London. “I imagine this is also true elsewhere, though much depends on individual countries’ regulatory frameworks.”

Indeed, being such a young industry, crowdfunding’s regulations are still in their infancy, but evolving swiftly. In the United States, the Federal Trade Commission has recently begun cracking down on people who raise funds online, then fail to deliver on their pledges to investors. At the same time, the JOBS Act, enacted in 2012, contains provisions to open up the door to equity crowdfunding, although they are being enacted gradually.

Vartolomei said the European Commission is also “looking into setting up a dedicated regulatory framework.” The UK has the most established crowdfunding market in the region, and its approach is “business as usual” but with “constant supervision,” she said.

Since much of the recent growth in crowdfunding comes from Asia—where total crowdfunding volume rose 320% from 2013 to 2014—the regulatory landscape is bound to change there as well.

For now, Vartolomei has one main message for companies considering equity crowdfunding: “There is a misconception that you can just put a campaign out there and money will come to you,” she says. “Instead, it takes a lot of work and a big marketing effort. You have to have a budget that is appropriate before you start. And the rule-of-thumb says you should have 30% of the funds you want to raise already secured before you launch the crowdfunding campaign.”