Opinion: Binance Says it Will Sue the Block, the Block Clarifies its Reporting

Crypto centric digital news site The Block is making some news about itself.

Last week, the Block reported on an alleged shutdown of a Binance office located in Shanghai.

As most crypto followers know, cryptocurrency trading is illegal in China – even while the Chinese government is focusing on developing its own Central Bank Digital Currency (CBDC) as well as making blockchain development a core policy item. Add to this the fact that a good amount of crypto-mining takes place in China and the country is well known for being active in the digital asset sector. It is widely assumed the OTC markets in crypto remain a vibrant reality across China.

Several days ago, the founder and CEO of Binance, “CZ,” indicated he was unhappy with the reporting and quickly pulled out the big legal guns and said Binance would be suing the Block.

As the dustup devolved, the Block has found themselves as being part of the news instead of covering it.

In a followup post, the Block provided clarity in the post by “Setting the record straight on our Binance reporting.”

The Block has made some changes to the original reporting – something it clarified in the followup report.

The crypto sector has rapidly emerged to create a dynamic sector of Fintech challenging regulators and policymakers globally. For this sector of Fintech to evolve effectively, and become a sustainable ecosystem, it is absolutely vital that an independent media emerges to cover the good, the bad and the simply ugly.

Crowdfund Insider stands by the Block’s approach and suggests that CZ reconsiders his legal challenge – something that will not help Binance’s cause and stands to undermine its image. Binance needs the Block, a publication that is known for its balanced reporting, just as much as the Block needs them. Hopefully, cooler minds will prevail.

Bigger is Better: Digital Brokerage Charles Schwab Buys TD Ameritrade for $26 Billion

As predicted last week, online broker Charles Schwab (NYSE:SCHW) has announced the purchase of TD Ameritrade (NASDAQ:AMTD) in a deal worth $26 billion.

According to Schwab, the all-stock transaction represents a 17% premium of TD Ameritrade’s average share price as of November 20, 2019. Shares in TD moved little in pre-market trading as much of the gain had already taken place when word of the acquisition became news last week. Shares in Schwab held steady in the pre-market too. TD Ameritrade stockholders will receive 1.0837 Schwab shares for each TD Ameritrade share.

The combined entity will handle 24 million client accounts with more than $5 trillion in client assets. Schwab + TD Ameritrade will generate a total annualized revenue of $17 billion and pre-tax profits of approximately $8 billion.

Schwab President and CEO Walt Bettinger issued the following statement:

“We have long respected TD Ameritrade since our early days pioneering the discount brokerage industry, and as a fellow advocate for investors and independent investment advisors. Together, we share a passion for breaking down barriers for investors and advisors through a combination of low cost, great service, and technology. With this transaction, we will capitalize on the unique opportunity to build a firm with the soul of a challenger and the resources of a large financial services institution that will be uniquely positioned to serve the investment, trading and wealth management needs of investors across every phase of their financial journeys.”

TD Ameritrade EVP and CFO Stephen Boyle said that partnering with Schwab on this transformative opportunity makes the right strategic and financial sense for TD Ameritrade:

“We share a common history—a journey since 1975 that has made Wall Street more accessible and financial dreams more attainable for millions of Americans. Our associates are fiercely proud of that legacy and all that we have accomplished to make TD Ameritrade one of the premier firms in financial services. Now we look to join forces with a respected firm like Schwab that shares our relentless focus, and to do more than we could do apart. Together, we can deliver the ultimate client experience for retail investors and independent registered investment advisors. We can continue to challenge the status quo, pooling our resources and expertise to transform lives—and investing—and deliver sustainable, long-term value to our many stakeholders.”

The deal is expected to close in the second half of 2020. “Integration,” a term that may also be construed as workforce reduction, will begin soon after. Schwab stated that “reductions in staff are a necessary part of achieving overall expense synergies.”

Synergies generated by the deal are expected to be 10-15% accretive to GAAP EPS and 15-20% accretive to Operating Cash EPS in year three, post-close. Expense reductions are predicted to be approximately $1.8 to $2 billion. Overlapping services will be rationalized along with the extensive real-estate holdings of the two firms. Schwab currently has over 365 physical branches. TD Ameritrade operates over 275 branches nationwide. These need to go as the cost to operate them is high.

Schwab stated that the transaction is squarely in line with Schwab’s long-term strategy – part of which is the sheer economies of scale accomplished by an instant doubling of their client base.

“It allows Schwab to continue to add scale on top of its organic growth, with the addition of approximately 12 million client accounts, $1.3 trillion in client assets and $5 billion in annual revenue. We expect this added scale to lead to lower operating expenses as a percentage of client assets (EOCA), which helps fund enhanced client experience capabilities, improve the company’s competitive position and further its financial success. This is our Virtuous Cycle at work.”

While both Schwab and TD Ameritrade are far bigger than many of the Fintech upstarts nipping at their heels, the digital brokerages have shifted from being the disruptors to becoming disrupted by these more agile Fintechs.

In recent weeks, emerging Fintech competitors to traditional online brokerages had worried the sector with their no-commission approach to trading along with their asset-light operations. Both Schwab and TD Ameritrade had announced the removal of trading commissions following the lead of Fintechs like Robinhood – an investment platform that has been hoovering up customers at a rapid rate. The elimination of commissions gave rise to the question if the competition was becoming a race to the bottom.

Earlier this year, Robinhood raised $323 million in financing at a $7.6 billion valuation. Robinhood prominently promotes zero fees on trading in stocks, funds, and options while also providing crypto trading. In October, Robinhood announced FDIC insured savings accounts with a high promotional interest rate to encourage more account creation (2.05% APY at the time of the announcement).

Schwab and TD Ameritrade provide trading and wealth management platforms, custody platforms, retirement services, banking, and asset management.

Of note, Schwab operates Charles Schwab Bank an entity that provides banking and lending services and products – a service TD Ameritrade clients will now find as part of the basket of product offerings.

So is bigger better or will this be another merger that suffers from hubris and a clash of cultures? The jury is out on its verdict.

Technology is at it is best when it is ubiquitous but not obtrusive. We want access to it when we need it otherwise don’t be a bother.  This holds true for Fintechs as well. While Fintechs like Robinhood have caught the wave of digital innovation boosted by its ethos of democratizing financial services, Schwab+TD are positioned to challenge Robinhood head-on – if corporate strategy allows it to make the right decisions. We live in a world where brokerage (and bank) branches are not necessary at all. Between Schwab and TD the two companies have over 640 offices.

New services by the traditional brokerage must be part of the package. This includes access to alternative investments like crypto, real estate and non-traditional funds. Schwab recently announced a partnership with iCapital that enables wealthier clients to access alternatives. Sophisticated services need to filter down to the regular guy.

The Charles Schwab Bank is key to the success of the merger. The digital bank offers unlimited ATM fees and 0% foreign transaction fees for consumers – a big deal. Unfortunately, savings rates have lagged the competition but this can be easily addressed. Schwab needs to bring its banking services out of the shadows and promote it more effectively. The Charles Schwab Bank is also in desperate need of a digital makeover.

The combination of the two brokerages will take some time. It is not clear how the two cultures will mix. Meanwhile, Fintechs will continue to iterate, adapt, add new services and expand, unhindered by a long legacy of financial service tradition.

 

Bigger is Better or Race to the Bottom? Schwab May Acquire TD Ameritrade

Two titans in the online brokerage space are preparing to merge, according to multiple reports. Schwab and TD Ameritrade are poised to combine operations in a deal that could be finalized as soon as today for an estimated $26 billion purchase.

The move to consolidate brokerage platforms comes at a time when agile Fintechs are nipping away at online brokers – a business that once crushed traditional brokerages. The disruptors are now the disrupted, in effect.

Recently, TD, Schwab, and Etrade all announced zero commissions – a vital source of revenue for these online platforms. The strategic move was compelled by insurgent Fintechs like Robinhood that have long offered commission-free trading. In 2018, Robinhood went from 4 million users in the summer to over 6 million users before the end of the year. The rapidity of such growth represents a huge challenge to traditional online brokerages as these millions of customers must come from somewhere.

So is bigger better? Or is this a race to the bottom where the once cool, online brokerages are flailing to keep pace with innovative Fintechs. That is the question that needs to be answered. But by combining Schwab’s 12.2 million accounts with TD Ameritrade’s similar number of users, the economies of scale start to make sense. TD Ameritrade announced in October that since eliminating commissions the number of accounts jumped by a whopping 49%.  Perhaps they are on to something?

