The Equity Crowdfunding Experience in the UK and Sweden: Implications for Angels

Seventeen states and the District of Columbia now allow non-accredited investors to invest in startups located in their state. As more states follow suit, it is useful to look at data detailing other countries’ experiences. Both the UK and Sweden have experimented with “equity crowdfunding” for non-accredited investors for a number of years now. Their experiences so far have been interesting, as have the implications for the UK and Swedish angel communities.

A 2014 report estimated that equity crowdfunding grew by 201% in the UK in 2013-2014, with an average amount raised of £199,095. Thirty-eight percent of investors were professional or high net worth individuals, who tended to have a larger average portfolio size (£8,000). For retail investors the average amount was only £4000.

A key lesson from the UK relates to information provided by equity crowdfunding platforms. A study conducted by the UK Financial Conduct Authority noted that the material on some of the platforms was misleading, especially in terms of how shares would be treated in the event of a buyout. The platforms implied equal treatment when in fact they would be diluted in the event of a VC round. This issue will become more important as crowdfunding grows. In order to make crowdfunded investments more appealing to later investors, an increasing number of deals in Europe have pre-negotiated clauses specifying that crowdfunders will be bought out at a set price in a later funding round.

Interestingly almost 95% of the funded deals were eligible for the country’s angel tax credit programs, providing significant income tax relief and no capital gains tax on stock held more than three years.

Although tax credits have proved useful in stimulating angel investing in the US, it is unlikely that they would be able to be used concurrently with crowd investments. As seen below, some states require a minimum investment well above the average crowdfunded amount.  Others are open only to accredited investors or have almost impossible filing requirements for the business. This difficulty could be exacerbated when the SEC finalizes rules for Title III of the JOBS Act, allowing interstate investment along with in-state programs.  For instance, the business is required to file investor details with the state tax authority.  Since only some investors would be in-state, this quickly becomes burdensome.  States also require different holding periods for equity, which would mean the business would have to keep track of which investors were allowed to sell and which were required to hold. Of course, a federal angel tax credit could quickly alleviate many of these issues.

Reasons Why Current State Tax Credits Could Not be Used for Crowdfunded Investments

Required minimum investment too large for most crowdfunders

Required holding period

Preclusive filing requirements on part of business (and for investor when application requires substantial details about the business)

Filing requirements that may not be worth the  administrative costs if only a few in-state investors  could take advantage of it

Accredited investor specified


Arizona, Connecticut, Maryland, Michigan, Minnesota, Nebraska, Utah

Georgia, Hawaii, Illinois, Iowa, Louisiana, Maine, Maryland, Minnesota,  Nebraska, New York, North Carolina, North Dakota, Ohio, Utah, Vermont, Virginia, West Virginia, Wisconsin

Arkansas, Colorado, Kansas, Maine, Maryland, New Jersey, North Carolina, West Virginia, Wisconsin

Georgia, Illinois, Indiana, Iowa, Nebraska, New York, Rhode Island, South Carolina

Georgia, Louisiana, Minnesota, Kansas, Kentucky, Nebraska, New Mexico, South Carolina. Wisconsin

Application fee for investor: Maine New Jersey

Requires investment in VC fund, University or angel group:  Iowa, Michigan, Oregon

Sweden’s equity platform, FundedByMe, has been around for a number of years. Its market is estimated at between 385 and 450 million EUR per year, about the same size as the formal Swedish venture capital market. As with the UK tax sweeteners, a number of organizations offer added incentives. For instance, the Internet Infrastructure Foundation .SE, tops up the amount a crowdfunding entrepreneur receives to 100% if he/she manages to raise 50% or more of the requested amount on the FundedByMe platform. Despite this, research shows that only 17% of equity investors are repeat investors, suggesting that equity crowdfunding is not becoming the investment mechanism of choice for many Swedes. Entrepreneurs have also expressed concern about having a large number of individuals with equity in their companies and the difficulty of coming to consensus on big decisions. Others were concerned about “tracking down and convincing lots of individuals to sell if they tried to sell the company later." IT entrepreneurs in particular preferred angels who often “better understand” complex IT business plans.

Equity crowdfunding has a number of potential benefits for startups, including the ability to test and build a market and access to a greater pool of investors. Unfortunately, it also has potential costs:  reputation effects if campaign goals are not met; IP exposure; donor exhaustion; and time spent “working the crowd”. The up-front costs are not small either. Over and above the required accountant fees, UK platforms in 2013 charged between 5 and 12%, often with a further 3-5% processing fee. Certain platforms such as Seedrs are taking steps to address the costs, standardize offerings and educate retail investors about all risks. On others they will remain a significant factor. These costs suggest that non-accredited equity crowdfunding is not the answer for every startup.

As it becomes more popular, reviewing other countries' experiences can help work out where and how the mechanism is best leveraged by firms and angels. Here’s hoping American policy makers can learn from these experiences and adapt programs to maximize their impact here.


Achieving a return on investment takes time - years. Legislation and policy on equity Crowed-funding is being champions by platform operators and some entrepreneurs as a quick fix to the funding gap faced by many. In the absence of return data on equity crowdfunding they "borrow" the data on returns achieved by Angel investors - which we all know is less than reliable as a reflection of reality even for the Angels. Out of interest, has anyone any data on an actual cash on cash return from an equity crowd-fund deal anywhere? The Financial Times reported on 27 May 2015 "Crowdcube, the UK’s market leader in the emerging equity crowdfunding sector, has come under fire over business practices that critics fear will lead to thousands of its investors losing large amounts of money" ...... "the UK’s Financial Conduct Authority recently rebuked the five year old industry, saying that many groups give a “misleading or unrealistically optimistic impression of the investment”......"critics say that Crowdcube leaves its investors at significant risk of “aggressive” dilution — when a company offers new shares at low prices, vastly reducing the value of stock — to the detriment of existing shareholders. In most pitches on Crowdcube, all but the largest investors receive “Class B” shares. They have no voting rights or contractual protections to prevent dilution, such as “preemption rights,”. Its time to stop looking at Equity Crowdfunding as just a funding mechanism, and start looking at it as an investment class - which is what the platform managers advertise it as. Getting information of the realities of what happened post investment is hard - though this site appears to be doing some research (though the author may be as negatively biased as the platform operators are positive).
Nelson Gray  8 years ago 
Thanks for the informative comment! If anyone does have information about actual cash return I would love to see it. The only 'results' I found are in a paper by Decarre and Wetterhag on 'Uncovering the Outcomes of Equity Crowdfunding-Post-funding outcomes of equity crowdfunded firms in Europe'. They report on profit growth of crowdfunded firms, but not angel returns. Interestingly they found that crowdfunded firms that had angels as participants experienced profit growth that was an average of 811% higher than if no professional investors had taken part.
Krista Tuomi  8 years ago 
very nice article
direct privateoffers  8 years ago 


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