Equity Crowdfunding will impact private capital in 2015 in four ways. Veterans seeking to start a business in 2015 can capitalize.

2015-02-10T11:50:15-05:00

If equity crowdfunding is simply a digital means of raising capital, then we have missed an opportunity to truly transform our industry. Equity crowdfunding has the potential to increase visibility, take local markets to the national stage, and bring efficiencies to a marketplace that has operated virtually unchanged for eighty years.

Many are waiting for "real equity crowdfunding" (Title III of the JOBS Act) to impact the market. The SEC recently announced its timetable - Rules for Title III of the JOBS Act will be released in October 2015. Add sixty days for comments, and non-accredited investors should have access to publicly solicited deals in early 2016.

But in the meantime, we are blazing a trail and clearing the path with Title II equity crowdfunding . The transformation of the private placement market and angel investing is already under way.[1]

Common sense dictates that equity crowdfunding will have a significant impact and will transform private markets in four ways.

1. Crowdfunding will reduce the time required to raise capital. For decades, raising money privately has taken months or even years. The regulators squeezed efficiency out of the process. In the 1930's more time meant additional transparency, and reduced the opportunity for fraud. Given adequate time, accredited investors and sophisticated investors could make informed decisions. Hand delivered documents, or face-to-face meetings added time. Cooling-off periods prevented new acquaintances from investing for a period of at least thirty days. Crowdfunding rules allow issuers access to a wide array of investors with digital distribution, provides digital transparency, instantaneous delivery of documents, and eliminates the need for a cooling off period. It has to save time for issuers.

2. Crowdfunding will break down regional barriers. For eighty years, angels invested locally or regionally, and usually in familiar industries. They invested through contacts and acquaintances. Angel investors insisted upon physical access to management, and often limited investments to companies located within a short driving distance. Small market companies suffered small market capital resources. Angels in remote sections of the country saw few deals. Armed with tools that bridge the distance gap, like video conferencing, generations of new investors are more comfortable in a digital setting. Because equity crowdfunding is national in reach, small market companies will access investors throughout the nation, and small market investors will have access to deals in the most active regions of the nation. Location will matter less and less as technology bridges the miles at almost no cost.

3. Crowdfunding will lower the cost of capital. Crowdfunding extends the reach of a regional company to a national audience. In any auction process, the bigger the number of potential bidders, the better the outcome for the seller (issuer). Nowhere is this more evident than in peer-to-peer lending, where companies like StreetShares conduct reverse auctions – the low interest rate bidder wins. Post-Internet companies like StreetShares and VeteranCrowd are designed to reduce internal complexity and costs for issuers, while providing a wider national reach. By squeezing the inefficiency out of the distribution process, Crowdfunding allows issuers to optimize the risk-adjusted cost of capital and match it to the market.

4. More Accredited Investors will actually invest. There are potentially millions of accredited investors in the US who are excluded from participating in private placements because the minimum investment size is too high. Before the JOBS Act, minimum investment amounts thresholds seldom fell below $50,000 limiting access to those with true liquid wealth. Accredited investors with the ability to invest $5,000 could not participate. Equity crowdfunding and peer to peer lending minimum investment thresholds will be set lower, opening access to accredited investors who had to sit on the sidelines.

As investors become familiar with crowdfunding, it will displace private placement practices that were the norm for eighty years. The technology provides transparency in a regulated setting. It saves time while offering a much wider array of investment options.

For issuers, crowdfunding through established platforms offers instant access to a wide audience of accredited investors, lower cost digital distribution, and time saving tools with the potential to optimize the cost of capital.

Notes:

[1] Title II of the JOBS Act allows general solicitation of accredited investors for Regulation D 506 (c) private placements. Accredited Investors are currently generally defined as individuals with liquid net worth (excluding primary residence) of greater than $1 million, or annual income greater than $200,000 for the past two years with a reasonable expectation of continuing at that level.

VeteranCrowd is a portal providing crowdfunding services to veteran run companies. Securities transactions are offered by WealthForge, LLC, a registered broker/dealer and member FINRA/SIPC. Hyperlinks to sites outside of our domain do not constitute an approval or endorsement of content on the visited site.

Response by LTC Private RallyPoint Member made Feb 10 at 2015 11:59 AM

2015-02-10T11:59:07-05:00

Thanks

Response by MAJ Private RallyPoint Member made Mar 24 at 2016 5:09 PM

2016-03-24T17:09:38-04:00

I am interested in this sort of finance discussion....I imagine there are others of the same mindset here in RP. Thanks for sharing. Pls share more like this!

Response by Maj Private RallyPoint Member made Oct 10 at 2018 12:31 PM

2018-10-10T12:31:46-04:00

I'm currently reading the 685 page SEC regulation on crowdfunding before I apply through FINRA's regulation crowdfunding to build my funding portal. Does anyone know of a good hub to discuss funding platform processes? I'm looking for efficiencies and effectiveness when on boarding startups..