"Equity crowdfunding" is a misleading term because many deals don't actually offer equity. The leading industry association, the Crowdfunding Professional Association, recommends that people use the term "Regulated Investment Crowdfunding." Thoughts?
You bring up an important point about terminology in the crowdfunding industry. The term "equity crowdfunding" can indeed be misleading if it implies that all offerings provide equity stakes, when in fact, many do not. The Crowdfunding Professional Association's recommendation to use "regulated investment crowdfunding" is a more accurate and inclusive term.
Here’s an expanded discussion on this topic:
Equity Crowdfunding vs. Regulated Investment Crowdfunding
Equity Crowdfunding
- Traditional Definition: In its original sense, equity crowdfunding refers to a method of raising capital where investors receive shares or equity in the company in exchange for their investment.
- Misleading Aspects: The term can be misleading because not all investment crowdfunding campaigns offer equity. Some might offer other types of securities, such as debt instruments, revenue shares, or convertible notes.
Regulated Investment Crowdfunding
- Broader Definition: This term encompasses all types of crowdfunding that involve regulated securities offerings, not just equity.
- Types of Securities: This can include equity, debt, revenue shares, and other forms of investment contracts.
- Regulatory Frameworks: These offerings are typically conducted under specific regulatory frameworks, such as Regulation Crowdfunding (Reg CF), Regulation A+, and Regulation D in the United States, which provide different levels of oversight and investor protection.
Benefits of Using "Regulated Investment Crowdfunding"
1. Clarity and Accuracy:
- The term "regulated investment crowdfunding" accurately reflects the range of financial instruments available and the regulatory environment governing these offerings.
- It helps avoid confusion for investors who might otherwise expect equity stakes in all crowdfunding opportunities.
2. Investor Education and Protection:
- Using precise terminology is crucial for investor education. It ensures that potential investors understand the nature of the securities being offered and the associated risks and returns.
- It underscores the fact that these offerings are subject to regulatory scrutiny.
3. Inclusiveness:
- The broader term encompasses a wider array of investment opportunities, making it more inclusive of different types of fundraising campaigns.
- It reflects the diversity in the crowdfunding space, acknowledging that companies might choose different financial instruments based on their specific needs and strategies.
Examples of Regulated Investment Crowdfunding
1. Regulation Crowdfunding (Reg CF):
- Purpose: Allows smaller companies to raise up to $5 million per year from a large number of investors through an online platform.
- Securities Offered: Can include equity, debt, and other types of securities.
2. Regulation A+:
- Purpose: Enables companies to raise up to $75 million per year from the public with fewer disclosure requirements than a full public offering.
- Securities Offered: Primarily equity, but can also include debt and other securities.
3. Regulation D (Rule 506(c)):
- Purpose: Allows companies to raise an unlimited amount of money from accredited investors with general solicitation and advertising.
- Securities Offered: Can include equity, debt, and other types of investment contracts.
Conclusion
The shift from using "equity crowdfunding" to "regulated investment crowdfunding" is a positive development that enhances clarity, accuracy, and inclusiveness in the crowdfunding industry. This terminology better reflects the variety of financial instruments available to investors and underscores the regulatory framework that governs these offerings. By adopting this term, industry stakeholders can help ensure that investors have a clear understanding of what they are investing in, ultimately fostering a more transparent and trustworthy investment environment.