Equity Crowdfunding in the Eurasian Economic Union (EAEU)

The aim of this article is to provide a comprehensive research and analysis about fundraising through equity crowdfunding or crowdinvesting compared to venture capital and other forms of equity financing in the Eurasian Economic Union member countries. The relevance of the research is conditioned with the fact that equity crowdfunding is one of the fastest growing capital raising platforms and has become a popular financing option for start-ups and early-stage companies. Analyzing generally accepted methods for evaluating early-stage companies, the authors propose to use the venture capital method combined with scenario analysis for determining the value of companies in order to raise funds on equity crowdfunding platforms. The statistical data of the EAEU countries were researched on macroeconomic development, stock markets, fintech, etc. This market is expected to grow year by year, but results show that for now it is still underdeveloped in the Eurasian Economic Union member states. The conclusion is that several regulatory and institutional reforms can enable the growth of equity crowdfunding, thereby diversifying potential sources of equity financing for start-ups and early-stage companies. The suggested approach can be applied by regulators.

intrODuctiOn Finance technologies (FinTech) are among the fastest-growing markets. They beat many other industries by the pace of development both in terms of financial performance and the number of endconsumers.
The financial services industry is being transformed by insurgent startups very quickly, each year more companies are becoming unicorns, getting higher equity funding, and exiting through IPO. The need to raise capital is one of the largest financial services subsectors, where equity crowdfunding platforms are utilizing the power of technology to create a new source of funding start-ups.
Equity crowdfunding is a platform where startups or early-stage unlisted private companies raise capital from the crowd by selling the securities (shares, convertible note, debt, revenue share, etc.) to investors. Unlike in traditional crowdfunding platforms, investors in equity crowdfunding expect to make a profit if the company which they chose for investment grows. In traditional crowdfunding campaigns, companies raise capital by selling their products and once investor receives the product, the sides have no obligations against each other. Equity crowdfunding provides investors partial ownership of a company where investment was made [1,2].
There are many scientific publications covering equity crowdfunding from different perspectives and scientific aims, from emphasizing the role of policy implementation and regulation for equity crowdfunding [3,4] to researching the operational side and outreach factors in developing countries via collecting and analyzing the data from different stakeholders of an ecosystem through surveys [5][6][7]. Other scholars are looking at the equity crowdfunding through the prism of how it influence and strengthen the entrepreneurial finance ecosystem [8][9][10]. The capital structure and rates of returns for crowdfunding ventures and portfolios is another area of the recent research [11][12][13]. All these scholars to some extent agree that equity crowdfunding can become a useful complement to the start-up ecosystem and serve to the interests and demands of different stakeholders from business angels and investment community to start-ups.
To achieve its aim, the rest of this paper is organized as follows: Section 2 presents equity market overview of the EAEU (Eurasian Economic Union) member states. Section 3 describes the state of the global crowdfunding industry and how platforms operate in a sample of one of the leading platforms -Seedrs. Section 4 analysis the crowdfunding industry in the EAEU member states. Section 5 discusses the valuation of early stage ventures for equity crowdfunding campaigns. Section 6 summarizes the key challenges, opportunities, and the future of the equity crowdfunding industry in the EAEU member states. Finally, Section 7 concludes this work, lists the key findings and results.

