London Turns to Crowdfunding to Open Up IPO Market

London Stock Exchange Group PLC is turning to a crowdfunding platform to give small-time investors in the U.K. access to initial public offerings, a market which is largely the preserve of institutional investors and rich individuals.

The LSE made Syndicate Room Ltd. a member of the exchange on Monday, allowing the startup’s customers to invest in IPOs and private share placements.

The move, the first of its kind in the U.K, aims to democratize the process of investing in companies coming to market in a response to criticism from smaller investors that they are often frozen out of these deals in which shares are often sold at a discount.

Depending on the IPO, Syndicate Room could allow investors to put sums of a few hundred dollars into listings via its website.

Other exchanges are already in on the act. In Australia On-Market Bookbuilds flags upcoming IPOs to members who can participate. Last year J.P. Morgan Chase & Co. and Motif Investing Inc., an online brokerage, joined a program to allow individuals to invest as little as $250 in IPOs.

The battle to open up the U.K. IPO market could prove long. Currently only a few initial public offerings include a tranche reserved for retail investors. Previous efforts to draw in a wider community of investors during the dot-com boom floundered as smaller investors lost money on sinking stock prices.

The U.K.’s Conservative government is trying to rekindle former Prime Minister Margaret Thatcher’s vision of a shareholder democracy. Thousands of retail investors bought shares when the government privatized various U.K. public companies in the 1980s.

That enthusiasm for IPOs hasn’t lasted. Some 12 million people in the U.K. population are estimated to own shares, but more than three quarters of those didn’t take part in initial offerings of stock last year, according to Syndicate Room. The U.K. government hoped to sell shares this year in Lloyds Banking Group PLC, one of the U.K. lenders bailed out in the financial crisis, but it has postponed the plan given volatile markets.

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AIG Introduces Equity Crowdfunding Insurance For Investors

Global insurance provider, American International Group, Inc. (NYSE: AIG), has announced the launch of a new insurance vehicle, Crowdfunding Fidelity, which was developed specifically to protect investors on equity crowdfunding platforms against issuer fraud. The launch of AIG’s new insurance comes just a little over a week after Title III / Reg CF rules of the JOBS Act went into effect enabling issuing companies to raise up to $1 million online. These rules allow anyone to invest in early stage companies via a registered crowdfunding portal or broker dealer.

According to AIG, Crowdfunding Fidelity protects investors against the theft of issuer assets by issuer directors, officers, or general employees which cause a direct loss to the individual investor. The coverage is currently available to platforms in the UK and Canada. As other countries finalize regulations for companies to raise capital, this policy can be customized to local needs of equity-based crowdfunding platforms.

Alexander R. Baugh, head of global casualty business at American International Group, Inc., stated:

“Crowdfunding Fidelity is a great example of how AIG learns together with the industries and clients it serves to better meet their strategic needs. We are looking forward to building similar relationships with other platforms across the world and to expanding our offering to this sector.”

The company also revealed that Eureeca, an equity crowdfunding platform registered in the UK and based in Dubai, is the first platform to purchase the coverage and make this protection against issuer fraud available to investors.

Chris Thomas, Co-Chief Executive Officer and Founder of Eureeca added,

“The new power of the crowd and the desire to democratize investing throughout the world can unleash great partnerships. The success of the ecosystem depends on collaboration between all stakeholders. AIG has demonstrated its commitment to being a valued insurer to this new industry by engaging the crowdfunding space at such an early stage.”

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Investors Committed $15 Billion To Social Progress And Profit In 2015

Impact investing just keeps growing.

Most investors today are interested in making lots and lots of money. And many people, as they earn lots of money, decide to give to charity. But somewhere between pure profit and pure charity is a relatively small but growing movement of investors who seek financial, environmental, and social returns of their investments all at once. They are called impact investors, and their ranks are continuing to grow.

Co.Exist has covered the emergence of the impact investing sector over the last decade, from something that no one had ever heard of to a phenomenon that governments around the world are now working to actively encourage.

