U.S. regulators are tied up in knots trying to figure out how to write laws for equity crowdfunding to prevent fraud.
Perhaps they ought to take a page from the Dutch.
In the Netherlands, equity crowdfunding from unaccredited investors has been legal for the better part of three years. “The Netherlands are really a frontrunner in equity-based crowdfunding,” Korstiaan Zandvliet, the co-founder of Symbid, said at the Massolution crowdsourcing conference in New York City last week.
Symbid is an equity-crowdfunding platform headquartered in the Netherlands that has been in existence since 2011. The platform has funded 23 startups that have raised a total of more than 2 million euros ($2.7 million) from over 15,000 unaccredited investors, according to Zandvliet. “We tend to have a bit of experience,” he says.
Equity crowdfunding is when a company raises capital by selling small pieces of equity to a large number of investors. This differs from donation-based crowdfunding – made popular by sites like Kickstarter and Indiegogo — whereby a company collects small donations from a large number of people and, in exchange, gives each donor some sort of non-monetary reward.
Currently, it’s legal for businesses to sell equity to the crowd, but they can only sell to accredited investors. An accredited investor is an individual who makes more than $200,000 a year or has more than $1 million in total assets, excluding primary residence.
But that’s all changing. The Jumpstart Our Business Startups Act, or JOBS Act, which was signed into law in April of last year, includes a provision to make it legal for entrepreneurs to sell pieces of their company to unaccredited investors, or “regular investors.” That means almost anyone can become a shareholder in a private company – a process that could leave many investors vulnerable to fraud.
Meanwhile, Zandvliet at Symbid has had zero cases of fraud in three years. “What we have seen so far is that the crowd is a great due diligence tool. They actually find out basically everything,” he says. Of the 15,000 individuals who have made contributions to startups on Symbid, 10 percent are angel investors. Zandvliet says many of these professional investors consider the crowd as effective a tool as any to identify entrepreneurs and startups with the most potential.
Symbid does take precautions to protect investors. For example, it uses an online electronic money institution to convert investors’ money into a digital currency that can be spent on the portal. Furthermore, Symbid gives its investors the option to “disinvest” their money. “It is an ongoing process where the entrepreneur needs to wake up every day and put up his best game in order to secure new investments but also to make sure the older investments remain into that particular proposition,” says Zandvliet.