While Fintechs may have schooled old online brokerages by eliminating commissions and taking the quarterly hit it seems that brokerages get it. Change they must or whither and die. This is less about a race to the bottom than a need to remain competitive while providing new services such as access to alternative investments and other new services that may make up for missing commissions.

Currently, shares in both Schwab and TD are reacting positively. Shares in TD have jumped by 25% premarket (NASDAQ: AMTD). Schwab has moved up over 11% 13% (NYSE:SCHW). The market likes what it sees. While a day of trading doesn’t make a company, perhaps the market is onto something.

What say you Etrade?

ICO Issuers that Sold Unregistered Securities May Not Be Able to Pay Penalties Assessed by the SEC. What Happens Now?

Last week, Crowdfund Insider referred to several Securities and Exchange Commission (SEC) enforcement actions that addressed the sale of unregistered securities by issuers of initial coin offerings (ICOs). Penalties assessed by the SEC are now coming due for several prominent enforcement actions brought by the SEC. Yet, questions remain as to whether, or not, many of these issuers have the resources to cover these costs – much less any refunds driven by a recission requirement.

A report in WSJ.com mentioned the Gladius Network LLC settlement where the company self-reported its alleged transgressions. This team received a slap on the wrist for its approach. Others have not been so fortunate.

CI received a note from Philip Moustakis commenting on several of the ICO enforcement actions.  Moustakis is a former senior counsel at the SEC who investigated and litigated the SEC’s first-ever Bitcoin-related enforcement action. He is also an early member of the SEC’s Cyber Unit working closely on distributed ledger technology issues. Currently, Moustakis is counsel at Seward & Kissel LLP.

Moustakis explained that in announcing its settlement with Gladius, the SEC heralded the fact that the company self-reported its ICO, took remedial steps, and cooperated with the SEC in its investigation as reasons a penalty was not imposed.  Just a few months prior, the SEC imposed a $250,000 penalty against both Paragon Coin, Inc. and AirFox for unregistered ICOs of comparable size. All three companies in their respective settlements with the SEC agreed to return funds to investors who purchased tokens in the ICO and requested a refund.

Because there were so many ICOs of equal or greater size during the 2017-2018 ICO craze that were cut-and-dried securities offerings, Moustakis said he had expected to see a self-reporting initiative of some kind following the Gladius settlement.

“… An initiative in which the SEC offered ICO promoters who self-reported, came into compliance, and offered refunds to investors who purchased in the ICO would receive similar no-penalty settlements.  Now we may be seeing why that has not happened,” explained Moustakis.  “As a practical matter, it may not be feasible for many firms to come into compliance.  On the whole, token values have declined since the craze, meaning many investors will opt to put their tokens back for a refund.  And with many of the blockchain-based platforms linked to token offerings still undeveloped or in development, the money may not be there.”

Moustakis said that it remains to be seen whether the apparent difficulties some of these companies have with complying with their settlement agreements will color the SEC’s approach in future cases.

We contacted Moustakis with several more questions regarding what happens when a settlement with the SEC cannot be paid.

“The SEC may agree to provide a respondent with more time, which is what I would expect them to do, so long as the respondent is endeavoring in good faith to meet its obligations under the settlement,” Moustakis stated. “At some point, if the SEC determines the respondent is not endeavoring in good faith to do what it agreed to do, the SEC may seek to unwind the settlement and proceed with its prosecution.  It is also possible that the delay here is attributable to investors having some difficulty with the claims processes created in connection with the settlements, which I would also expect the SEC to work through.”

Regarding rescission offers, if an issuer cannot meet the demand of investors asking for their money back – what happens? Does the company simply file for bankruptcy?

Moustakis explained:

“Strictly speaking, the settlements do not provide for the ICO issuers to make rescission offers – which can be a lengthy and costly process, requiring additional filings – but rather an agreement to return funds to investors who purchased tokens in the ICOs and want to put those tokens back to the issuers for a refund.  It is for the SEC to enforce those settlements.  But civil suits may also follow.  Whether a suit would drive the issuer into bankruptcy would depend on the strength of the plaintiffs’ claims, the economics involved in meeting plaintiffs’ demands, and the financial condition of the company.”

Another attorney had indicated, in his opinion, that it was not practical for the SEC to assess penalties when it is pretty clear they will never be paid. Is there an alternative?

“The SEC can enter into a settlement with a respondent that does not include a penalty if the respondent can demonstrate he or she cannot pay.  However, the SEC is not in the habit of waiving disgorgement, that is, that the respondent gives up the proceeds of any securities law violations committed, in the SEC’s view,” shared Moustakis. “But here the issue appears to be that the respondents cannot follow through on undertakings to which they agreed as a condition of their settlements, namely to refund investors who would prefer to have their money back rather than keep the tokens they purchased in the respective ICOs.”

In retrospect, would there have been a better approach by regulators to have better managed the ICO craze? The DAO report appears insufficient in hindsight.

Moustakis said, that in his view, the DAO Report did just what it was intended to do:

“… it put the industry on notice that under a traditional securities law analysis, on the whole, ICOs constituted securities transactions.  There may have been those in the industry unwilling to hear that or not getting the greatest advice on the issue.  To that end, more aggressive prosecution following the report may have given the report’s message greater teeth, but the SEC has a really smart team doing this work and, often, it comes down to resources.”

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CFTC Chairman Tarbert Calls for More Principles Based Regulation for Fintech, Not More Rules

Commodity Futures Trading Commission (CFTC) Chairman Heath Tarbert published an Op-Ed today which appeared in Fortune as well as the CFTC website. Tarbert called for a more principles-based approach regarding Fintech innovation – not more rules. Tarbert said that a principles-based approach can provide the leeway necessary for technology can develop without stifling positive change.

A principles-based approach should not be misconstrued as being soft on fraud. Quite the contrary as fraud and illicit activities will always be dealt with swiftly.

The rule upon regulation approach by policymakers has, at times, crushed innovation before it could fully develop. It is this same innovation that is vital to providing better and less expensive services to the population. Fintech technology, which continues to evolve, is touching all aspects of financial services. Chairman Tarbert explains that blockchain and digital assets are changing the way the derivatives markets work.

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“We must remember that how we regulate is just as important as what we regulate. That’s why a principles-based approach is the best way to govern this emerging market. Principles-based regulation involves moving away from detailed, prescriptive rules and relying more on high-level, broadly-stated principles to set standards for regulated firms and products. Companies will then be responsible for finding the most efficient way of satisfying those standards. Such an approach affords greater flexibility to the tech sector. It will also enable the CFTC to stay ahead of the curve by reacting more quickly to changes in technology and the marketplace,” states Tarbert.

In comparison, the UK has a more principled approach to financial regulation. This has enabled the UK to foster what is widely viewed as the most robust Fintech market in the world – fueled, in part, to its regulatory environment.

Tarbert points to the extent of regulatory abuse:

“If you make 10,000 regulations, you destroy all respect for the law.” Yet Titles 12 and 17 of the U.S. Code of Federal Regulations—which together cover banking, securities, and derivatives regulation—now total over 13,000 pages.”

Tarbert believes that flexibility is key. Some areas require more rigidity such as custody. Tarbert says CFTC staff is considering how the core principles applicable to exchanges and clearinghouses “can be better tailored for Fintech.”

“Digital assets face the unique operational risk of a systems hack that could result in loss or theft. Our core principles include a requirement that clearinghouses have systems to identify and minimize operational risk,” Tarbert states. “The CFTC does not have formulaic, prescriptive rules laying out what systems are required. The agency also does not spell out how operational risk must be allocated between clearinghouses and its members and customers. Yet derivatives clearinghouses are anything but lightly regulated.”

Tarbert uses Bitcoin as an example saying the CFTC took a principles-based approach in regulating the three clearinghouses handling digital assets. A principles-based approach will also provide additional time for policymakers to watch and learn.

In the end, this is about allowing innovation to blossom helping the US maintain its competitive position within the global world of finance. If innovation is stymied domestically in the US, it will find more receptive jurisdictions that recognize the positive benefits of change and competition.

CFTC Chairman Tarbert’s Op-Ed may be read here.

Reg CF Funding Portals: 50 in Total with Several Exits and Several Additions. Is Reg CF Ready to Scale?

Periodically, Crowdfund Insider revisits the Reg CF sector of online capital formation. Reg CF or “Regulation Crowdfunding” may have garnered most of the attention from popular media but really there are three individual crowdfunding exemptions including Reg A+ and Reg D 506c.

Under Reg A+ you must file an extensive offering circular with the entire offering process costing around $300,000, according to one estimate. But Reg A+ enables an issuer to raise up to $50 million from both accredited and non-accredited investors.

