A comparison of equity crowdfunding in four countries: Implications for business angels

• Author: Krista Tuomi,Richard T. Harrison
• DOI: http://doi.org/10.1002/jsc.2172
• Published date: 01 November 2017
• Date: 01 November 2017

RESEARCH ARTICLE

DOI: 10.1002/jsc.2172

Strategic Change. 2017;26(6):609–615. wileyonlinelibrary.com/journal/jsc © 2017 John Wiley & Sons, Ltd. 609

Abstract

Equity crowdfunding as a rapidly growing source of nance for new and growing entrepreneurial

ventures poses new challenges for nancial regulators and potenally disrupts the early stage

risk capital market and its exisng actors, notably business angels. Equity crowdfunding responds

primarily to the needs of small start‐ups that do not manage to access bank nance, or who do

not need the larger sums available from venture capital or business angels. It is not appropriate

for rms where business informaon is too sensive to be shared with a large number of poten‐

al investors, nor those which require substanal amounts of follow on nancing. Within these

parameters and with sensible policy implementaon and regulaon, equity crowdfunding can

play a useful complement to the role of business angels in innovaon nance as an alternave

form of start‐up and growth capital.

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 INTRODUCTION

Equity crowdfunding is a method of funding where entrepreneurs

seek nancing from many individuals in exchange for shares in the

rm. It diers from other forms of crowdfunding in that it involves

the sale of a security (Harrison, 2013), oering a nancial return to

funders (Belleamme, Lambert, & Schwienbacher, 2013), through an

open call for funding on internet‐based plaorms (Ahlers et al., 2015).

These plaorms primarily target small investors and provide both the

legal base and the ability to process the nancial transacons (Decarre

& Weerhag, 2014). They receive applicaons from entrepreneurs

who want to showcase their business idea and, typically aer a back‐

ground check, host the entrepreneur’s pitch to potenal investors. If

the funding goal is reached (in the “all or nothing” model), the funds

are distributed to the project owner, otherwise they are returned to

investors. As business models in the sector connue to evolve (Gajda

and Mason, 2013), some internaonal plaorms oer a prot sharing

type of crowdfunding, with a VC type structure: investors pool fees

in a community investment fund run by the plaorm which invests

in parcular entrepreneurial projects. These are held for a few years

aer which the plaorm takes a 20% to 25% share of the prots and

distributes the remainder.

Like other forms of crowdfunding, this model has a number of

potenal benets for start‐ups. It enables them to test and build a

market and gives them access to a large pool of investors. Unfortu‐

nately, it also has potenal costs: reputaon eects if campaign goals

are not met; IP exposure; investor exhauson; and the me required

to “work the crowd.” (Agrawal et al, 2013; Belleamme et al, 2014;

Schwienbacher and Larralde, 2012). The up‐front costs are not small

either. Over and above the required accountant fees, UK plaorms in

2013 charged between 5% and 12%, oen with a further 3% to 5%

processing fee (compared with typical angel group charges of 5% of

cash raised plus a 1% warrant; J. Waddell, personal communicaon,

February 2016). These costs suggest that crowdfunding may not be

the answer for every entrepreneur. Crowdfunding also has implica‐

ons for business angels. Should it be viewed as useful complement

to angel invesng? Or a problemac new development that could

jeopardize recent strides in seed invesng? (Hornuf and Schwien‐

bacher, 2014) It is therefore important to prevent an overenthusias‐

c response from unaware investors, and in due course, regulators.

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 LITERATURE REVIEW

There is a small (albeit growing) number of arcles on equity crowd‐

funding, a result of the short me period of available data (Collins &

Pierrakis, 2012; Zhang et al, 2014, 2015). Research from the UK is

A comparison of equity crowdfunding in four countries:

Implicaons for business angels*

Krista Tuomi1 | Richard T. Harrison2

1 School of Internaonal Service, American

University, Washington DC

2 Centre for Entrepreneurship Research,

University of Edinburgh, United Kingdom

Correspondence

Richard T. Harrison, Centre for

Entrepreneurship Research, University of

Edinburgh Business School, 29 Buccleuch

Place, Edinburgh EH8 9JS, Scotland, UK.

Email: r.harrison@ed.ac.uk

* JEL classicaon codes: G24, K22, L53, N20.