Alliance54.com » Crowdfunding

How Can Crowdfunding Scale In Sub-Saharan Africa?

Tue, 05 Jul 2016 00:03:48 +0000

It will have been difficult to ignore the exponential growth in crowdfunding over the past five years. In a relatively short period of time the industry has become an established and credible source of funding for small businesses and start-ups globally explains Will Tindall, Co-Founder of Emerging Crowd. In 2013, more than $6 billion was raised through crowdfunding platforms, and in 2014 an impressive $16.2 billion. When the results for 2015 are released, volumes are expected to more than double again, to reach $34.4 billion and by 2025 it could be as much as $96 billion . The industry has now surpassed venture capital and angel investing in total volumes raised; this is quite a feat considering it was a relatively unheard of concept not so long ago! Despite this phenomenal international growth, crowdfunding’s potential in sub-Saharan Africa (Africa) has yet to be unlocked. Small and medium-sized enterprises (SMEs) and startups, which account for the vast majority of growth and jobs on the continent, suffer acutely from a lack of access to capital. Meanwhile, China and India are gradually becoming middle class nations?—?thanks in part to entrepreneurial value creation. Business growth stages and capital needs The lack of an angel investing culture or any scaled venture capital offering means the “funding gap” is even more barren across Africa. This is widened further by the lack of entrepreneurial and support networks that exist in the likes of the US and Europe. An adapted crowdfunding model has the potential to address this head-on, but before the panacea can be reached, some sizeable hurdles and misconceptions need to be addressed: Regulations All investment-based crowdfunding must to be strictly regulated and platforms should be required to follow guidelines to ensure that investors are protected and the sector is able to grow. Often the guiding principles are around the implementation of robust anti-bribery and corruption, anti-money laundering and financial sanctions procedures. This is paramount to prevent an early upset. To address the increased risks associated with investing in Africa, platforms need to be properly regulated by international regulators who have built specific frameworks for crowdfunding. This also enables platforms to demonstrate that their issuers have adhered to the highest international standards before being marketed to investors. Overcoming Asymmetric Investor Information Frontier market investors often assume, sometimes rightly so, that they aren’t always privy to the full set of company facts. It is vital that platforms undertake deep-dive financial, commercial and legal due diligence on all prospective issuers and that this information is fully disclosed to investors. The “wisdom of the crowd” is often relied upon in developed markets, but with fewer participants and a less efficient exchange of information, platforms need to do the heavy lifting and be able to display high-quality enhanced diligence. Experienced analysts should be able to perform comprehensive company analysis as expected of companies in developed markets. For crowdfunding to reach a meaningful size, opportunities must to be seen as investments as opposed to punts! Investor Protection Simple minority investor protections such as pre-emption rights and tag-along rights should be provided as standard across all platforms – without this, investors may miss out on their fair share at an exit and this could lead to a PR disaster. We all know that start-ups and SMEs are likely to fail more frequently than established companies. There can be many commercial causes for this and savvy investors should be able to consider the risk-return trade-off before committing. What isn’t considered a fair risk by investors is if a company fails as a result of malfeasance. A platform that wishes to win the trust of its clients and deter fraudulent activity, must be able to demonstrate that it can pursue appropriate and enforceable legal action on behalf of its investors. A recent USAID study showed that over 24 million Africans abroad use the web to search for investment opportunities in their home country. Crowdfunding has the potential to become a conduit for this and to become truly transformational. To enable this, African platforms need to foster a culture of trust and transparency within their online communities. If this can be achieved, crowdfunding could bridge a significant part of the existing funding gap and African entrepreneurs will be able to build local economic ecosystems and drive prosperity. By appsafrica

For Investors, Is Alternative Finance Collaborative or Disruptive ?

Mon, 13 Jun 2016 15:49:41 +0000

Rather than trying to supplant banking and venture capital, a collaborative model is emerging where digital platforms work side by side with traditional investors

Today we take a a look at the investor side of the alternative finance market, which is comprised of both retail and institutional investors. We foresee that equity crowdfunding, like debt-based P2P lending, will continue to evolve and attract ever more institutional investors going forward, boosting deal volumes and injecting more professionalism in the market.

The slashing of interest rates globally in the wake of the 2008 financial crisis pushed retail investors to look to non-traditional investments to boost returns. This major development boosted the popularity of the alternative finance market as an asset class. Since then, the increased access afforded by the online investment model has meant that the industry has secured its position alongside more traditional asset classes, drawing the interest of institutional investors.

