For all the skeptics who think crowdfunding is a fringe idea, today I attended an event at the New York Stock Exchange about crowdfunding – yes, you read correctly, THE NYSE AND CROWDFUNDING, together. It may seem incongruous to match the two, representing seemingly polar extremes, but the fact is that accredited investor crowdfunding platforms are providing an entirely new source of capital for startup and early stage companies on the path to IPO.
One of the sponsors and speaker from OurCrowd, Jon Medved, described how he knew we were in a brave new world of finance when one of his first offerings had an investor commit $50,000 after spending seven minutes on the site. We are at a point of no return, the interesting part will be to see how the different models develop over time.
I see the market for accredited investor crowdfunding developing in several ways:
The fully curated platform – where the issuers are carefully screened before being given access to the platform—such as OurCrowd, which takes an equity stake in the issuers and offers some support functions typical of angel investors, such as seasoned professionals to sit on the board, mentoring and strategic introductions. By their nature these sites are highly selective, and as the financial resources to invest are finite, these sites will have limited capacity.
The platform of curated companies where the platform does not take an equity stake or offer managerial support. These sites may have the capacity to make their platform available to more issuers than the fully curated + investment + support model.
The open model where the platform simply provides the tools for any issuer to offer its securities to its accredited investor base.
The hybrid model, such as SeedInvest, which has a tiered system of access that combines aspects of the fully-curated site with the open model.
The accredited investor platforms can be available to both US and non-US companies, and if set-up correctly to adhere to any offering requirements in a particular jurisdiction, can be multi-jurisdictional – the world is a pretty big marketplace.
It is likely that all the models will exist in the near term, but the hybrid model may be the one that comes closest to meeting the characteristics of crowdfunding in its purest sense, which leads me to my next topic: the viability of crowdfunding for the general public as envisioned by Title III of the JOBS Act and the SECs proposed Regulation Crowdfunding.
The limitations under the JOBS Act and proposed Regulation Crowdfunding on the annual amount that can be raised annually ($1 million) and on the amounts a purchaser may invest (annual cap for the aggregate amount of purchases of Reg CF-placed securities in a rolling 12-month period based on the purchaser’s income or net worth), coupled with the disclosure requirements (extensive and ongoing), and the limitations on compensation for the Internet platforms, are obstacles to a robust development of a retail (non-accredited investor) crowdfunding market under proposed regulation. The SEC did a great job coming up with a working model within the very strictly-defined parameters of the JOBS Act, and by thankfully proposing that Internet platforms be allowed to rely on purchaser self verification that s/he did not exceed the annual purchaser investment limits, it overcame a hurdle that would have been an immediate death knell to the development of any market. It was also clear at today’s crowdfunding event at the NYSE that the bigger investors and VC funds would likely avoid taking on an issuer that has sold securities under Regulation Crowdfunding, potentially limiting the ability of those companies to scale up and/or launch an IPO. That being said, not every business needs, wants or intends to scale up in a grand fashion or launch an IPO. There may indeed be a place for retail crowdfunding in certain niches, such as local small businesses, restaurants, discrete projects in the film and entertainment business and the like, but a company with a product that may have broader appeal that would need larger sums going forward may be better served with the accredited investor crowdfunding model.
I have compiled my earlier postings on Regulation Crowdfunding into a single article, which can be downloaded here.