eQuitY MarKet OVerVieW Of tHe eaeu ( euraSian ecOnOMic uniOn ) MeMBer StateS
The Eurasian Economic Union (further refers to: EAEU) is an international organization for regional economic integration providing for free movement of goods, services, capital, and labor, pursues coordinated, harmonized and single policy in the sectors determined by the Treaty and international agreements within the Union, including creation of a single services market and protocol of financial services. The memberstates of the Eurasian Economic Union are the Republic of Armenia, the Republic of Belarus, the Republic of Kazakhstan, the Kyrgyz Republic and the Russian Federation 1 . Some macroeconomic indicators determining the sustainability of the economic development of the EAEU member states, 2018 ( Table 1).
The macroeconomic indicators shows there are divergences in both life standard (Russia and Kazakhstan are 7 times higher in GDP per capita than Kyrgyzstan) and fiscal policy (Armenia and Kyrgyzstan have deficit, while other the EUEA states have surplus, Armenia and Kyrgyzstan have 5 to 6 times higher government debt to GDP ratio compare with Russia).
This difference imposes additional challenge for the union in the pursuit of further integration of institutions and markets.
Russia is the highlighted leader in FinTech industry, where Kazakhstan is trying to catch-up, while other states, being comparably small economies, are still far from creating competition ( Table 2) Equity markets in the EAEU countries are still behind debt markets in total volumes ( Table 3).
Russia has the most developed equity market among the EAEU states. The equity markets consists of public equity and private equity, mainly PE & VC funds (     n/a n/a Kyrgyzstan n/a n/a n/a n/a n/a n/a In 2018, the volume of PE and VC investments dropped to USD863 million, from that of USD1,492 million in 2017. The major stake, USD801 million, of 2018 investment went to the expansion stage PE and VC investments, USD16 million was Seed and Start-up stage investments, USD26 million -to early growth and another USD16 million -to later-stage investments ( Table 5).
It is worth mentioning that in 2018, invested capital was a tiny fraction of committed capital of the funds, which is an indication of both weak demand from early and later-stage start-ups and scale-ups for institutional private funding and underdeveloped ecosystem for entrepreneurial finance.
There were exits of the total amount of USD76 million in 2018 in the Russian private equity market, of which USD73 million were sales to financial investors and USD2 million MBOs. The number of PE exits were 10, while VC exists were 20 ( Table 6).    2016, which provides investments in the amount of 25 million roubles for projects in the early stages and up to 140 million roubles for companies in the growth stage. Its total size is 1.4 billion roubles. The investors of the fund are the Belarusian Innovation Fund (Belinfond), RVC and RVC Infrafund that at the first stage invested 50%, 49%, and 1% respectively 5 . The development of the venture capital ecosystem in the EAEU is not rapid. Unlike the leading countries in this area (such as China, USA, and UK), the EAEU and particularly Russia's venture funds have recently started making deals in the acquiring markets. However, every year, more and more venture deals are made, new funds are formed, and ventures get their desired investments. As for 2018, among the EAEU countries, Russia has the most attractive VC and PE market according to "The Venture Capital & Private Equity Country Attractiveness Index" ( Table 8).
There are no available public data regarding the private equity returns of the EAEU member states PE and VC funds. Bain & Company in its recent report found that over the past 30 years, US buyouts have generated average net returns of 13.1%, compared with 8.1% for an alternative private-market performance benchmark, based on the Long-Nickels public market equivalent (PME) method and using the S&P 500 as the proxy. While a narrower look, just after the 2009 recession shows that the US public equity returns (IRR) matched the buyouts (later stage PE funds) returns at around 15% [14]. 5 RBF Ventures. URL: https://rbf.vc/news-en/325/ (accessed on 18.02.2020).

State Of tHe GLOBaL crOWDfunDinG inDuStrY anD HOW pLatfOrMS Operate
Broadly speaking, crowdfunding can be divided into four main categories: • Donation: funders as philanthropists that don't expect any direct return for their donations (e. g., Go-FundMe, Kickstarter).
• Rewards-based: funders are expecting to get rewards/compensations in the form of final products, services (e. g. Indiegogo).
• Lending: funds are offered as a loan, with the expectation of some rate of return on capital invested (e. g., Lending Club, Funding Circle).
-P2P lending: investors and borrowers are individuals.
-P2B lending: investor is an individual, borrower is an entity.
-B2B lending: investors and borrowers are entities.
• Equity: funders are treated as investors, having participation in the projects (e. g., SEEDRS, Crowdcube, AngelList, CircleUp, OurCrowd) [15]. The term equity-based crowdfunding or crowdinvesting defines a variety of transactions where an unspecified number of investors come together in order to invest in a well-defined purpose. The following segment exclusively considers equitybased crowdfunding: investments in equity shares or profit-related returns (for example, royalties or convertible loans). Crowdinvesting has become a popular financing option for start-ups and is considered as a part of venture capital financing. Well-known platforms in this area are EquityNet, CrowdCube and Seedrs.

internatiOnaL finance
Global equity crowdfunding (crowdinvesting) data: • Transaction value in the crowdinvesting segment amounts to USD5,800.2 million in 2020.
• Transaction value is expected to show the annual growth rate (CAGR2020-2023) of 11.4% resulting in the total amount of USD8,014.6 million by 2023.
• The average funding per campaign in the crowdinvesting segment amounts to USD112,615 in 2020.
• In terms of global comparison, it is shown that the highest transaction value is reached in China (USD1,209 million in 2020) 6 . As shown in Fig. 1, equity crowdfunding global market is expected to grow year by year. It is expected that in 2020 top 5 equity crowdfunding markets China, Israel, United States, United Kingdom and Netherlands collectively will generate about 75% of the global crowdinvesting transaction value.
Equity crowdfunding global market transaction value and a number of campaigns (Fig. 1).
Seedrs is one of the leading platforms in the UK and comparably is one of the leaders in terms of the amount raised in the platform globally. It is a platform for investing in the equity of fast-growing startups and scale-ups.

