Modern Investor Binding
Promising platforms including ProFunder and Seedmatch that systematically encouraged the development appeared in 2009. However, although the development is still erratic, the tendency is clearly upward and offers enormous potential with regard to transparency and participation for the investors. As with analog businesses, confidence-building will be the greatest challenge for the more ambitious crowdinvesting platforms.
We offer several solutions to aid the issues of crowdinvesting!
History of Crowdinvesting
In the year 2000, the first known idea for equity crowdfunding was created in Russia. The idea was for a platform that would target small businesses, entrepreneurs and small start-ups who were unable to secure funding. This platform was to provide businesses with plans and risk-assessment information to investors. Additionally, they also wanted there to be policies to protect both parties. This concept was more formal than usual crowdfunding in that deals and agreements would be legally reached for current and future funding.
By 2007, in Australia, a company launched an equity crowdfunding platform. Enable Funding is what it is known as today. They helped to fund 176 companies almost 80% of which are still trading to this day. After this, many other platforms were created, some successful, some not so much, especially after regulations were tightened. Some novel platforms even used their own money to invest.
Types of Investment Crowdfunding
Different models have been used over the years within this kind of investing. Crowdinvesting can be equity-based, debt-based, profit-sharing or a hybrid model based on a few different methods. An equity investment is where money is invested in a company typically by buying shares of that company. The investor can then see the value of their shares go up or down depending on the performance of the company. A debt investment is where someone invests in a firm by purchasing debt. This is then expected to be paid back with interest. Debt-based investing is also known as peer-to-peer lending. Profit sharing is mainly where a company shares profits with employees, often with strict limitations.
Investment crowdfunding can easily break laws because trying to get the public to invest is illegal unless the opportunity has been approved by a specific regulatory body. In the US, for example, this body is known as the Securities and Exchange Commission. Whereas in France the Autorite des Marches Financiers oversee these kinds of investments. All the world’s regulators have different ways of classifying what an investment actually is. A general rule to abide by is the Howey Test. This test states that a transaction becomes an investment when there is 1) an exchange of money that (2) expects profits resulting in 3) a common enterprise which 4) depends solely on the efforts of a third party.
When a transaction passes this test or similar then it has to be registered with the relevant regulatory body for that country. There are, of course, some exceptions to this rule in specific circumstances. These investments are regulated to protect the investors. Some creators and businesses on these platforms can be inexperienced and be unable to meet the goals and deadlines set out originally. Investors can also fall victim to fraud and as such these laws are in place to protect their money.