As it stands, the investor side of the alternative finance market, incorporating both debt and equity, is made up of both retail and institutional investors. As the alternative finance market moves upstream, drawing larger more established SME issuers, institutions are becoming more involved. These institutions are investing in the space both through platforms and in the platforms themselves.

Retail

Retail investment into the P2P market has been primarily driven by the low interest rates available globally on bank deposits. When factoring in inflation rates, the picture for savers becomes even worse. In the UK for example, with interest rates at 0.5% after the financial crisis and inflation at around 2% up until recently, in real terms, capital deposited in banks was decreasing in value. Compared to the rates on offer from various different P2P platforms during the same period, it is easy to see why alternative lending has become so popular for consumers.

Other key drivers for P2P lending include: the diversification benefits brought about by incorporating new asset classes into a portfolio; consumers general dislike of banks as a result of their perceived role in the global recession; and the ability for investors to choose exactly where their capital goes.

The story with retail equity investment is similar – it is the outsized returns from private company investment that draws investors. But aside from this, the key driver for equity crowdfunding’s rapid growth is the increased access to a previously severely restricted asset class. For relatively small qualifying amounts, investors can now gain access to a market that has been traditionally out of the reach of most ordinary people. The low qualifying amounts also mean investors can spread their investment over a number of companies and lower overall portfolio risk.

Prior to the introduction of equity crowdfunding platforms, it was notoriously hard for individuals to invest in private companies. Legislation made it illegal for companies to advertise that they were raising funds, meaning they could not post it on a website or on social networks, making it hard for investors to identify which companies were in need of capital. Other ways were to invest were via an angel network or venture capital firm, but both are prohibitively expensive for the majority of people.

Institutional Investment

Thus far the alternative finance sector has seen a divisive split between the characteristics and development of equity versus debt-focused platforms. Debt platforms have outpaced equity offerings in the pace at which they have been adopted by institutional investors. In fact, many P2P lenders, such as Lending Club, Funding Circle, and Prosper, already have direct funding lines to banks. Arguably one of the reasons that the P2P lending market is comparatively more advanced than the equity crowdfunding market is that the offering is more advanced for institutional investors. Tools are more complete and allow institutions to more easily analyse investments, assess risk and execute deals. Platforms such as Orchard and PeerIQ, make the investment process simpler and more transparent. The short-term returns available through platform-based lending should also not be overlooked as a factor driving this trend. The ready adoption by institutional investors helps explain why debt platforms have received more media attention and outsized valuations, such as Lending Club’s $6.42Bn valuation as of June 2015. However, equity platforms now look set to catch up with debt platforms as they increasingly attract institutional investment.

When it comes to equity crowdfunding, a more complete offering that better serves the need of institutions is starting to emerge. As more data providers and marketplaces come online, allowing institutions to better source and evaluate deals, institutions are becoming more involved. Newer hybrid, co-investment models are evidence of institutional participation alongside the crowd.

One of the major trends in the financial markets has been ever-later IPOs by large, successful, young businesses. This has meant that investors, especially on the institutional side, such as those from hedge funds and mutual funds, are having to invest in companies when they are still private in order to see the outsized returns they used to earn from investing at the IPO stage. A number of developments are making such investing more viable and fluid.

Firstly, aside from the increased access that equity crowdfunding platforms afford investors, they are also able to massively reduce the time it takes for investors to make decisions. Platforms do a lot of the legwork by condensing all the investment articles into one place and save the investor the time it takes to reach out to a company themselves. They can also offer guidance in the form of pre-vetted deals and by being able to view the other investors in a deal.

Additionally, the growth of platforms like SecondMarket and Founder’s Club, makes it easier than ever for investors to commit capital comfortably, allowing investors to enter and exit positions in a similar way to what they have grown accustomed to in public markets.

All of this informs our view that equity crowdfunding, like debt-based P2P lending, is going to attract ever more institutional investment moving forward, boosting deal volumes and professionalising the market. Some institutional investors may even go a step further, investing in the space by buying the platforms themselves.

By Michelle Tang

Nordea Bank launches crowdfunding platform in Finland

Fri, 10 Jun 2016 04:28:47 +0000

The Nordic financial services group offers a technology bringing together investors and startup businesses

The Finnish arm of Sweden’s Nordea Bank will be the first Nordic bank to offer businesses access to the crowdfunding market by launching a technology platform in the summer of 2016.