Create a video and marketing plan -The
campaign video is one of the most important tools to engage the crowd by showcasing the business, team and current investors. At the same time prepare a marketing plan for warming up the investors.

Private launch -Shareholders, consumers and
your network have the exclusive opportunity to invest before anyone else when the campaign launches privately.

Public launch -If the campaign demonstrates
traction during the private launch, they will publish it for all to see on Seedrs. Campaigns run for up to 40 days. Once public, it's important that you get as many potential investors to see the compaign as possible.

5.
Campaign hits 100% -After hitting the target, the campaign can stay open to take advantage of overfunding. After closing a round, Seedrs performs legal due diligence on the company and prepares documentation.

6.
Receive all funds -Once that's all completed, the amount raised in the fundraising campaign is transferred, less Seedrs fee 7 .
The process of submitting a campaign at Seedrs consists of 4 steps: • Campaign submission -Entrepreneur submits the campaign copy to Seedrs.
• Initial screening -Campaign is reviewed to ensure it is viable, appropriate and engaging. 7 SEEDRS website. URL: https://www.seedrs.com/raise (accessed on 02.03.2020).  • Detailed verification -Each statement is reviewed, and initial due diligence is performed.
• Campaign live -Once campaign meets the standards; it's approved and becomes available for investment.
Seedrs' latest Portfolio Update (2012-2017) shows that "on a fair value basis, early-stage and growth equity investing on Seedrs has produced outstanding annualized rates of return (IRRs)".
Platform-wide IRR12.02% exceeds that of most asset classes, and it increases to 26.42% when impacts of SEIS and EIS tax reliefs are taken into account.
There is a general optimism towards equity crowdfunding and there is a strong intuition, that it democratizes entrepreneurial finance. One research found that equity crowdfunding opens a diverse investor base, democratizing capital access for entrepreneurs [16]. Other studies found that equity crowdfunding mitigates market frictions in geography [17], entrepreneur gender [18], venture scale and sector 9 .
Further, in large campaigns, angels take the lead, with the crowd following and filling their funding gaps, while in small campaigns, crowd plays a more pivotal role in campaign success while angels generally lack the interest.
In another recent interesting research conducted by Hellmann, Mostipan and Vulkan the following conclusions have been made: i) fundraising goal is highly important, ii) experienced teams (entrepreneurial experience & education) are asking for more, are more likely to be successful and raise more money, iii) female teams (especially all-female teams) ask for less, are equally successful and raise less money (but hold out for longer) [19].

crOWDfunDinG inDuStrY in tHe eaeu MeMBer StateS
In the first nine months of 2019, the volume of the Russian crowdfunding market (the total volume of 9   internatiOnaL finance transactions in all segments) amounted to USD76 million, decreasing by almost 42% compared to the same period of 2018.
In 2019, the Russian B2B FinTech lending market registered the largest drop of 80.5% (USD12.5 million in 2019 compared to USD64 million in 2018). The declining trend was observed for more than a year -in 2017, the volume of this segment amounted to USD92 million.
The volume of the Russian P2P lending market in 2019 decreased by 70% (from USD3.9 million to USD1.2 million) compared to the previous year.
However, the largest crowdfunding segment -P2B lending -on the contrary, grew by 2.5% in the first nine months of 2019 compared with the same period of the previous year and reached USD59.8 million. The growth was not as explosive as a year earlier, when the volume of the segment in annual terms increased by 4.4 times.
The rewards-based segment also grew slightly by 2.3% up to USD1.93 million in 2019 10 .
The main reason for the reduction of the crowdlending market in Russia is competition among banks.
Equity crowdfunding or crowdinvesting is still underdeveloped in Russia and the other EAEU mem-10 URL: https://www.rbc.ru/finances/18/11/2019/5dcd55c19a7 94751a1a5c3ca (accessed on 12.03.2020). ber states. There are few equity crowdfunding platforms in Russia, e. g. StartTrack and Simex, while in the rest EAEU member states such platforms either do not exist or are in the stage of early formation (Fig. 2).
The EAEU member states (excl. Russia) mainly have rewards and donation crowdfunding platforms, with an underdeveloped crowdlending and crowdinvesting markets ( Table 9).
There are no public data regarding the returns for the early-stage ventures, who raised funding equity crowdfunding campaigns in the EAEU.