Under Reg D 506c, you may raise an unlimited amount of money but only from accredited investors. This is the most popular crowdfunding exemption and Reg D (5o6c and 5o06b) is a trillion-dollar market.

Issuers using Reg CF may only raise $1.07 million and must utilize a FINRA regulated Funding Portal or a broker-dealer. Due to the low cap on funding, frequently issuers will do a side-by-side Reg D 506c offering to circumvent the extremely low amount you may raise.

Last time CI revisited the number of approved Funding Portals was in July. Since that time, several new funding portals have joined the approved list and several have exited.

Regarding Reg CF funding portal exits – two more have departed this sector of crowdfunding.

EquityBender based in Charleston, South Carolina, is no more. The domain just indicates a private site.

Seeding VR is the other exit. As the name indicates, Seeding VR was targeting the virtual reality sector. Apparently, it even attempted to launch a crowdfunding platform in the UK. Today, both domains simply time out.

This brings the total of funding portal exits to 12 with at least two the direct result of some time of enforcement action: UFP LLC and DreamFunding Marketplace.

The three additions to the list bring the total to 50 FINRA approved funding portals with one in question as Fundpaas has long been on the suspended list and is expected to join the exits.

The three recent additions include:

Fundopolis has yet to list its first offering but appears ready to launch its first issuer. According to its website, Fundopolis expects to also enable issuers to raise capital under both Reg A+ and Reg D as well.

Infrashares is described as follows:

“InfraShares is a crowdfunding platform that pools investment from individuals into large sums of development capital for critical infrastructure projects (roads, bridges, airports, mass transit, water systems, renewable energy and schools).”

This platform is utilizing Reg D as well. Currently, there are two issuers posted on the site -both under Reg D 506c.

Prospect Equity does not appear to have a live site as of yet.

As Crowdfund Insider reported in October, Reg CF has raised over $300 million in securities offerings since the exemption became actionable in May of 2016, providing capital to over 2000 campaigns. This is according to a report by Crowdfund Capital Advisors.

Overall, Reg CF can be called a success as it has helped smaller companies raise much-needed growth capital while creating new jobs. But multiple shortcomings hobble the exemption thus undermining its potential success.

First, the fund cap is widely recognized as far too low.

Average seed rounds in the US stand at about $2.2 million – typically using Reg D. A good number raise much more.

In the UK, the most robust crowdfunding market in the world, issuers may raise as much money as they want. A prospectus requirement at €8 million creates a virtual speedbump for issuers looking to raise more than that amount.

The most successful Reg CF Funding Portal, Wefunder, stated earlier this year that limitations to the exemption may make the exemption an option of last resort.

Republic, another leader in the Reg CF sector, published a letter providing the perspective from issuers that have utilized Reg CF to raise growth capital. The letter, signed by 23 different founders and CEOs of early-stage firms, indicated that Reg CF has its benefits but suffers from serious limitations.

Every industry participant has voiced their concerns to both Congress and the Securities and Exchange Commission (SEC). While some policymakers have supported common-sense updates, since 2016, little has been accomplished.

And it is not just the funding cap that undermines Reg CF.

A report by the SEC from this past summer touched upon many of the issues.

Common sense changes that allow for special purpose vehicles (SPVs) that safeguard smaller investors while making it simpler to gain access to higher-quality deals is a no brainer.

There is also the 12g trap that may compel a company to become a reporting company once it has 500 investors. A problem that is antithetical to investment crowdfunding.

The Association of Online Investment Platforms (AOIP), an advocacy group for online capital formation, has posted a position paper with its goals.

So is Reg CF ready to scale? Probably not without some changes to the rules. Many of the larger platforms now have broker dealer licenses and offer other services. Doing enough $1 million deals in a year to cover your costs can be quite difficult.

The SEC is currently going through a regulatory review, as defined by a concept release, which seeks to improve the exemption ecosystem while harmonizing the alphabet soup of rules. This may be the best opportunity the industry has to see some impactful improvements. If not, it will be up to Congress to step up and do the job. Don’t hold your breath.


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Rearguard Action: Independent Community Bankers of America Supports Closure of Industrial Loan Charter “Loophole” to Eliminate “Shadow Banking”

The Independent Community Bankers of America (ICBA) has issued a statement of “strong support” regarding pending legislation targeting Industrial Loan Charters (ILC).

An ILC is a regulated financial services charter that may be held by non-financial institutions. ILCs may hold FDIC insured deposits – a key aspect of the traditional banking system. They may also issue loans.

Fintechs have emerged to challenge traditional banks that suffer from antiquated technology, a culture averse to change and expensive brick and mortar locations that are difficult to close. In brief, Fintechs are looking to create the future of banking and banks do not like this. Multiple big-name Fintechs have explored ILCs as becoming a chartered national bank simply makes sense for Fintechs.

The Eliminating Corporate Shadow Banking Act of 2019 (S 2839) was introduced to the Senate Banking Committee yesterday sponsored by Senator John Kennedy.

The ICBA states, in a press release, that ILCs allow companies to “skirt regulatory oversight” thus “endangering consumers” without provide any empirical evidence. The Senate bill will close the gate on Fintechs accessing ILCs by altering the Bank Holding Company Act.

ICBA President and CEO Rebeca Romero Rainey states:

“ICBA strongly supports the Eliminating Corporate Shadow Banking Act to close the industrial loan company loophole, which allows commercial interests to own full-service banks, avoid consolidated supervision, and threaten the financial system. Any company that wishes to own a full-service bank should be subject to the same restrictions and supervision that apply to any other bank holding company. ICBA and the nation’s community banks thank Sen. Kennedy and urge Congress to advance this critical legislation to ensure a level regulatory playing field, maintain the separation of banking and commerce, and avoid risks for the American taxpayer.”

Last spring, Nat Hoopes, Executive Director of the Marketplace Lending Association, challenged the ICBA’s attack on Fintechs via RollCall:

“As thousands of traditional bank branches close, many communities are losing banking options. Limiting consumers’ banking choices in these circumstances is not going to help the American economy. “Digital banks” could help to fill these gaps, he said, and spur innovation from within the banking system rather than outside it. The industrial loan company charter is a long-established and well-regulated state banking option that has proven very durable, and today’s fintech companies should be able to apply.”

In reality, the genie is already out of the bottle and the ICBA probably understands this. But by causing additional delays, ICBA members may have more time to embrace digital banking.

Even if the legislation becomes law, Fintechs are already providing a host of bank-like services by partnering with traditional banks. Today, Google announced its intent to offer consumer checking accounts via a partnership with Citi and a small credit union.

At some point in early 2020, Varo Money should become the first Fintech with a bank charter to go it alone. Varo Money CEO Colin Walsh has stated in the past that traditional banks, on average, dedicate $0.60 of every dollar of revenue to maintaining overhead: employees, branches, old systems. This is the real problem for both big and small traditional banks. New legislation cannot fix this.

The ICBA will continue its battle against Fintechs. But in the end, any victory will be Pyrrhic. This is a rearguard action – one that seeks to limit competition.

Code Name Cache: Google to Offer Consumer Checking as it Pushes Deeper into Fintech

Global tech giant Google is pushing further into Fintech with the revelation of a forthcoming consumer checking service. First reported in WSJ.com, Google is expected to partner-up with Citigroup, along with a small credit union at Stanford University, to provide checking accounts. The project is code-named “Cache.” Checking accounts will be offered in 2020.

Big tech moving into financial services is a natural next step in their evolution of providing a portfolio of digital services. Google already provides payments – holding money in a current account for consumers can offer consumers a better service, perhaps paying higher interest rates than traditional banks. This is just another step in the disaggregation of financial services to become distributed and ubiquitous – available wherever and whenever you need bank.

Apple recently partnered with Goldman Sachs to offer a new spin on the credit card that complements Apple Pay.

This week, Facebook announced its own payment platform that starts in the US but expects to roll out globally.

Google will, of course, have access to the deep data generated by consumers utilizing their banking service. This data can be leveraged to provide other bank-like services such as online lending or investment/brokerage offerings. Importantly, Google says it will not sell consumer data, according to Google executive Caesar Sengupta. But they will certainly keep this information for their own usage.

Globally, big tech offering bank-like services is nothing new. In China, tech firms like Alibaba and Tencent already provide many bank-like services. In China, payments are mostly handled digitally via Alipay or Wechat pay. This week’s successful Singles Day highlights the shift from analog to digital transactions.

The challenge in the US is the posture of policymakers and the clout of old banks in lobbying against big tech getting into Fintech. By partnering with Citi, Google should be able to shield some of the parochial political vitriol. It can also piggyback on top of Citi’s bank charter to roll out additional services over time.

