Implications of online funding regulations for small businesses

Author:Peter Yeoh
Position:School of Law, Social Sciences & Communications, University of Wolverhampton, Wolverhampton, UK
Pages:349-364
SUMMARY

Purpose - This paper aims to examine the implications of exemptions to facilitate small businesses’ access to crowdfunding (CF) schemes. The aftermath of the 2008 global financial crisis and even now witnessed many small profits and non-profits encountering significant difficulties in accessing funding from the conventional sources and on many occasions have to turn to the newly emerging Internet-enabled donation or... (see full summary)

 
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Implications of online funding
regulations for small businesses
Peter Yeoh
School of Law, Social Sciences & Communications,
University of Wolverhampton, Wolverhampton, UK
Abstract
Purpose – This paper aims to examine the implications of exemptions to facilitate small businesses’
access to crowdfunding (CF) schemes. The aftermath of the 2008 global nancial crisis and even now
witnessed many small prots and non-prots encountering signicant difculties in accessing funding
from the conventional sources and on many occasions have to turn to the newly emerging
Internet-enabled donation or product compensation CF schemes. Access to securities-based CF schemes
has, however, been seriously difcult due to securities laws obstacles. Regulatory authorities in the USA
and the UK have responded with exemptions to facilitate small businesses’ access to CF.
Design/methodology/approach – The paper driven by the qualitative doctrinal approach would
rely extensively on primary data from the applicable regulations and secondary data from industry
sources and other publicly available commentaries.
Findings – Securities-based CF schemes hitherto heavily restricted in the USA and the UK are under
current regulatory interventions-accorded exemption status, thereby enabling enhanced access for
those small businesses seeking alternatives to conventional nancing and enhanced investment
opportunities for small investors. The paper’s preliminary analysis suggests that the proposed new
regulatory rules in the USA and the UK are generally well-balanced with adequate small investors’
protection, while simultaneously not hampering the innovative growth of small businesses with
excessive restrictions. Further, the preparedness of the regulators to ne-tune the proposed rules as the
CF industry evolves would likely ensure its orderly growth, thereby helping to address various
humanitarian and social challenges in these jurisdictions.
Originality/value – The added value of the analysis lies in its substantive evaluation of the proposed
rules in both jurisdictions to ascertain the feasibility of securities-based CF schemes as alternatives for
small businesses in relation to traditional nancing and enhanced investment opportunities for small
unsophisticated investors.
Keywords Crowdsourcing, Crowdfunding, Securities exchange commission, Crowdfunding portals,
Internet-based nancing, Online nancing, Financial conduct authority
Paper type Research paper
1. Introduction
Crowdfunding (CF) arguably provides a feasible alternative from conventional
nancing sources for individuals and small enterprises. CF basically involves the
raising of funds in small denominations from many people, not just friends and family
only but including strangers afar, commonly done through online platforms, which
usually provides little opportunity for careful due diligence and in that sense carries
some risks for donors and/or investors (Mollick, 2014;Schwienbacher, 2010).
This paper traces the contextual background of CF as it evolves from its early
beginnings when the focus was on aspirants seeking nancial support online for various
personal ambitions for some and various causes for various social and humanitarian
causes for others to its graduation as equity-based nancial options for small and
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
Online funding
regulations
349
Journal of Financial Regulation and
Compliance
Vol. 22 No. 4, 2014
pp. 349-364
© Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-02-2014-0012
medium enterprises, and in the process of which, attracted regulatory interventions in
the USA and the UK. It would also evaluate the signicance of regulatory and
implications of these respective regulatory interventions using primary data from
applicable statutes and secondary data from various legal and social commentaries and
other published sources.
2. Nature and purpose of CF
There are four general forms (but more when variants are included within each) in which
CF can occur, namely, donating; pre-nancing involving the pre-purchase of products
and services where in return for their contributions, contributors received early versions
of the nished products as exemplied in CF platforms like Kickstarter.com;
peer-to-peer (P2P) social lending where users are able to lend their funds to those in need
and earn interest thereby over the agreed terms of payments within a closed social
network as exemplied by CF platforms like Zopa.com; and equity-based investing
where there are expectations for worthy results and some kind of nancial returns as
exemplied by Growvc.com where the crowd cherry-pick new entrant small businesses
with prot potential where besides receiving equity, investors also receive regular
dividends (Belleamme et al., 2013). While donating is clearly philanthropically focused
and equity-based clearly commercial-minded, questions are often raised over why
people choose to invest their money outside the already organized markets. General
observations suggest three general types of crowdfunders. These are those who feel
closely connected to the venture; those who identify only nancial opportunity; and
those who experience both. This further suggests that CF is largely driven by altruism,
hedonism and economical reasons.
CF is not really new. It resembles the “ll the thermometer” drives of the past. A good
example is the “tontine” system commonly used in Asia and elsewhere by groups of
disadvantaged people in local communities to pool their small resources together to
assist one another (Callier, 1990). What has altered through CF is that people are now
contributing online and what they fund has migrated from pure donations or P2P
lending to investment projects (Boschert et al., 2013). CF started off in the creative
industries and used by movie-makers, artists and other inventors to help fund the
upfront costs when market launching their creations. In return, donors/
lenders/investors get early-bird discounts, special access to the production process and
even lunch dates with the directors for the large donors (Davies and Sigthorsson, 2013).
Indeed, Web 2.0, a two-way collaborative platform, catalyzed the emergence of the social
web. Web 2.0 further accelerated the development of the open-source platforms,
co-design and open innovation, thus enabling individuals to access wide collaborative
inputs from large and wide audiences (Lee et al., 2008). This led to the emergence of huge
social networks like MySpace, LinkedIn and Facebook (Mislove et al., 2007), commonly
referred to as Web 3.0. This encouraged and enhanced the collective and collaborative
participative working of people across economies and cultures and led to the notion and
practice of why the many are cleverer than the few, popularly referred to as “The
Wisdom of the Crowd” (Surowiecki, 2004). To perform effectively, the “crowd” needs to
be independent and diverse and have the capacity to fulll special kinds of
decentralization. The social web has ergo coalesced with capital formation through Web
3.0. CF has grown rapidly since its inception in 2006; and currently, some 45 nations
across the world have active CF platforms.
JFRC
22,4
350

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