Regulating Crowdfunding Key Considerations - Tim Wright Deep Impact India Conference March 2015

Tim WrightTim Wright

Regulating CrowdfundingRegulating CrowdfundingKey ConsiderationsKey Considerations

Deep Impact - India 21st March 2015

Crowd EconomyCrowd Economy

•CrowdfundingCrowdfunding•CrowdsourcingCrowdsourcing•Open InnovationOpen Innovation•Knowledge TransferKnowledge Transfer

Management ConsultancyManagement Consultancy

PropositionProposition

• Crowdfunding is new and better finance.

• Bad regulation will damage it, constrain it, and reduce its inherent benefits.

• Regulation of crowdfunding requires new thinking.

Is Regulation a Good Thing?Is Regulation a Good Thing?

Unique Value of CrowdfundingUnique Value of Crowdfunding

• New money• More diverse• Novel expectations of return• Closer to market• Lower cost• Quick money• Slow money• Often locally focused

Why Regulate?Why Regulate?

Mitigate risk

Build confidence

Grow the market

Crowdfunding Risk MitigationCrowdfunding Risk Mitigation• Atomisation

• Transparency

• Crowd scrutiny

To Grow Crowdfunding RequiresTo Grow Crowdfunding Requires

•Low transaction costs•Low barriers to participation

Four Models of Crowdfunding

GIFTGIFT

PERKPERK

LOANLOAN

EQUITYEQUITY

Who can participate

How to Regulate?How to Regulate?

How they behave

What they are told

How to Respond?How to Respond?

Two approaches• “Common Law”

– If you satisfy any relevant law can do it• “Napoleonic Code”

– The law needs to say explicitly that you can do it

The Common Law ApproachThe Common Law Approach

• Outsourcing regulated activities

• Becoming regulated bodies

• Changing the nature of the investment vehicle

• Operating below thresholds

• Gating access

Satisfy a Mix of Regulation

The Associated Press

British Library

Photo: Ian Sewell, Wikipedia

Common misconception that UK equity Common misconception that UK equity crowdfunding was unregulated prior to April 2014crowdfunding was unregulated prior to April 2014

UK equity crowdfunding exists in spite of regulator not because of it

10%

Rewriting Law

Introducing Law

Awaiting Title III

Need to extend law

• Increases risk– Reducing transparency– Reducing participation– Reducing diligence– Drive up investment size

• Reduces the value of crowdfunding– Reduce engagement– Reduce participation– Reduce diversity– Increase cost– Distort novel expectation (the usual suspects)

Crowdfunding Being Treated Like Old FinanceCrowdfunding Being Treated Like Old Finance

http://www.altfi.com/data/analysis/747

Currently £2,500

Average Investment SizeAverage Investment Size

Individual offers have averaged £8,500

January 2014 £2,687

February 2012 £1,854

“They will not understand the

philosophy or the procedures of this (Grameen) bank,”

Muhammad Yunus

“You cannot create the bank of the poor with the same architecture as the

bank of the rich.”

On bank regulators also regulating microcredit institutions

Tim WrightTim Wright

[email protected] 814 595@twintangibles

Questions?Questions?