VaLuatiOn Of earLY StaGe VentureS fOr eQuitY crOWDfunDinG caMpaiGnS
Obviously, the early stage ventures are highly risky investments and the valuation for such investments can be approached similarly with the early stage VC valuation techniques. Despite that valuation is often looked at as art, rather than science, there are three widely used techniques for the early stage valuation: • discounted cash flow (DCF) approach; • scenario analysis (multi DCF); • "venture capital" method [20].  Total bust** 30% Source: assumptions based on industry practices, compiled by the authors.
* This scenario means that the cash flows forecasted in the base case scenario are halved due to the uncertainty and over-optimistic expectations.
** Given the high risk of a venture, there is probability of total write-off of the firm.
where: r -is the rate of discount; g -is the growth rate; t -is time to exit; TV -is the terminal value.

Scenario analysis (multi DCF)
Multi DCF techniques also use the same DCF equations for calculating present value of future cash flows of the firm. The difference is, that there is one base-case scenario in the DCF technique, which could be over-optimistic and/or not represent main outcomes of potential scenarios.
For example, a venture can have several scenarios and assigned probabilities to them ( Table 10).
Both DCF and scenario analysis (multi DCF) techniques are highly sensitive to the terminal value and to the discounting rate. Given that the early-stage venture's cash flows are not highly predictable, then for partially mitigating the uncertainty with the terminal value the scenario analysis (multi DCF) technique has a higher accuracy rate compared to the DCF technique.
Furthermore, the terminal values' share in the present value of the discounted future cash flows of the venture frequently counts somewhere between 70% to 90%, which shows high subjectivity of the assumptions underlying the DCF approach. The multi DCF approach can partially bypass this problem by assigning weights to the different scenarios regarding the future of a venture.
"Venture capital" method The venture capital method (sometimes also known as First Chicago Method) is a technique which blends both multiples-based valuation and DCF approaches.
The formula for VC method is: where: E t -is earnings (income) at the time of exit; P/E ratio -is the price to earnings ratio for similar ventures (or estimated); r -is the required rate of return; t -is the time of exit. Earnings (income) at the time of exit is a highly subjective prediction, but given relevant market data regarding exits of similar firms in the industry, it can be based not so much on the optimistic views of the founders regarding their ventures, but more on the relevant market data. The calculations of ratios for similar ventures are still challenging given the lack of sufficient market information in the EAEU member states.
The rate of return, used in all three early-stage valuation techniques, as already mentioned is highly sensitive regarding the value of a firm and is considered as a black box for many entrepreneurs.
There is a common practice in the Silicon Valley ecosystem to apply discount rates in the range of 50% to 70% for early-stage start-ups.
Applied discount rates for an early stage ventures can be explained by the modified capital asset pricing model (CAPM) [21], with the additional risk premiums associated with the early-stage ventures.
The formula is: β × (market risk premium) -is the systematic risk premium, for the sensitivity of the return on the stock to the return on the market as a whole; R l -is the liquidity premium, for investing in the private company, which compared to the investment in the public company stock is characterized by illiquidity, defined as the inability to convert the holding to cash at their full value in a reasonable period of time; R va -is the value-added by a venture capitalist, who is an active investor and mentor to the firm they invest in. They usually engage in the process of high-level decision making regarding the strategy, C-level executive team hiring and firing; R cf -is the cash flow adjustment premium. Given that the nature of a start-up venture requires reinvestment of generated cash flows, there are highly limited options for an investor to get some cash inflows during the period prior to the full or partial exit of a firm.
The beta and market risk premium could be calculated based on the Russian stock market data and be used for the other EAEU member states through the country and currency risk adjustments 11 . The premium for the liquidity and cash flow adjustment to some extent can also be calculated based on comparison with more liquid investments, while the valueadded premium is highly subjective.
The venture capital method can be deployed with the scenario analysis approach for testing to what extent the discount rate and the assumption regarding earnings (income) at the time of exit are affecting the outcome of the value of a venture.

