In 2015, we heard the first rumblings of the deafening thunder equity crowdfunding can become. We waited, with bated breath, for the launch of Title III, and saw the first case of fraud in equity crowdfunding to close out the year. It was a big and important year for the sector, and 2016 will be game changing.
Equity Crowdfunding vs. Regulated Crowdfunding
We’ll be classifying the sector a bit differently in 2016. We’ll move away from talking about equity crowdfunding alone, in favor of regulated crowdfunding, bringing clarity into the market. The word itself may sound scary, as it implies debt, equity, royalty, flowthrough, and debenture, but this is how the discussion will shift in 2016. Equity crowdfunding is too limiting. Portals can do much more than that, and will begin to move away from talking about equity crowdfunding towards regulated crowdfunding.
The Impact of Title III Writ Large
Title III’s final approval was a landmark event in equity crowdfunding. It represented the essence of the JOBS Act’s creation, empowering 233.7 million Americans with the opportunity to invest and paving the way for true crowdfunding and democratic investment.
While there’s huge cause for celebration, companies and portals will have to adapt to these new market conditions, or die. Companies raising money under Title III will find themselves with hundreds of investors, and without a method to manage them. Shareholder management after the fact will be key, something that KoreConX is built for. Some think of their shareholders as a burden, and ask “why would I want 100 shareholders?”, a topic we recently wrote an article on. But this is shortsighted and old fashioned thinking. Your shareholders are your best customers and biggest advocates, so why would you not want 100, or even 1,000?
Companies that properly manage and communicate with their shareholders pre, during, and post campaign will be well poised for success if they apply the basic principles of marketing, communications and customer service to their shareholders.
For equity crowdfunding portals, this means that due diligence is even more important. The consequences of failure are high, both in terms of reputational damage, and people affected. Once portals and issuers have adapted to the sheer number of accessible investors, Title III becomes an extremely powerful economic development.
Globally, Title III is the most anticipated crowdfunding exemption, and its impact shouldn’t be underestimated outside the US either. It’s an example for other countries, setting the pace for crowdfunding regulations and demonstrating what needs to be done to stay competitive in the international market.
Now, countries that once dismissed regulated crowdfunding are really paying attention. They see that in order to compete, they need to follow the example set by the JOBS Act and embrace disruption.
Registered (and Regulated) Crowdfunding Portals VS. Bulletin Boards
Ascenergy’s $5Million fraud brought the issue of unregulated crowdfunding to the forefront of industry awareness. Under legal loopholes in the US, certain sites are able to divorce themselves from the requirement to perform due diligence and be licensed broker dealers, and operate “bulletin boards” for equity. Companies then disclose only what they choose to, and investors make their buying decision at their own risk.
This leaves investors open to fraudulent deals that would have been prevented by the due diligence process of regulated crowdfunding portals, meaning that while these bulletin boards continue to be hands off with due diligence, cases like Ascenergy’s are bound to continue to pop up.
The SEC caught, and responded to, this fraud case before the company had managed to spend the full $5 Million that they’d raised: the company only managed to spend $1.2 Million. This should indicate that the companies raising money via bulletin boards (and those running the bulletin boards) have caught the attention of the SEC. Bulletin board operators will be under increasing pressure in 2016 to adopt measures to protect investors, and by association, their own brands, from similar fraudsters.
The sector will find itself facing the issue of how regulated these boards need to be to protect the sector as a whole. Bulletin boards like AngelList, Equity, Wefund, and Crowdfunder, but this comes with responsibility. Either these boards realize that and begin asking companies to provide 3rd party reports, or the regulators take it all away.
The Emergence of Secondary Markets
The emergence of secondary markets is game changing, disrupting capital markets. Typically, a company’s life cycle involves either selling your company, or going public, often very premature. With the emergence of secondary markets, companies and investors now have a third choice. They can remain private, and still provide investors with the opportunity to exit through a legal framework to do so.
These secondary markets will come in three different forms:
The First (Stock Exchanges)
Stock Exchanges that currently operate listed issuer business have or will launch private capital markets. The only issue here is the the current way these exchanges operate is not in the interest of the company, investors, or dealers, but purely themselves, and therefore unless the culture changes, they will not be able to successfully complete with the other two models.
Case and point in Canada, the TMX launched their private capital markets, and in essence it’s competing against the very people it’s supposed to be serving. They are using an old model that is broken.
The Second (Equity Portals)
Some portals are creating their own secondary markets to allow the investors that use them to achieve liquidity, providing a solution to one concern that many investors have, which is liquidity after they invest. An example of a portal already working on this is CircleUP, which is opening its own secondary market for its consumer goods equity portal.
The Third (The Co-ops)
A colleague of mine, Chris Tyrrell CEO of Offerboard, once explained to me that this could be a viable way for a number of equity portals to work together build and own their own secondary market.
Chinese Equity Crowdfunding
China’s 100 million accredited investors are ready to invest through crowdfunding, and they’re now able to do so internationally. The Chinese government has also announced its intention to develop regulations allowing non-accredited investors to take advantage of equity crowdfunding internally, meaning that portal operators and companies looking to raise money should be paying serious attention to the Chinese market. To do otherwise would be to neglect a future regulated crowdfunding powerhouse now able to invest internationally.
Practically speaking, this means that regulated crowdfunding portals the world over need to make sure that their portal is available in Mandarin. Since China requires that investors be able to access information through a single access point, they’ll need to get into this market through KoreConX.
I spent much of my year travelling all over the world to speak about crowdfunding, and I’ve had a chance to observe the global phenomenon internationally first hand. I believe that regulated crowdfunding is the future, and that 2016 will play this fact out. I can’t wait to see the market growth, and bigger and better deals. We’re very privileged to be able to observe ground-shaking changes of this magnitude. Financial systems that have been in place for generations are crumbling to the ground, and in their place something newer and better is appearing that decentralizes economic power. Now, investment is becoming truly democratic.