The technology will enable investors to provide capital for growing businesses through automated processes – a major change for a bank as it will not be providing the capital but enabling other organisations or individuals to do so.

Startup businesses are increasingly turning to crowds for financing – the European crowdfunding market topped €6bn in 2015.

“Digitisation is transforming the banking industry and we want to be part of that transformation,” Topi Manner, CEO of Nordea Bank Finland, told Computer Weekly. “We will offer startups and growth companies the chance to find funding through a digital platform and bring together investors and companies in need of financing.”

The financial middle man

The platform, Nordea Crowdfunding, will operate an investment model where investors receive a proportion of the company’s shares in return for funding.

Nordea will not give investment advice regarding companies on the platform, instead only acting as the intermediary in the process.

Nordea has developed the service together with IT company Futurice and post-trade services provider Euroclear Finland, which manages the country’s digital register for securities ownership.

“This means we have been able to integrate the platform with the book-entry system in Finland (which records ownership),” said Manner.

Furthermore, while the crowdfunding platform is separate from Nordea’s online banking services, data will be visible on a customer’s online bank after being transmitted by Euroclear Finland.

Nordea originally planned to build the service on a cloud-based platform entirely independent from its core IT, but claimed financial regulation made this too complex. Consequently, the platform is currently hosted on the bank’s servers and will be moved to the cloud when suitable technology is found.

Growth sector

Nordea has timed its market entry to coincide with the introduction of a Crowdfunding Act in Finland, scheduled to come into force on 1 July 2016 and aimed at establishing legislative ground rules for crowdfunding, clarifying the responsibilities of different authorities, as well as increasing financing options for small- and medium-sized enterprises (SMEs).

The legislation will also ease the regulatory burden on the intermediaries in investment-based crowdfunding and improve investor protection.

Manner said new legislation and growing demand for crowdfunding services were the key reasons why Nordea was launching the service first in Finland.

In 2015, the Finnish crowdfunding market grew by 48% year-on-year to reach €84.4m. Equity crowdfunding represented €15.5m of this amount.

Nearly two-thirds of bankers believe retail peer-to-peer (P2P) lending will be available via banking platforms soon. In the UK, Metro Bank announced in 2015 it was offering loans through P2P lending platform Zopa and RBS struck a deal with P2P lenders Funding Circle and Assetz Capital to refer them to small business customers.

Manner said the trend of new digital forms of funding and lending will only grow. He added a major part of digitisation is mediation, as companies such as Uber and AirBnB merely mediate taxi and accommodation services.

“The same applies to financing. A greater share of financing will be digitally mediated between investors and those in need of funding,” said Manner. “A bank’s balance sheet won’t be tied up any more. Instead, the bank acts as the intermediary. This is what we are trying out and learning more about this market.”

By Eeva Haaramo

Thank you for visiting Alliance54. Are you aware of the Crowdfunding Africa Forum? As traditional banks like Nordea Bank are already embracing Crowdfunding, adjusting their operations and adapting to the ever-changing financial system which in this case is spurred by the trend; the growing challenges and lack of clarity calls for an understanding of the why, how, when and who. At the Crowdfunding Africa Forum where these issues will be addressed, you will have the chance to learn, understand, internalize, meet and network with the industry shapers. Download the Brochure now >> Click here

Crowdfunding Industry Overtakes Venture Capital and Angel Investing

Wed, 01 Jun 2016 09:35:56 +0000

By 2016 the crowdfunding industry is on track to account for more funding than venture capital, according to research firm Massolution’s annual report. With an estimated market value of $34 billion in 2015, crowdfunding has come a long way since its valuation of $880 million in 2010.

In comparison, the VC industry invests an average of $30 billion each year. Meanwhile the crowdfunding industry is doubling or more, every year, and is spread across several types of funding models including rewards, donation, equity, and debt/lending. In particular, equity crowdfunding – now being legalised in the US – holds huge disruptive potential.

Crowdfunding industry growth figures, as reported by Massolution

The crowdfunding market grew by 167% in 2014, continuing the exponential growth of previous years. Two months ago the thriving British FinTech (financial technology) sector witnessed its first billion-dollar business. The company? Funding Circle, a five year-old crowdfunding platform. Their $150 million funding round was over-subscribed.