All of this is probably good for consumers as additional choice and competition tend to drive prices down while improving services. On the other side of the coin, the US has been slow to empower early-stage Fintechs to challenged entrenched tech like Google. A Fintech Charter provided by the Office of the Comptroller of the Currency could make it easier for agile Fintechs to challenge traditional banks. But then, old finance has fought against that since the concept emerged years ago.

Sara Hanks Comments on SEC Concept Release, Defends Reg A+, Advocates on Behalf of Companies in Need of Growth Capital

Last week, a meeting of the Securities and Exchange Commission (SEC) Investor Advisory Committee (IAC) held a meeting. On the agenda was the topic of the SEC’s concept release on regulatory harmonization.

The concept release was initiated in recognition of the current ecosystem of private securities which has evolved over time to create a convoluted and confusing amalgamation of rules and exemptions. It should be obvious to everyone that much can be improved.

The task to update and reform the securities exemption regime is monumental. If the Jay Clayton led Commission can improve the ecosystem it will be a huge accomplishment. Securities law is deeply embedded into capital markets and change is always hard but an important goal.

During the Investor Advisory Committee meeting, diverse viewpoints were shared with several panelists criticizing private markets and a relative push to make them more accessible. It is the Commission’s mission to improve both private and public markets while making them more accessible to a wider segment of both investors and issuers – while being safe and transparent.

Sara Hanks, a securities attorney, former SEC staffer and longtime advocate of online capital formation participated in the panel. She provided a much-needed boots on the ground perspective in contrast to some more academic opinions. Hanks, via her company Crowdcheck, is a leading legal services provider for exempt securities offerings like Reg A+ and Reg CF. At the end of last month, Hanks posted an extensive comment letter regarding the SEC concept release expressing her opinion as to what changes should be made.

Following the SEC IAC meeting, Crowdfund Insider caught up with Hanks to ask additional questions regarding her comments and perspective. Our discussion is shared below.


Recently you provided perspective on small companies and access to capital in the current securities exemption regime. What is the problem we are trying to solve here?

Sara Hanks: The issue the Concept Release is addressing is that there are now a number of different exemptions from registration for early-stage companies. Each of them has different conditions relating to who you can sell to, when you can start making offers, and similar matters. These can get confusing and increasingly hard for issuers to comply with. I’ve seen issuers get into trouble by following the rules for the wrong exemption, thinking that they were doing the right thing. So there has to be a way of harmonizing all these exemptions and creating a rational matrix of exemptions that make compliance easier.

You made the comment that “one size does not fit all” during a discussion regarding public vs. private markets. Please explain.

Sara Hanks: What I was trying to get at there was the fact that even when the same exemption is used, one issuer might have completely different objectives from another user, and so you can’t measure success by reference to the same metrics. In particular, with respect to Regulation A, some commentators look only at the companies that use Reg A to become traded companies, and look at their subsequent stock price, as opposed to looking at the number of companies who raise funds under Reg A and wish to remain non-traded. Some companies just don’t want a trading market for their shares yet.

How can private markets be improved?

Sara Hanks: Making compliance easier would be the biggest thing. Compliance with some of the exemptions is appalling. I’m not suggesting that we need to loosen the rules in general, just to make sure that issuers understand clearly what they are supposed to do and when. And I would like investors of modest means not to be completely excluded from the private markets, so long as someone is looking out for their interests. But to flip this question on its head, what would make the private markets “better” would be to make them smaller — improve the public markets so that companies leave the private markets earlier in their life cycle. Make it easier for companies to become and remain public companies.

You made the comment that it would be better to regulate at the sale of an exempt security. Can you elaborate on that idea?

Sara Hanks: We currently regulate both “offers” and sales of securities, and as I used to say when I taught securities law, “everything’s an offer.” That is, any statement which might “condition the market” for an offering. In many cases, when an offer is made, requirements such as the delivery of an offering document are triggered. If the offer is made through channels like TV or radio, or in print, delivery of an offering document is difficult. So it would be better to have these requirements triggered at the time of sale, when someone is actually in the process of giving the issuer money.

You defended Reg A+, a sector of online capital formation that you know well. Why is Reg A+ a good option for some issuers?

Sara Hanks: Regulation A isn’t a great option right now for companies who wish to get listed on a securities exchange, mostly for very technical reasons.

The ability for an investment bank or broker to “stabilize” the stock price and protect against short sellers is limited, especially when, as is typical under current conditions, Reg A offerings are made overtime on a “best efforts” basis. But I know several banks or brokers are looking at changing the process, so this may change in the near future. We don’t need rule changes for this to happen. But for companies who aren’t looking at listing in the near future, Reg A is a great option. It’s not difficult to comply with and the ongoing reporting requirements are not burdensome. I used to think it was a great option for all early-stage companies other than complete start-ups, but we work with a number of newly-formed companies who are very happy with the way Reg A worked out for them. That being said, the old adage “securities are sold and not bought” is still true, so you do need serious marketing efforts by brokers, a marketing specialist or your own customers or fans. We’ve seen a number of good companies withdraw their Reg A offerings because they couldn’t attract attention from the markets.

What about the criticism regarding issuers that used Reg A+ to raise capital, listed on an exchange but then performed poorly?

Sara Hanks: That’s really such a limited number of companies that I think we don’t have a meaningful dataset. I would suggest that we see what happens after banks and brokers address some of the structural issues and then re-assess the success of Reg A.

What are your expectations regarding regulatory harmonization and the outcome of the SEC concept release?

Sara Hanks: It will take far longer than any of us expect or hope!

This is a huge project the Commission is undertaking. The first step will be to redefine what it means to be “accredited,” and I wouldn’t expect to see a proposal on that before early in 2020.

Then of course, everyone will argue about the proposal, so there could be a reproposal, so we could be talking 2021 before that issue is settled. I hope I’m wrong, but so far being pessimistic on timing has generally been the right call.

Long Known for its Nominee Structure, Seedrs Adds Direct Investment Option for Issuers, Investors

Leading investment crowdfunding platform Seedrs has announced a new feature – the ability to offer a direct investment in a company raising capital online.

Seedrs has long been known for its “Nominee” structure, a type of special purpose vehicle (SPV) that benefits both issuers and investors.

By using a Nominee, issuers may better manage individual investors as the Nominee is the single legal shareholder. Communications to investors are streamlined and the cap table is minimized.

For investors, their interests are better protected. The Nominee assures investor rights such as anti-dilution clauses. Seedrs acts as the Nominee and, similar to traditional venture capital, takes a carry on any gains. Thus, interests are aligned. It is in the interest of Seedrs that the company is successful and that investors benefit from their investment. The Nominee structure has also been vital in enabling the Secondary Market which provides a path to liquidity for investors beyond a merger/acquisition or public offering.

While Seedrs has long facilitated the occasional “ad-hoc” direct investment, now Seedrs has incorporated it as an option for issuers. When launching a securities offering, issuers may decide to provide an option to invest directly and at what level an investor must participate to gain access to this feature.

Seedrs has added this feature as they recognize there is a demand among some investors to hold shares directly while not being assessed the carry fee.

Seedrs explains the process of direct investing as follows:

“Going forward, whenever a company creates a campaign on Seedrs, it will be able to specify the threshold above which it will accept direct investments. It can also choose not to allow direct investors at all.

Once live, the campaign will disclose the direct investment threshold, and any investor who elects to invest above that amount will be presented with a choice between direct and nominee holding, along with an explanation of the differences between the two.

Importantly, no investor will be forced to invest directly: investors at all levels will still be able to use the nominee if they so choose.

To the extent direct investors wish to enter into any contractual arrangements with the company in connection with their investment, they will be responsible for arranging this with the investee company.

Following completion of the investment, direct investors will oversee administration of their shareholdings, including around tax relief matters and exits, themselves. Direct investors will not have access to the investee company’s post-investment page on the Seedrs platform, nor will they be able to use the Seedrs Secondary Market to sell their shares.”

The Future of Venture Capital

Seedrs states that their mission is to “build a full-scale marketplace for investing in private companies.” This means as the platform grows it will empower not just smaller investors but larger ones. Venture capital continues to largely exist in an analog universe. Seedrs will now better be able to facilitate the needs of both smaller and larger investors. At some point, expect Seedrs to facilitate securities offerings targeting only larger investors as there will be some issuers that will inevitably prefer this path. This is all part of becoming a full stack digital VC and investment banking platform that empowers smaller investors to gain access to this asset class. Online capital formation is the future.