The latest annual survey from the Global Impact Investor Network (GIIN) shows this strength. According to the organization, which surveyed 158 major impact investors, there are now at least $77 billion assets under management that qualify as impact investments, and a total of $15 billion committed in more than 7,500 deals in 2015 alone. This is not an estimate of the entire global market, which is difficult to measure, but a good idea of its strength. Importantly, nearly 90% of all respondents said the financial performance of their investments were “in line with or above expectations.”

“The data show impact investing is no longer a nascent market,” writes GIIN CEO Amit Bouri.

It’s hard to compare this data to prior years’ surveys, because the sample sizes were different. Still, the evidence points to slow growth. Prior years showed $60 billion under management in 2015, and $46 billion in 2014.

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The next step for crowdfunding: “crowd-directing”?

Investors today have access to a wider variety of investments than at any other time in history; the rise of the alternative finance industry has democratised investment, and unquoted equity is no longer just the preserve of finance professionals and industry insiders.

We now have unprecedented access to investments, and crowdfunding platforms give us the ability to evaluate, question and guide the offers and the entrepreneurs. This open forum is forging an era of investor education and knowledge-sharing which some people believe is contributing to the success of the enterprise.

According to the Altfi 2015 report Where are they now? over 80% of the companies that crowdfunded between 2011 and 2013 are still trading. Of these, many have raised further capital at higher valuations – and one has even realised a return for investors. This compares favourably alongside an October 2014 report by the insurer RSA that found that 55% of UK small and medium-sized enterprises did not survive five years.

Is the survival rate better for crowdfunded companies because the crowd contributes to its success and collaborative decision-making is better at picking a winner? Or is it too soon to judge?

In his 2004 book, The Wisdom of Crowds, James Surowiecki suggests that a large group of reasonably informed and motivated people is able to make better decisions than a small group of experts.

The book suggests that the view of a crowd is more accurate than all but a handful of individuals and that no individual is able consistently to make decisions superior to those of the crowd.

Surowiecki’s work was published long before crowdfunding was conceived, and its findings changed the business’ understanding of leadership and management. However, as the premise emerges that crowdfunded companies are more successful than non-crowdfunded companies should we should we revisit Surowiecki’s findings and examine again why diversity works?

If we agree that the crowd is more capable of selecting successful businesses than business angels, venture capital partners (VCs) and traditional financiers, are entrepreneurs missing a trick if they then forget about the crowd after funding?

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PayPal drops purchase protection for crowdfunding

PayPal has announced plans to eliminate its Purchase Protection coverage for customers who give money to crowdfunding projects. The new policy takes effect on June 25th, 2016, and says “payments on crowdfunding platforms” are ineligible for protection. The broad move could be a response to the well-documented frequency of fraud and failure on crowdfunding platforms — one Kickstarter study found that 9 percent of all its projects failed to deliver rewards.

PayPal may also just be hoping to clear up some of the confusion that has surrounded its support for crowdfunding platforms so far; both creators and buyers have reported stumbling over PayPal’s terms. PayPal technically treats crowdfunding and “preselling” differently, even though crowdfunding projects often essentially function as preorders. As Glenn Fleishman reported on Medium, one of Kickstarter’s largest failures led to a messy refund situation where some customers who preordered the Zano drone outside of Kickstarter received their units first, and were able to receive refunds, while people who tried to receive chargebacks through Kickstarter were rejected.

The new policy means that people who use PayPal to support crowdfunding projects won’t be able to recoup their money by disputing the charge — meaning PayPal won’t provide relief if a project fails to deliver, delivers a broken product, or is completely fraudulent. The change mostly impacts Indiegogo; Kickstarter payments were already not protected by PayPal. (Kickstarter itself also does not take any responsibility for fulfilling rewards, and does not permit people who funded successful projects to request chargebacks.) We’ve asked PayPal to explain the reason for the change, but it’s likely the company just doesn’t want to assume the risk from crowdfunding’s ongoing trust problem.

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