U.S.-based crowdfunding sites like Kickstarter, Indiegogo and ArtistShare offer a huge range of creative perks like T-shirts, backstage access, chip clips, or a week’s worth of personal training alongside Bret Easton Ellis. But what if a startup could offer equity in the company to the little people who helped make it happen?
The JOBS Act, passed in April, gave the SEC a directive to clear the path for equity-based crowdfunding (some call it “crowdinvesting”) sites. The regulatory agency is deliberating over the rules now, with the goal of publishing the new rules by January. We’ll see how that goes, given how complicated crowdfunding is. What are the disclosure requirements for companies? What kind of due diligence will an equity-based crowdfunding “portal” have to do? Yes, the Act and the SEC are calling crowdfunding sites “portals.”
Meanwhile, across the pond, equity-based crowdfunding is already legal and underway. A London-based startup called Escape the City has raised £557,920 (roughly $892,481) on a £600,000 goal with 14 days to go on the equity crowdfunding platform Crowdcube. The startup upped its goal because of high demand. Escape the City is a social network somewhere between LinkedIn and Idealist.org; it aims to match dissatisfied corporate drones with new jobs, more noble jobs, or professional adventures abroad.
Escape the City, which has two main communities, based in London and New York, claims to be the first U.K.-based web startup to have raised half a million pounds. “It’s also the largest equity crowd funding fundraise for an online start-up anywhere in the world,” community manager Adele Barlow told Betabeat in an email. The campaign has been up for just 11 days, and the company is offering 24 percent equity total at £1 a share. Crowdcube also claims to have turned down an offer from one of London’s “top venture capital firms.”
“We are really thrilled to be one of the startups spearheading equity crowdfunding in the UK. We think it is a fantastic way to democratise start-up investment and fund exciting ideas,” cofounder Rob Symington said in a statement.
Crowdcube launched in July 2011. In November, a restaurant group raised £1 million (for just 10 percent equity). To date, more than £2.1 million has been raised on the site. Crowdcube does give pitches an initial review, but the onus is on investors–buyer beware. Anyone who is a U.K. resident, over 18 years old and has a U.K.-based Limited Company can list a campaign on Crowdcube.
Each campaign has a 1,000-word disclaimer appended. “The content of this pitch by Escape the City (the “Company”) and the documents, comments and information contained within it (together the “Pitch”) have not been approved by an authorised person within the meaning of the Financial Services and Markets Acts 2000 (the “Act”),” it opens. It ends with, “Potential investors should be aware of the risks associated with an investment in the Company, and should ensure that they have read and understood the Risk Warning on the Crowdcube website before continuing.”
Crowdcube charges a five percent fee of the total raised as well as a £1,750 fee for legal paperwork. For now, there is no listing fee, although Crowdcube says in the future it will cost £250 just to put up a campaign.
It’s estimated that there are more than 500 crowdfunding sites, many of which will attempt to add equity-based crowdfunding once it becomes fully sanctioned in the U.S. Others, like Boston-based WeFunder, built their platforms in advance of the law and will have to scramble to adapt when the SEC hands down the specifics.