It should come as no surprise that a crowdfunder is the first business in the booming world of FinTech to break through the billion-dollar mark. Small businesses are finding it harder than ever to raise money from traditional sources. Quite simply, banks don’t seem up to the task. New bank loans to small businesses in Europe plummeted by 35% between 2008 and 2013. Meanwhile, crowdfunding platforms are enjoying huge support from policymakers in the form of tax breaks, and from institutional investors looking to diversify their portfolios.

Crowdfunding is moving mainstream. So, what does this mean for older, more established types of business financing?

Venture capital overtaken

The World Bank estimated that crowdfunding would reach $90 billion by 2020. If the current trend of doubling year over year continues, we’ll see $90 billion by 2017.

VC funding, a well-travelled avenue for small businesses trying to raise capital, accounts for roughly $30 billion a year. Angel investing, meanwhile, accounts for roughly $20 billion a year. In short, the crowdfunding industry is scaling up rapidly with VC and angel investing firmly in its crosshairs.

Note: growth figures of the entire crowdfunding industry

Interestingly, the crowdfunding sector with the most potential for disruption is yet to truly take off. If, as expected, equity crowdfunding doubles in size annually over the next few years, it will overtake venture capital as the largest source of startup funding by 2020 ($36 billion). Equity crowdfunding in Europe has been flourishing for several years, while the US – the birthplace of crowdfunding generally – has been slow in legislating for its introduction.

Currently the US equity crowdfunding market is limited to accredited (professional) investors only. But what happens when an entirely new class of investors – namely 250 million Americans – are empowered to participate and invest for the first time under new equity crowdfunding laws? In theory this would more than double the current European-dominated equity crowdfunding market.

The potential growth and impact is staggering.

How will angels & VCs respond to equity crowdfunding?

What will the market for startup investing and small business finance look like as equity crowdfunding continues to grow? And are VCs embracing the changes?

It’s fair to say that crowdfunding was originally looked down upon by professional investors. Some angels and VCs have begun integrating equity crowdfunding as a step in their investment strategy. Increasingly we’re seeing startups in talks with bigger investors after a successful crowdfunding campaign, as fund managers scout platforms for interesting ideas.

The lines are being blurred across the early stage investment ecosystem – some equity crowdfunding platforms are effectively becoming venture funds of their own. Meanwhile, VCs are integrating equity crowdfunding into their investment processes due to the marketing and strategic benefits it can bring.

What’s for sure is that the real winners are the high-growth entrepreneurs who have more sources and channels for finding capital than ever.

A giant new capital market is taking shape before our eyes.

By Louis Emmerson, Editor-in-Chief, Symbid

London Turns to Crowdfunding to Open Up IPO Market

Tue, 31 May 2016 00:05:29 +0000

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.

Some British executives and academics have called for better use of new technology to widen access to IPOs.

The traditional IPO process is “preindustrial,” Paul Myners, the former financial services secretary to the U.K. Treasury said last April.

There hadn’t been much technological innovation in IPOs because “entrenched interests” were resisting change to a business model that suited them, Mr. Myners said. “Too many people’s rice bowls are at risk,” he said.

By Max Colchester and Simon Clark of WSJ

AIG Introduces Equity Crowdfunding Insurance For Investors

Thu, 26 May 2016 13:02:38 +0000

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.”

Thomas also added that crowdfunding insurance is indicative of a maturing industry;

“We think that this is another clear indication of the growth and evolution of equity crowdfunding. While we hope that there isn’t actually a need for the policy, it is promising that global giants like AIG are building and marketing products specifically for the sector.”

Investment crowdfunding has taken various forms in the US. Unlike most other countries, there are currently three iterations of ranging from Reg CF to Title II accredited crowdfunding. AIG did not provide details on which variants may participate. Additional details on the coverage and cost were not available on the AIG web site.

By Samantha Hurst

Crowdfunding helps Europe’s businesses boom

Wed, 25 May 2016 13:25:30 +0000

Crowdfunding is no longer a niche, it’s booming in Europe. In this edition of Business Planet, from Finland, Serge Rombi finds out how these platforms work and what makes a successful campaign.

Crowdfunding: a big deal

“Global crowdfunding was more than 30 billion euros last year,” Lasse Makela, CEO of the Invesdor crowd-funding platform, told euronews’ Serge Rombi.

“It’s growing by more than 100 percent per year. And it’s going to be larger than venture capital financing this year.”

Crowdfunding puts sparkle in drinks company

In the autonomous Aland islands in the Baltic Sea, a family-run SME produces 100 percent natural lemonade, using only local products.

