Compared to its popularity in Anglo-American countries, crowd investing – which enables broad groups of investors to fund start-up companies and small businesses in return for equity – is still very young in Europe. If a crowd-invested business succeeds, then its value increases, as does the value of a share in that business. Neither banks, venture capitalists, angel investors, or other resources can fill the financing needs of start-up companies. Crowd investing can help to bridge this substantial financing gap.
Three years ago, the Austrian legislator changed the national securities law (KMG) and raised the threshold value for issues without a prospectus from EUR 100,000 to 250,000. Following this, the first crowd investing opportunity was offered to investors by a portal named 1000x1000, with the first issuer raising a total of EUR 170,500 after a nearly eight-week funding period. The amount clearly exceeded the initial threshold of the critical value for issues without a prospectus, indicating that issuers would have been constrained under the earlier regulation. Austria then adapted a new regulatory scheme and allowed issues of up to EUR 5 million without requesting a prospectus from the issuer. Austria the introduced another new law in 2015 (AltFG), which specifically regulates crowd investing and other alternative forms of investment. The law is meant to set a clear legal framework for crowd investing, making it more accessible to entrepreneurs and improving the protection for investors. As a result, in 2015 crowd investing platforms were able to generate USD 9 million for 44 start-up projects.
What benefit can crowd investing offer for smaller firms in Austria? To answer that question, it is important to note that information plays a crucial role in each financial market transaction. Information is however distributed asymmetrically between the contracting parties, with those who need capital having better information about their chances to succeed and repay than those who provide it. Due to this, the financial sector is subject to many laws and regulations designed to protect investors. Unfortunately, these rules impose high costs on companies, and complying with them can make a financial transaction too expensive for smaller firms, especially the obligation to prepare the costly capital market prospectus, along with other investor protections. Crowd investing paves the way around these rules and costs, offering start-up companies and small businesses a chance to join the market.
Another benefit of crowd investing over other forms of entrepreneurial finance is that it makes use of the “wisdom of the crowd.” The participation of many individuals can, in aggregate, generate information that often cannot be obtained from a single individual or investor. In the case of crowd investing, this crowd has also been known to make investment decisions rather than consumption decisions, which can be particularly useful. Furthermore, it gives investors an opportunity for high returns and a profitable enterprise value, while at the same time allowing individual investors to carry only a part of the business risk. If the company is not successful or becomes bankrupt, funders lose their investment but have no repayment obligation. (As a result, it may be prudent for investors to support several different projects, so that returns from other companies can compensate for a single failure).
Crowd investing platforms – which can only be operated with a concession from the financial market supervisory authority or a business license – support businesses by providing the necessary know-how for investors who want to provide financial support for a specific project. These platforms are obliged to disclose all details of the businesses, including the legal form and location, as well as information about the owner and other shareholders with a minimum of 25% participation. In addition, they also have to publish the business registry number, the corporate purpose, and the current financial status. The disclosure obligation also includes publishing the selection criteria for the admission of the businesses to the platforms, as well as the nature, frequency, and amount of payments made by investors and issuers. Furthermore, crowd-investing platforms have to mention the risk of a lack of success. This indication must be set before the very first investment is made and must be confirmed by the issuers. Consumers also have the right to step back from the contract and recoup their investment within a two-week period.
To summarize, crowd investing in Austria not only offers an opportunity for start-up companies and small businesses to grow but also gives investors the chance to support them and receive the benefit for low risk.