Between Profit and Impact: Inside The Mind of Millennial Investors

Investment has never seen anything like Millennials. This savvy, ethical and growing group consciously spend their money like no demographic before them. The impact of their dollar is just as important as the profit it generates – something investment has not been forced to consider seriously until now.

However, with great change comes great opportunity. Millennials will represent $15 trillion in assets in the US alone within two decades and demonstrate an ability and willingness to put their money where their beliefs are. Knowing what young investors want is the first step, the second for equity funding is learning how to give it to them.

The tale of the Millenial

Millennials have a different worldview because they have grown up in a different world. Born between 1980 and 2000, this young demographic has experienced a time of rapid change, giving them a set of priorities and expectations sharply different from previous generations.

The numbers speak for themselves. Nine out of every 10 millennial invests, about half of such investment goes to technology firms, and about two-thirds rank the social impact of their investment as somewhat to very important.

Further, the risk appetite of younger investors is higher than the generations before them. Affluent millennials can afford to take more calculated risks with the goal of earning higher returns, as they have the advantages of time and more money on their side. They are willing to pair their money with ethics in backing projects which balance profits against impact.

In the US, millennials will account for three-quarters of workers by 2030. Higher incomes will push the group’s spending 17 percent higher within five years while Baby Boomers (born between 1946 and 1964) will spend 10 percent less, according to Goldman Sachs. Millennials are a force to be reckoned with – and a force that needs to be convinced.

The question of Impact investments

Simply put: young investors do not trust traditional corporations. This group has lived through one of the worst financial crashes since the Great Depression and do not have much faith in traditional financial management. Couple this with the rise in global environmental concern and the Millennial mindset starts to come to the fore. This is a group for whom ethics matter. They understand the world around them and most want their money to be a force for good.

This generation may have less money to spend but embrace investments more than those before – and their investment decisions consider overall impact.

It is in this way venture capital looks like a perfect match for young investors. Startups, like Millennials, are fueled by idealism and the promise of a better tomorrow. While more than half of young investors have considered supporting startups, less than 10 percent actually commit.

So, why the disconnect? Well, there is still a risk when it comes to backing startups. Many Millennials fear to lose their money to unstable businesses or fraudulent ventures, while some lack the knowledge to enter the market. Thus, venture capital will need to position themselves in the coming years as a viable, stable investment alternative to attract young money.

The change for equity funding

Millennial investors are already bringing big changes to equity funding. This demographic, unlike their predecessors, strongly desire to back projects which actively seek positive change. In other words: successful equity funding projects going forward will need to chase profits as much as social good.

This is the same generation behind the massive growth of crowdfunding platforms like Kickstarter, helping to raise more than $4 billion for various projects since launch in 2009. Now, this demographic is reaching adulthood and prepared to back ventures which preference impact and investment experience. It should surprise no-one if these younger investors are willing to transition from reward-based to equity investment.

The fact this generation has less disposable income than those previous should not deter the industry. The Millennial investor is less interested in traditional investments and spends more in proportion to those older. Equity funding and startup founders are best advised to leverage artificial intelligence, foreground education, communicate via mobile, and present independent investment evaluations to find success with this group.

Millennials want to invest with startups, it is up to equity funding to give them good enough reasons to take the plunge.


Max LyadvinskyMax Lyadvinsky is co-founder and CEO of Bloomio an early stage crowdfunding platform connecting startups with individual investors. He is an entrepreneur and angel investor with expertise in fundraising and scaling startup teams, envisioning future technology trends, developing product strategies and innovating disruptive technologies.

EU: “No global stablecoin arrangement should begin operation in the European Union until the legal, regulatory and oversight challenges and risks have been adequately identified and addressed”

The Council of the European Union has posted a memo, or “draft joint statement,” regarding stablecoins – a hot policy topic these days due to Facebook’s attempt to launch a global, non-sovereign, cryptocurrency.

When Facebook revealed the creation of Libra, and the executive body the Libra Association, it took global policymakers a bit of time to ingest exactly what Facebook was attempting to accomplish. While the giant social media platform packaged Libra in a glow of altruism the true economic impact obviously has the potential to be far different. Facebook claims over 2 billion global users which could, potentially, migrate into the non-sovereign currency thus undermining monetary policy around the world. Understandably, both elected and appointed officials have hit the pause button on Facebook’s move to undermine national governments.

The Draft Joint Statement, in its final form, by the Council and the European Commission, will be officially submitted on December 5, 2019 to the Permanent Representatives Committee with a view to the approval by the Council (ECOFIN).

In brief, the statement declares:

“… the Council and the Commission state that no global stablecoin arrangement should begin operation in the European Union until the legal, regulatory and oversight challenges and risks have been adequately identified and addressed.”

This should effectively halt Facebook’s goal of launching Libra in Europe.

The Council and Commission believe that global stablecoins demand a “coordinated global response.”

The authors recognize the intrinsic innovation affiliated with stablecoins but the many known, unknowns far outweigh any benefits.

Perhaps the best outcome of Facebook’s ham-fisted attempt to create their own cryptocurrency is this should incentivize public entities to speed up the digitization of currency and facilitate faster payments.


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SEC Chairman Jay Clayton: Main Street investors should be able to invest in the private market on terms similar to those available to institutional investors

Securities and Exchange Commission (SEC) Chairman Jay Clayton has re-affirmed his belief that retail investors should have a compliant path to access more private securities offerings.

While initial public offerings (IPOs) have morphed into an exit opportunity for big money where retail investors end up holding the bag, and most wealth is captured in private securities offerings, Chair Clayton is looking to right this societal wrong that disenfranchises much of the population.

In opening remarks at the SEC’s Investor Advisory Committee meeting, Clayton said:

“I believe it is our obligation to explore whether we can reduce cost and complexity, and increase opportunity for our Main Street investors in this important market, including through professionally managed funds, where Main Street investors are able to invest in the private market on terms similar to those available to institutional investors. Importantly, we must ensure appropriate investor protections for our long-term Main Street investors.”

This is not the first time Clayton has expressed his opinion on leveling the playing field when it comes to investment opportunity. For some months now, Clayton has messaged his ambition to create a regulated path for retail investors to gain access to promising early-stage firms that frequently raise growth capital under Reg D – currently the realm of VCs and the very wealthy.

In the past, Clayton has also expressed his goal of addressing the definition of an Accredited Investor, which is fundamentally flawed. The current definition is widely understood as a poor metric for financial acumen and sophistication.

Clayton’s comments come at a time during a regulatory review on exemption harmonization as encapsulated in a “Concept Release.” The consultation recently closed comments from interested parties in September.

What the European Crowdfunding Industry Recommends for Harmonized EU Rules

Last month, Crowdfund Insider reported on comments by EC Vice President Valdis Dombrovskis, a Commissioner whose portfolio includes Financial Stability, Financial Services, and the Capital Markets Union, indicating harmonized crowdfunding rules may be forthcoming before the end of the year. In a tweet, Dombrovskis stated there is a “willingness to move forward and find compromises, hopefully still this year” (on investment crowdfunding).

Harmonization across all EU member states could dramatically help European SMEs and entrepreneurs access much-needed growth capital.  Platforms could operate across national borders with the assurance of a single set of regulations.

Currently, investment crowdfunding platforms must adhere to national, member state rules which vary dramatically across Europe. This fragmented ecosystem stands in stark contrast to what the European Union ostensibly seeks to achieve. Capital Markets Union has been a longstanding and obvious policy goal of Europe, but while simple in concept, the reality has been far more difficult to accomplish.

The most robust market for investment crowdfunding remains the UK – a country that will sometime soon exit Europe. While the UK platforms will continue to provide online capital formation across the continent, a single set of rules will help all involved. It will also foster competition between crowdfunding providers.

The leading voice for the sector of Fintech has been the European Crowdfunding Network (ECN) an association that has long advocated on behalf of a common-sense approach to regulation. Last month, the ECN published a position paper on what they expect the Commission should produce.

Currently, there are three proposals for regulatory harmonization as the European Parliament, European Commission and the Council have each had their say.

While it appears something (at some point) will be agreed upon, the ECN has itemized its point of view that, hopefully, the Commission will abide by as the industry understands the sector of Fintech better than anyone else.

So what does the ECN seek in final rules?