In 2014, Tony Asumaa – founder of Amalias Limonadfabrik – realised that he needed to expand production and he immediately opted for crowdfunding.

“We chose crowdfunding because it was cheap, efficient, fast and, above all, non-bureaucratic – to get new capital into the company,” he said.

Through Lasse’s platform, Tony won more than 86-thousand euros in equity crowdfunding.

In other words, those who invested in his company are now shareholders.

“We have 163 new shareholders. As our ambassadors, they promote our products, they sell them. Some restaurant owners sell products throughout the country,” said Tony.

Thanks to the fundraising, Tony Asumaa will soon automate part of his drinks production.

He wants to drive up sales from 90-thousand to 200-thousand euros.

For Tony, it’s given his SME new impetus, but it’s a way of boosting the regional economy too.

“The most important thing for us is to use local, raw materials, fruits and berries,” explained Tony.

“We export 40 percent using local transport services and we’ve created new jobs for young people here, on Aland.”

How do you seal crowdfunding success?

Lasse Makela said Tony’s success is down to a “good idea.”

“He had a good team behind him, and then there was some growth potential for the business. But also willingness and resources to do a good marketing,” Lasse added.

Serge Rombi, euronews: “Lasse, there are 600 crowd-funding platforms in Europe. Yours is the largest in the Nordic countries. How do you choose the right platform?”

Lasse Makela: “Well. It’s really about the experience. Choose the company who has a lot of transactions in the past. But also, it’s about the licences. Choose the company who has the proper licences. And this can be checked by the local authorities of that country.”

And if you want to learn more about the different forms of crowdfunding – both the benefits and risks – there’s a European practical guide online and free.

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

Mon, 16 May 2016 09:19:20 +0000

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?

Should entrepreneurs keep the crowd intuition tap running after funding?

When business angels and VCs invest in a business they usually take a seat on the board. They want to keep an eye on the performance and direction of their investment and, more importantly, use their contacts, knowledge and experience to advance the business. A pool of crowd investors will probably include some sophisticated investors that have the know-how and contacts useful for the business. But there are, thus far, limited tools and processes that can take full advantage of this asset.

Adzuna, the jobs search engine, acquired a long list of successful investors from its crowdfunding round, including CEOs, executives and founders from many well-known names. At the time, Adzuna said it was looking at making use of the expertise and connections of its new investors, but wasn’t sure how it could do that.

Many entrepreneurs know they could and should be exploiting their crowd of investors but have no premise for it and so this resource goes untapped.

If the crowd is comprised of 10-20 investors, communication and information flow would be easy to administer, however if the crowd is made up of hundreds or even thousands of investors then the issue of creating an open and constant dialogue with investors becomes time-consuming and expensive.

Structures or mechanisms for companies to communicate with their crowd investors are emerging; some platforms are providing a “post-raise” area and there are suggestions in some quarters for a representative of the crowd to be appointed as a director or board observer. The designated crowd director would be charged with the communication flow between crowd investors and the company executives indefinitely.

As the alternative finance industry grows and crowdfunded businesses become more commonplace, might we see a new concept emerge, “crowddirected” enterprises?

By Altfi

The Fix Crowdfunding Act is Mostly About Investor Protection

Tue, 10 May 2016 10:06:22 +0000

Last week the House Subcommittee on Capital Markets, part of the powerful House Financial Services Committee, debated several important bills that may boost access to capital for SMEs. One of the bills, the Fix Crowdfunding Act (HR 4855), has the profound potential to turn Title III crowdfunding (Reg CF) into something quite powerful by addressing several shortcomings prescribed in existing rules. But probably the most important aspect of the Fix Crowdfunding Act is the fact that it will incorporate significant changes that will dramatically enhance investor protection while providing improved opportunity for smaller investors to generate wealth.

While much of the discussion regarding HR 4855, sponsored by Congressman McHenry, lined up along party lines, what was striking was the disconnect between the empirical and the speculative. Several Representatives expressed a “wait-and-see” approach – something that may do their constituents harm. The Fix Crowdfunding Act should be pushed forward quickly – for the benefit of all.

Why Wait?

A major criticisms of existing Title III rules is one of negative selection. While the intent was to protect those individuals who could least afford to lose money, the cumbersome rules may ironically do the exact opposite. The law of unintended consequences is at play here. Using Reg D, the most popular securities exemption, is a far easier method of raising capital. All you have to do is make certain your investors are accredited (wealthy). As the thesis goes, some of the companies raising capital under Title III will be businesses that were unable to raise smart money using Reg D. If the VCs or professional Angel investors aren’t interested perhaps you can convince the “crowd” of retail investors.