cHaLLenGeS, OppOrtunitieS, anD tHe future Of tHe eQuitY crOWDfunDinG inDuStrY in tHe eaeu MeMBer StateS
The equity crowdfunding industry in Russia and the other EAEU member states face some challenges, but also, there are opportunities for a potential entrant (further referred to as Platform), which is intending to dominate the EAEU market [22]. Supply and demand-side economies of scale: the platform should gain enough projects, as well as attention from the crowd quickly to benefit both from an economy of scale and gain its market presence. There are significant costs of branding and marketing, as well as operational costs for a platform, which can be breakeven if a critical mass of projects and the crowd gathers around it. Demand-related projects have very limited time to raise funds, if the platform is a waste of time, they will better directly go to VC funds and angel investors.
Customers switching costs: from a perspective of funding alternatives, there are no major switching costs from a platform to a VC or an Angel investor as soon as the project has its pitch deck and valuations. Although in the process of already launched crowdfunding campaigns, the switching costs are relatively high, since the platform will already or in accordance with the conditions charge a project fee for listing.
Capital requirements: the launch of a new equity crowdfunding platform requires significant costs of marketing and branding; the development of the platform requires a business model and solid algorithms.
Incumbent advantages independent of size: track records in the industry are critical for gaining new projects to be listed at the platform, while an 11 One of the open sources for such analysis is the Aswath Damodaran's calculations. URL: http://pages.stern.nyu. edu/~adamodar/ (accessed on 12.03.2020).
innovative business model can disrupt the status quo of incumbent players and the market.
Bargaining power of suppliers: in the majority cases, platforms are operating peer to peer without any intermediary organizations and individuals. While advisory firms can be treated as suppliers of valuations and management advisory services, which can affect the decision-making process and value chain of the fundraising at the platforms.
Bargaining power of investors: the information regarding listed projects at the platforms is very limited, it is practically impossible for an investor to conduct due diligence of a project, and campaigns are open to unsophisticated investors. The sequential nature of crowdfunding may include pledge herding, abstention herding, and information cascades, which affects the rationality of investment decisions and/or investors' actions.
Threat of substitute funding sources: VC & PE funds, alongside Angel Investors, are dominating the equity funding industry. On the flip side, the picture is changing in developed countries, especially in the UK, where the share of equity crowdfunding is growing rapidly in comparison to the growth rates of PE & VC funds. Thus, this innovative financing alternative could gain even faster penetration in the EAEU if the infrastructure, ecosystem, and regulation play in favor of this FinTech area.
Impact of new legislation: for boosting equity crowdfunding industry in the EAEU states, new legislative reforms are required, particularly addressing the following issues: • tax incentives; • procedures for ensuring that the public understands the basics of investing in start-ups (e. g. investors self-certification after tutorial and quiz); • regulatory focus on disclosures on investors' side; • standardization of valuation, adoption of industry-standard International Private Equity Valuation (IPEV) Guidelines.
Rivalry among existing competitors: at the first stage, the competition will be wider, the platform should compete with existing VC & PE funds, which will be tough and intense competition. As the case with the Russian crowdlending shows, the peer-to-peer lending market dropped significantly in 2019 due to the intense competition from the Russian banks softening the process of SME lending.
In the second stage, after the formation of the equity crowdfunding industry and gaining a solid market share of equity capital allocation, the competition will switch more between the platforms. The more agile, innovative, better positioned from the branding and marketing perspective, user-friendly platforms will have the potential to gain a competitive advantage from enabled capabilities of the industry and the business model particularly.
cOncLuSiOn Finance technologies markets are growing rapidly. Among them equity crowdfunding is one of the fastest growing capital raising platforms worldwide. Crowdinvesting has become a popular financing option for early-stage ventures and is considered as a substitute to the traditional venture capital financing and Angel investment. The popular global crowdfunding platforms are Eq-uityNet, CrowdCube, Seedrs, AngelList, CircleUp, OurCrowd. Top 5 countries with developed equity crowdfunding markets in the world are China, Is-rael, United States, United Kingdom and Netherlands.
Equity crowdfunding is still underdeveloped in the EAEU member states, and there is no dominant player in the market. Among 5 EAEU countries, only Russia has a few equity crowdfunding platforms. The rest of the EAEU countries have mostly rewards and donation crowdfunding platforms. The valuations of projects on the crowdfunding platforms can be conducted by deploying three widely used techniques: DCF, scenario analysis (multi DCF) and the venture capital method, while we suggest using the latter with the blend with the scenario analysis approach using the modified CAPM formula discussed in this article. Furthermore, legislative reforms are required for boosting the equity crowdfunding industry in the EAEU member states and for enhancing competitiveness of this form of funding and consequently diversifying the spectrum of funding sources and instruments for start-ups and early-stage companies.