The ECN has published a position paper that outlines what the industry needs to succeed. The guidance comes in a 12 point outline of key issues. Below is a summary some of the more important aspects of the ECN’s recommendations:

  • Investment crowdfunding should be capped at €8 million. “A limit below €8 million is likely to exclude many of the types of businesses that the Regulation is intended to cover, explains ECN. Currently, the €8 million amount aligns with the prospectus requirement and is the de-facto cap utilized in the UK.
  • Conflict of interest: ECN states that it is very important that CSPs [crowdfunding service providers] be able to align their interests with those of sheir investors by investing in projects and/or charging carry as part of their fee model.
  • Investor classification: ECN believes sophisticated investors must meet one of a set of criteria to be deemed sophisticated:
    • (a) EUR 100k own funds; (b) EUR 2m net turnover; (c) EUR 1m balance sheet; and (2) natural persons that meet two of the following: (a) income of EUR 60k or investment portfolio of EUR 100k; (b) has worked in financial sector, or as an executive in a sophisticated legal person, for at least a year; (c) has carried out 10 significant capital markets transactions per quarter over past four quarters
  • Bulletin Board: This references secondary transactions. The ECN agrees that a buyer and seller should be able to transact on crowdfunded securities while stating there should not be an internal matching system.
  • Customer due diligence KYC: CSPs must apply due diligence measures including identifying the residency of an investor
  • Due diligence on issuers: ECN believes that due diligence is very important but the Parliament’s version (the only one provided) is not practical.
  • Entry Knowledge Test – consequences of failure: This has to do with risk notifications and the reality that many early stage investments have a high risk of failure. The ECN believes CSPs must warn non-sophisticated investors who fail or refuse to complete test but may still allow them to invest
  • Investment limits – There should be none.

There are other recommendations included in the position paper.

The ECN welcomes forthcoming regulation and believes it will have a positive impact on European startups and SMEs – as well as investors:

“A harmonised regime will at last make it possible for CSPs to provide their services on a fully cross-border basis within Europe, and with this will come an increase the volumes, quality and professionalism of crowdfunding across the continent.”

Now it is up to the Commission to decide what to do. Hopefully, policymakers will take advantage of this opportunity to move forward with the future of online capital formation and foster a workable and robust crowdfunding ecosystem.

The ECN Position Paper is available here.

Ron Suber Shares Perspective on Fintech: “Creating a successful digital bank is like golf and bridge – harder than it looks”

Ron Suber is one of the better-known names in the Fintech sector. Originally, Suber’s role as the President of the marketplace lending platform Prosper Marketplace brought Suber’s name to prominence as the Fintech emerged as an early leader in the US online lending market. Since departing Prosper’s management team several years ago, Suber has been associated with multiple Fintech’s as an investor, advisor or, perhaps, a board member. Today, Suber has invested in more than a dozen Fintech companies

For years, Suber’s presentations at the LendIt conferences were widely anticipated as he shared his perspective on online lending and other areas of Fintech. While he still pops up on the conference circuit periodically, Suber has made the transition from executive management to investor, entrepreneur, and advocate still in the thick of emerging Fintechs.

Suber has been a longtime source for Crowdfund Insider providing perspective and insight into the online lending sector as well as other innovative financial services firms. Recently, Crowdfund Insider caught up with Suber to hear his thoughts on a variety of topics in the Fintech industry. Our conversation is shared below.


You continue to be very active in the Fintech space. Recently, you joined the Board of Qwil. What attracted you to make such a commitment?

Ron Suber: I have thoroughly enjoyed “ReWirement” which began almost 3 years ago. It’s the period of life between full-time work and ReTirement.

For the last few years, I have been the Chairman of the Board of Credible which we funded in the Series A, follow on round, took public and recently sold to Fox.

I was looking for the next young, smart, dedicated, scrappy, coachable (full of Grit) entrepreneur to support and found Johnny. Johnny and I got to know each other as we went for numerous dog walks, beers, and breakfasts with my better half (Caryn).

I invested in the Qwil equity and debt, I like the leadership team, board, investors, products and business model so I made the decision to lean in and join the board.

I know you have a good number of Fintech investments what are some of the more interesting investments you have made?

Ron Suber:

A) AvidXchange and Docusign have been fascinating companies to be an investor in. Amazing CEO’s, huge TAM’s, rapid growth, global execution and major success after a few curvy roads along the way.

B) Juvo, Even Financial, EarnUp, Unison, and Yield Street have also been very interesting as they have terrific leaders who have pivoted to capture new, enormous opportunities presented along the way.

It has been some time now since you departed Prosper. What are your thoughts on the platform’s progress?

Ron Suber: David (CEO), Usama (CFO) and the Team have done an incredible job in getting Prosper to where it is today as a stable, profitable and multi-product platform. I just wish they had arrived a year earlier!

What about LendingClub? You have probably been tracking their progress. How do you think they are doing?

Ron Suber: It will be an amazing MBA case study and documentary movie one day. (I think
Bradly Cooper plays Scott)

Life and stock prices are all about expectations.

LendingClub has indicated it may pursue a bank license and move into the hot Digital Banking sector. What are your thoughts on that?

Ron Suber: Wanting something is easy. Saying something is easy.

Ideas and indications are a commodity…The execution of them is not. Creating a successful digital bank is like golf and bridge…harder than it looks.

[easy-tweet tweet=”Creating a successful digital bank is like golf and bridge…harder than it looks #Fintech @RonSuber” template=”light”]

Digital bank Marcus (by Goldman Sachs) has gone from a few billion in deposits to $55 billion in deposits. How do marketplace lenders compete with that?

Ron Suber: Marcus while successful (and enjoying low cost of capital) has learned that entering the space is harder, more expensive and takes longer than they expected.

We heard a lot throughout the industry that the NY Wall Street firms were better at pricing, credit, and risk than those on the West Coast but that has proven to be not accurate (so far). They too need to figure out how to generate EBITA [because] GS partners will not fund Marcus losses forever.

Do you have any thoughts on digital assets? What about Libra?

Ron Suber: The winning digital asset doesn’t exist yet and will not be created by a platform that lacks trust, transparency and government consent.

[easy-tweet tweet=”The winning digital asset doesn’t exist yet and will not be created by a platform that lacks trust, transparency and government consent #Libra #Stablecoins #Facebook” template=”light”]

What about Mike Cagney’s new startup Figure?

Ron Suber: I have been asked many times to comment publicly on this topic and will do so here for the first time.

I have known Mike for 20+ years and was an early investor in the equity and debt of SoFi. While he is controversial at times, often mischaracterized by opponents and champions, he remains to some a villain and to others a hero.

Mike admittedly made big mistakes yet remains one of the smartest, creative and driven entrepreneurs/innovators in our industry.

He fell from grace by self-inflicted wounds and has worked hard to rehabilitate himself which reminds us that America is all about second chances. He and Team Figure are clearly on a mission.

Are you planning any big moves? Will you ever go back into a management role?

Ron Suber: I may join one more Board of Directors before moving to Boulder, CO in a few years. I recently got a tattoo as a reminder not to go back into any full-time gigs. The tattoo says “ENOUGH” and the blog post explains much.

If lucky, we each get to take 200 million steps in our lifetimes.

I have learned that it’s Not the number of steps that matter but where they take you.

Open Banking: Learning Lessons from Asia

With the implementation of PSD2 in Europe, Open Banking payment solutions are starting to be rolled out across the UK and Europe.

But while the core Open Banking payment solutions are live, there is a long way to go until we see the widespread adoption of Open Banking as a payment method, particularly with use cases outside the e-Commerce environment. This is where the UK and Europe should turn an eye to the East: if Open Banking is to become a ubiquitous payment solution to rival cards, European players would be wise to study the payments innovations across Asia.

Of course, it’s not possible to evaluate Asia as a single entity. Throughout the continent, varied regulatory strategies and differing starting points means payments have progressed in different ways. As a result, we will explore the Open Banking and payments developments on a country-by-country basis.

[easy-tweet tweet=”while the core #OpenBanking payment solutions are live, there is a long way to go until we see the widespread adoption of Open Banking as a payment method” template=”light”]

Which progressive markets should we be watching?

India’s Open Banking ecosystem began with the introduction of the Unified Payments Interface (UPI) in 2016. Today, Open Banking payments are growing at a rapid pace, with UPI now enabling payments to be collected from 60 banks.  Merchants and service providers using UPI as a payment method include some of the biggest names in the country: PayTM (mega-App), Flipkart (ecommerce) and Redbus (transport).

Singapore has also matured rapidly with its Open Banking infrastructure. Starting groundwork as early as 2014, the Monetary Authority of Singapore (MAS) has driven innovation with a comprehensive, non-mandatory governance framework. This has led to banks opening access to their own data through APIs. Local banks like DBS and OCBC are some of the global leaders on Open Banking, and their customers can now access banking services and payments through a variety of platforms and marketplaces.