One of the most glaring shortcomings of existing Title III rules is the inability to use a Special Purpose Vehicle or SPV. An SPV can be a legal entity where a group of individuals invests in a company while being represented as a single investor on the cap table. Small companies need to be spending their time building their business and not dealing with the whims of every small investor. At the same time, a bloated cap table may be a disincentive for future investors to come on board. The SPV, if allowed to be structured correctly, may allow a professional investor to help guide smaller investors along the way. This approach has been described as the “killer app” of equity crowdfunding by MIT Sloan Professor Christian Catalini. His research has correlated nicely with some of the most successful investment crowdfunding platforms around the world.

Not too long ago I had the opportunity to speak with a founder of one of the most successful equity crowdfunding platforms around. The company spends an incredible amount of time in due diligence. The platform lists securities where you can invest side by side with some of the most famous investors in the world. This is where smaller investors should want to allocate their risk capital and, in fact, the results have been pretty impressive. Asked about whether or not Title III incorporation is on the horizon the founder stated he would love to but unfortunately cannot, mentioning specifically the lack of an SPV. Once again, the small guy gets shut out.

AngelList is a global pioneer in internet finance. Since platform launch, AngelList has matched hundreds of millions of dollars from accredited investors into early stage startups. Their syndicate structure (which uses an SPV) has allowed smaller, accredited individuals to join along with professional investors thus combining the pros with the (accredited) ordinary Joes. During the subcommittee hearing last week, Kevin Laws, COO of AngelList, shared his real-world experience explaining to the subcommittee members;

“This bill [HR 4855] … simply brings the protections afforded to accredited investors to the unaccredited investors where they are likely to be even more necessary.” [emphasis added]

And who would be against that?

Retail crowdfunding is not only about providing access to capital for SMEs but investment opportunity to a wider audience. Congress should create an exemption that the very best companies seek out – not just the last company to be selected for the team roster.

It is a fact that most wealth is vacuumed up by professional investors in private companies before trading on a public exchange. This fact means the current IPO market has become more of an exit instead of an entrance as small IPO’s have all but dried up. While the cause of this phenomena is multi-factorial, much of this has to do with the economics of going public. These days the most promising companies remain private as long as possible raising capital in successive private funding rounds. The graph below, courtesy of Andreessen Horowitz, is a visual depiction of the enigma. You would think our elected officials would want to help alleviate this glaring inequality – one that continues to exacerbate the problematic wealth gap.

The other provisions of the Fix Crowdfunding Act such as enabling “Testing the Waters”, so an issuer can gauge investor interest before launching (and paying for) an offering is an obvious fix. And increasing the funding amount to $5 million is a common sense change. There are other positive elements in HR 4855 that can turn an OK exemption into a truly promising one. While I have great confidence the Title III market will launch with fanfare and a solid deal flow, it is incumbent upon our policy makers to do what they can to make things better. Having interacted with many of the platforms intent on leveraging Title III retail crowdfunding, I know they will do what it takes to make it work.

Investing in early stage companies is a risky endeavor. Many small firms will inevitably fail, and investors will lose money. But that is how capitalism works. As it stands now, the deck is stacked against retail investors. Turning the Fix Crowdfunding Act into law will help address many of the existing shortcomings while improving access to capital and opportunity for all investors – both large and small.

By JD Alois

View the bill at https://fr.scribd.com/doc/307458976/Fix-Crowdfunding-Act-BILLS-114hr4855ih

PayPal drops purchase protection for crowdfunding

Sun, 08 May 2016 09:42:18 +0000

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.

PayPal issued the following statement about the change:

In Australia, Brazil, Canada, Japan, United States and other countries, we have excluded payments made to crowdfunding campaigns from our buyer protection programs. This is consistent with the risks and uncertainties involved in contributing to crowdfunding campaigns, which do not guarantee a return for the investment made in these types of campaigns. We work with our crowdfunding platform partners to encourage fundraisers to communicate the risks involved in investing in their campaign to donors.

Gone are the days of pledging your support for a potato salad, safe in the knowledge that you’ll be protected even if the mayonnaise is subpar. It was a simpler time.

By The Verge and Claire Reilly