Meanwhile, Hong Kong’s Monetary Authority launched the first phase of its Open Banking framework in January 2019. The staged rollout started with APIs to enable new product applications, and will extend to account information and payments. Already these APIs are being integrated into 3rd party Apps, with the Octopus card (HK’s answer to the Oyster card) continuing to grow its ecosystem by enabling its customers to apply for a credit card directly through the app, while sharing data with the underwriting bank.

One country which is often touted as a market leader is China, who are undoubtedly further down the line when it comes to instant, invisible, and free payments. Giants like Tencent and Alipay have driven incredible growth in ecosystem-based payments, particularly by enabling and powering payments to micro and small merchants without expensive card technology. The comparative lack of legacy financial infrastructure has enabled these innovators to gain a foothold much quicker, with solutions focused on the underbanked.

[easy-tweet tweet=”Giants like Tencent and Alipay have driven incredible growth in ecosystem-based payments, particularly by enabling and powering payments to micro and small merchants without expensive card technology” template=”light”]

So what can Europe and the UK learn from these developments?

Firstly, the UK and Europe could expand Open Banking payments, by looking to alternatives like QR codes for certain face-to-face use cases. Indeed, China has seen the rise of QR codes which enable users to scan the code to purchase items at a store without using card details. This has led to significant growth of non-cash payment in environments where card devices are just not feasible.

While some would view QR as a retrograde step for the UK and Europe, with smartphone penetration projected to reach 80% by 2022 in the UK, we may do well to investigate the opportunity that QR codes present to the merchant and consumer to enable Open Banking within a face-to-face environment. Small corner stores, coffee shops & small restaurants, hairdressers, market stalls, charities, sporting clubs could all benefit from low-cost Open Banking solutions to support them in an increasingly cashless world.

Secondly, the UK needs to enable a faster authentication and checkout approach in order to enable Open Banking to deliver a better customer experience. To achieve this, we need a framework to enable a merchant or PSP to identify and authenticate customers, rather than relying on the banks. In India, this is done using the Government’s Aadhaar biometric IDs, so the PSP authenticates customers providing some flexibility around how or where this is done in the customer journey.

[easy-tweet tweet=”the UK needs to enable a faster authentication and checkout approach in order to enable #OpenBanking to deliver a better customer experience” template=”light”]

In the UK, banks are responsible for authenticating customers and, while most have moved to biometric authentication on mobile devices, for some banks the payment can be cumbersome. Those who still bank with one of the major high street banks may even find that to authorise a payment for the first time, they need to wait for a call from the bank in order to receive a one time password – a far cry from best in class. A shift towards enabling PSPs and merchants to authenticate the customer at a different point in the journey would enable faster, frictionless customer experiences.

Thirdly, the closed ecosystems or “mega Apps” like Tencent, Alipay and PayTM have driven some of the fastest payment Asia. These ecosystems are the types of environments where the greatest benefits from Open Banking can be extracted, with the potential to leverage both open data and payments to optimize the customer’s experience.

As Amazon continues to grow the breadth of its services in Europe, and other players look to mimic the mega ‘Apps of the East’, Open Banking solution providers should look at how they can best support these ecosystems with integrated data and payment capabilities. This would enable a customer within an App to share their data to receive better, more targeted products and, where necessary, seamlessly transfer funds from a linked underlying account into the App or a 3rd party. 

Finally, the UK could take India’s lead in its approach to infrastructure, particularly its pricing. India has a centralised, competitively priced core real-time payments capability, with a series of overlay services to provide additional functionality. For Open Banking transactions, the price paid for the underlying transaction is equivalent to ~£0.009 per transaction; this is significantly below the cost of the Faster Payments Scheme in the UK. The faster the UK can deliver the New Payments Architecture, with a more cost-effective service provider, the better off Open Banking will be.

What is Asia learning from Europe?

When it comes to the UK and Europe, there is still plenty to do to make Open Banking a complete success story. With that said, there is already a very solid foundation for innovation to progress, in large due to the strong regulatory framework that has been implemented in Europe, and particularly in the UK. 

When it comes to regulation, Asia could, therefore, look to adopt a model more akin to that of the UK and Europe.

Whilst the Monetary Authority of Singapore did not make it mandatory to share banking data, they are strongly encouraging organisations to develop Open Banking initiatives. In 2016, they published a comprehensive framework on governance, implementations, use cases and design principles for APIs.

The problem with the non-mandatory approach is the difficulty for third parties to integrate into multiple banking systems. For example, a merchant in Singapore would need to integrate into DBS’ “PayLah” open banking payments, as well as OCBC, and Standard Chartered in order to provide services to a broad set of the population. Despite only a small number of banks, this is still significantly more challenging than in the UK environment where merchants can integrate into one TPP to reach all consumers.

As mentioned earlier, in China, we are seeing the emergence of ecosystems integrating payments, wallets and a large range of other services. This ecosystem growth has aided the rapid adoption of new payment forms, but as wallet balances continue to grow and flows are incentivised to remain within the ecosystem, there are questions as to whether this is good for long-term competition. It begs the question, how easily would consumers be able to view their Alipay wallet balances and trigger payments from another App without relying on the Alipay payment infrastructure? At some point, China may benefit from a more comprehensive regulatory approach to Open Banking, in order to enable access to the underlying account and payment infrastructure and maintain competition. 

At the end of the day, we really do need the best of both worlds. There is much that Europe and the UK can learn from Asia and their innovations in the payments space. But equally, Asia’s lighter touch regulatory approaches could be strengthened to provide better services and competition for consumers.

[easy-tweet tweet=”there is much that Europe and the UK can learn from Asia and their innovations in the payments space. But equally, Asia’s lighter touch regulatory approaches could be strengthened” template=”light”]


Nick Raper, Head of Nuapay UK. Nuapay is a pioneer of Open Banking and the industry’s leading Account-2-Account payment environment. Building upon the trust, scale and experience of our parent company Sentenial – who securely processes over €42 billion every year as an outsourcing provider to many of the world’s leading Banks. Nuapay has worked tirelessly to reinvent what’s possible from a modern banking and payment solution. Raper was previously Director of Strategic Planning Group, American Express. He spent 9 years at AT Kearney where he was a Principle.

Report: Reg CF Tops $300 Million in Total Funding, 2000+ Campaigns Funded

Crowdfund Capital Advisors co-founder Sherwood “Woodie” Neiss is tweeting that Reg CF (Regulation Crowdfunding) has now topped $300 million in total funding, providing capital to over 2000 campaigns.

Reg CF, part of the JOBS Act of 2012, is a securities crowdfunding exemption where issuers may raise up to $1.07 million. Funding may take place on either FINRA regulated funding portals or via broker-dealers. Today, there are well over 40 funding portals but the bulk of crowdfunding activity is concentrated in a handful of early leaders. According to CCA, Wefunder, StartEngine, and SeedInvest are the top three.

Much of the funding is finding its way to California followed by New York, which is most likely due to more concentrated startup ecosystems.

Reg CF became actionable in May of 2016 – four years after the JOBS Act became law. It took some time for the Securities and Exchange Commission to publish final rules.

While early results are encouraging, as jobs are being created and smaller companies are gaining access to capital, the exemption could accomplish much more if a few regulatory adjustments were made.

Earlier this week, the US House of Representatives approved by voice vote the Crowdfunding Amendments Act of 2019. You may read more here but the legislation addresses a couple of obvious shortcomings in the existing law.

One pressing, but obvious issue, is the funding cap. Today, seed rounds average $2.2 million in the US. Some higher-profile companies have raised far more. Some advocates believe that Reg CF funding should be capped at $20 million. Others, perhaps $10 million and a few at just $5 million. Regardless, it should go much higher from where it currently sits.


House of Representatives Passes the Crowdfunding Amendments Act by Voice Vote

The US House of Representatives passed HR 4860 or the Crowdfunding Amendments Act by a voice vote today thus indicating broad bipartisan support. The bill was part of a grouping of five financial services bills each quickly approved by the House.

The bill was introduced by Representative Patrick McHenry (D-NC), Ranking Member of the House Committee on Financial Services, and Representative Maxine Waters (D-CA), Chairwoman of the House Committee on Financial Services.

McHenry commented on the passage of the bill:

“We all agree small businesses and entrepreneurs are America’s true job creators. This is especially true in communities I represent in western North Carolina. But today, America’s small businesses are still struggling to find capital. Small business lending from traditional banks continues to decline, and small business loans in America’s small towns are less than half they were merely fifteen years ago. Investment crowdfunding is one way we can reverse this concerning trend.”

The Crowdfunding Amendments Act improves upon “Regulation Crowdfunding” or Reg CF by addressing several well-known shortcomings of the law.

In 2012, McHenry wrote the original bill (part of the JOBS Act) to legalize investment-based crowdfunding, making it easier for businesses to raise capital.

This bill is said to fixe crowdfunding’s “12-g problem” by raising the asset threshold for both small businesses that already have revenue, and for those startups that do not, making it more likely that high-growth companies will consider crowdfunding as an option for raising capital.

Additionally, the bill addresses single purpose funds (or SPVs), which are currently not permitted by the SEC. S

“Single-purpose funds” allow main street investors to invest along with more sophisticated lead investors who have an obligation to advocate for their best interests, meaning better terms and greater transparency for investors.

Empirical information regarding the investment crowdfunding industry has proven that combining sophisticated money alongside retail investors can improve results for these same investors. A special-purpose vehicle can act as a single entity to better manage shares held by retail investors while safeguarding the rights of these individuals.

Perhaps the biggest area that is not addressed in the bill is the arbitrary cap on Reg CF which remains at a paltry $1.07 million.

Today, the average seed round in the US is about $2.2 million. Some exceptionally promising early-stage firms raise much more.

If a company seeks to return to a crowdfunding platform and raise a Series A round – it is then difficult to use Reg CF. Smaller investors may be cut out of the equation and, even worse, see existing shareholders diluted by newer investors.

In the UK, the most robust investment crowdfunding market in the world, the cap on crowdfunding is effectively set at €8 million (USD$8.875 million). In the UK, numerous early-stage firms have leveraged crowdfunding and then moved on to become Unicorns – private companies with valuations in excess of $1 billion.

In July of 2018, a letter from prominent Fintech industry members was sent to SEC Chairman Jay Clayton requesting the exemption be increased to $20 million.

Recently, the Association of Online Investment Platforms (AOIP) published a position paper demanding the exemption be increased to just $10 million. Members of the AOIP visited with staffers in Congress this past September advocating on behalf of Reg CF and more.

Regardless of the pressing need to increase the funding cap (and some other issues), Representatives McHenry and Waters should be lauded for moving this positive legislation through the House Financial Services Committee and ushering it to a successful floor vote.

Now it is up to the Senate to act and take advantage of this bipartisan bill.

Still Hope for Harmonized Crowdfunding Rules in Europe before End of the Year?

For some years now there has been a discussion at the European Commission regarding harmonization of online capital formation rules. Today, crowdfunding is regulated at the member state (national) level creating a mish-mash of European regulations that defy the entire concept of a single market – the entire reason the Europe Union was created.

To quote the EC:

“Investment is one of the 3 pillars of the EU’s economic policy priorities along with fiscal responsibility and structural reforms. The European Commission encourages the financing of investment in Europe through a wide range of financial programmes and instruments.”

Specifically on crowdfunding:

“The European Commission is working to help investors and businesses seize the potential of crowdfunding and make it easier for platforms to offer their services EU-wide.”

In a speech from February 2019, EC Vice President Valdis Dombrovskis, a Commissioner whose portfolio includes Financial Stability, Financial Services, and the Capital Markets Union, had this to say:

“In the crowdfunding market, for example, domestic regulations are hindering platforms from expanding across national borders. But as you know, you need a crowd to crowdfund. So this is one of the areas we have taken action. Last year, we proposed to allow EU crowdfunding platforms to operate across the EU based on a single license. This proposal is currently with the European Parliament and the Member States.”

Dombrovskis noted that EU rules already allow certain financial companies to operate in all member states with a single license. This has benefited some Fintechs like Transferwise, a payments and money transfer Fintech and emerging stealth bank. In fact, Dombrovskis highlighted the fact that Transferwise saw the ability to passport their services across the EU, unlike the United States where, obtusely, you need a license for Transferwise to operate in each of the 50 states.

But while you can leverage investment crowdfunding in all 50 states with one of three “federal” securities exemption, the same cannot be said of the Europe Union and its 28 member states which encompasses over 500 million individuals and tens of thousands of SMEs.

The Commission’s Fintech Action plan includes crowdfunding regulation (as well as blockchain, AI and more) as one of its goals.

But while there has been a fair amount of discussion regarding a regulatory update for crowdfunding that should be fairly simple to accomplish there has been a paucity of action.

Last week, Dombrovskis tweeted that there appears to be a “willingness to move forward and find compromises, hopefully still this year” on crowdfunding. Perhaps there is light at the end of the tunnel? 

Dombrovskis added in his speech from last winter:

“for European companies to freely access the Single Market we need one set of rules. So this is what we are working on, sector by sector …”

It is hard not to agree.

The EU already has a rule in place where securities issuers are not required to produce a prospectus until they top €8 million in funding but the specific decision is still left at the member state level. Effectively, the prospectus rule has set a base point for securities issuers that raise capital online. In the UK, the most robust crowdfunding market in Europe, crowdfunding issuers frequently near the €8 million amount. If the Commission can follow the UK’s lead for continental Europe and streamline the regulatory process – it will certainly be a positive accomplishment for Fintechs, online capital formation, and European companies in need of growth capital.

German Law Professor Proposes Legal Solutions for Problems Posed by DLT and Blockchain

Dr. Matthias Lehmann, chair for civil law, private international law and international business law at the University of Bonn, has published a paper proposing localized legal solutions to problems posed by transnational distributed ledgers (DLT) and blockchains like Bitcoin.

According to a blog post regarding the paper, blockchains poses two problems (“endogenous” and “exogenous”) when it comes to the law.

Bitcoin, the blockchain that popularized most others, is designed to operate with no arbiter.

In the absence of third-party oversight, transactions are locked in by the software. Once sent, transactions on Bitcoin cannot be reversed or forcibly recovered by the sender as the recipient now has total control of the funds.

Examples of endogenous problems (problems inherent to the blockchain) may include a sender making a mistake recording or transposing a recipient’s crypto wallet address resulting in the wrong party receiving the tokens or currency.

Other conceivable endogenous problems, though Lehmann does not mention these, include potential software failings such as bugs in smart contracts (not uncommon) and/or hacks.

Exogenous problems (problems outside the blockchain) include, “opening of insolvency proceedings or a succession into the estate of the holder of crypto assets.”

As such, “The widespread use of virtual currencies and other crypto assets may lead to problems that have been well-known for centuries in private law,” Lehmann writes.

Bitcoin and other crypto networks are a traditionally underground affair, whereby hardscrabble and technically-proficient aficionados address risks of mis-sends by observing careful best practices around copying, pasting and double-checking addresses.

Hardcore cryptonauts also reduce the risk of hacks by storing the majority of their cryptocurrency and token holding on hardware wallet devices. These are essentially specialized thumb drives not accessible by Internet.

Crypto aficionados have traditionally cherished the perhaps erroneous idea that their holdings are “unconfiscatable.”

In fact, there are several criminal cases on the books now in which judges have successfully coerced accused hackers and fraudsters into turning over alleged cryptocurrency proceeds of crime.

The main tactic there has been a threat of a long prison sentence imposed.

But as crypto attempts to go more mainstream, 3rd party service firms hoping to profit from the sector seem to be looking for ways to make crypto more closely resemble standard finance.

These firms are offering insured custody of crypto. These firms can negotiate reversals because their customers trade crypto proxies such as futures while the custodian holds the actual pools of crypto and makes adjustments on a standard ledger database controlled by them rather than a public blockchain.

Lehmann proposes that issues involving mis-sends, bankruptcy, and estate transfer, “…can be resolved by (local laws enshrining) the obligation to make a transfer. For instance, a person who has received a certain amount of Bitcoin by error could be obliged to send back the same amount. A transfer obligation may also be the remedy of choice to effectuate the rights of an insolvency administrator or the heir of an estate.”

According to Lehmann:

“(T)he UK Financial Markets Law Committee has made a number of proposals for factors connecting the DLT to a legal system. They range from the choice of the governing law (dubbed ‘elective situs’) to the place of the relevant operating authority (‘PROPA’) to that of the primary residence of the coder.”

However:

“These factors work best for permissioned networks with a governing authority and a number of identified nodes. They do not, however, provide an answer for permissionless networks where the coder is unknown, such as Bitcoin. In the latter case, there seems to be no other solution than to renounce the identification of one particular governing law. Instead, different national laws should be applied that correct blockchain records where necessary. For instance, the law of torts is the appropriate instrument to rectify the consequences of a coerced transfer, and the law of restitution could be used to ordain the retransfer of crypto assets sent by mistake. These laws can be easily identified using the classic connecting factors, such as the place of the tort or the place of enrichment, because they point to facts outside of the blockchain.”