Crowdfunding

Crowdfinance: Experts Predict What’s in Store for 2016

Locavesting Staff | December 28, 2015

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2016 will be the year that the long-awaited Title III “Regulation Crowdfunding” goes into effect.  That, along with Title II (for accredited investors), Regulation A+ (Title IV, the ‘mini-IPO’) and intrastate crowdfunding, will open up new avenues for entrepreneurs, investors and portals alike. But where will it all lead? We asked some experts to weigh in on what the year ahead will bring.

Title III goes Live

Issuers will rush to the starting gate on May 16, only to realize that all the money they expected to appear isn’t magically there. They’ll come to the realization that raising money is a hard thing and this is just a new way to do a difficult thing, not an easy road to free money.

Sherwood Neiss, CCA
Sherwood Neiss, CCA

Similarly, portals will rush into the space thinking this is a technology play, rather than a highly regulated securities play.  Someone will get in big trouble and potentially go to jail.  Regulators will be watching and more than one ‘cease and desist’ letter will go out.  The Wall Street Journal will cover it in a rational way, the New York Times will decry crowdfunding from an investor protectionist point of view.

– Sherwood Neiss, principal, Crowdfund Capital Advisors

Title III will be a disaster. Picking winners in startups is difficult. Some little old lady is going to lose money and say she should have been warned. (Therefore) many platforms that are doing Title II accredited investor crowdfunding today will avoid it.

– Peter Renton, CEO and Founder, Lend Academy and co-founder of LendIt

Title III will be a huge success. People just need to set reasonable expectations. Title II has been a slow steady ramp, and Title III may be even slower because of its higher regulatory hurdles. But there will be more due diligence than people believe. And there is a lot more investor appetite among retail investors for honest risk than the SEC has permitted up until now. Given the complexity involved with Title III to raise $1 million, I think we’ll see many Title III raises tied to a larger Title II offering or a pre-order Kickstarter campaign.

– Douglas Ellenoff, partner, Ellenoff, Grossman & Schole

Local Crowdfunding

Amy Pearl, Hatch Innovation
Amy Pearl, Hatch Innovation

There will be intrastate crowdfunding exemptions in every state—no doubt! Some states may be slower, but laws will emerge as education and understanding improve. Look for national organizations such as the SBA, SBDC, USDA, NASAA and others trying to work on a state-by-state basis in new ways to come up with new programs, responsibilities and demands.

– Amy Pearl, Founder & Executive Director, Hatch Innovation

Local Chambers of Commerce will be flooded with crowdfunding requests and complaints about banks. One of them will figure out how to create a platform that allows the community to be the lender, the chamber to be the platform and the local businesses to get the capital they need to stay afloat. This will further re-energize local communities, create local jobs and engage citizens around the local businesses they love the most.

– Sherwood Neiss, Crowdfund Capital Advisors

Beyond Equity

2016 will be an interesting year for financial ingenuity and deal structures as straight equity deals for startups will have difficulty gaining traction. Whether it’s through Title III, intrastate crowdfunding exemptions or Regulation A+, I foresee innovative financing structures emerging to satiate the more risk adverse retail investor.

– Dara Albright, President of Dara Albright Media and co-founder of FinFair

Education is King

There is confusion on the part of investors, entrepreneurs, and ecosystem builders about Title III, federal vs. state law, changes in the rules, language, and more, and it’s going to get worse. The average person in this country has no understanding of the law, securities, or finance—and this makes for a weak ecosystem in which to launch radical transformation that leverages all three. Education is going to be central to successful uptake by all stakeholders, and it’s going to take time.

– Amy Pearl, Founder & Executive Director, Hatch Innovation

Entrepreneur and investor education will turn out to be the most important thing. Platforms will require issuers and investors to prove their understanding via third party education programs.

– Sherwood Neiss, Crowdfund Capital Advisors

Industry Fallout

Mergers will start to take place. The platforms that have been around the longest have built great brand equity. However, they’ve also burnt through millions of dollars of capital. Investors might shy on the thought of follow-on capital or question their ability to scale. This will force industry mergers that will promote stronger platforms with deeper coffers.

– Sherwood Neiss, Crowdfund Capital Advisors

We’re going to see early adopters drop out because of a lack of market (investor) readiness. It will look like failure, but it’s a natural process in an emerging landscape and the result of two realities: too-high expectations by entrepreneurs, and limited investor awareness.

– Amy Pearl, Hatch Innovation

Testing the Waters

Dara Albright
Dara Albright

“Testing the waters”—where issuers solicit indications of interest before commencing a formal fundraise—will prove invaluable to a Regulation A issuer’s branding efforts, but there will be a sizeable discrepancy between the level of interest and the amount of capital that is actually raised. With Reg A, however, people will eventually know how much capital was raised. That’s not the case with Reg D offerings under Title II. There is currently nothing that mandates that a Regulation D issuer must disclose the final amount raised, so it can appear that a company is much more capitalized than it really is. I believe that this will draw more regulatory attention and ultimately lead to new guidelines for general solicitation under Title II.

– Dara Albright, Dara Albright Media

Fighting Fraud

The first case of crowdfunding fraud—involving Ascenergy, an oil & gas company that the S.E.C. says defrauded 90 accredited investors of $5 million it raised through Title II crowdfunding—will lead to a showdown between technology-driven and finance-driven business models. Can funding platforms take a “Craigslist approach,” where they simply list deals that the issuers market themselves (as Ascenergy did using several well known funding platforms)? Or are these platforms responsible for a higher degree of financial professionalism and vetting of the companies they list? This test case will have major implications not just for Title II but also for Regulation A.

– D.J. Paul, co-chair of the Crowdfund Intermediary Regulatory Advocates (CFIRA) and member of the S.E.C. Advisory Committee on Small and Emerging Companies

Syndicates

The AngelList investment syndicates model will be successful in other areas of online investing outside of angel rounds and early VC.  We’ll begin to see later-stage companies doing broadly syndicated deals that include a wider distribution of investors.

Similarly, banking syndicates will begin to form around larger private placement deals being marketed online, such as Reg A+ transactions.  While much of the “marketing” of deals will take place through online platforms, the “selling efforts” will take place at broker-dealers who will form broker-dealer syndicates in much the same manner that public offerings use syndicates.  The process of managing the syndicate sales efforts and “book building” will be similar to the way conventional IPOs or follow-ons are coordinated.  Issuers will compensate these broker-dealers with customary banking fees.

– Steven Dresner, founder & CEO, Dealflow

Unicorn Chasing

The country’s addiction to the fast company, easy money, quick profits concept will continue to permeate the media, misrepresenting the potential of state-based investing. This kind of local finance is different, and new language and definitions will emerge to help maximize its benefits to communities.

– Amy Pearl, Hatch Innovation

Investors Weigh Higher Interest Rates

Interest rates will be raised and the bull market will see its end. These two factors will have an impact on crowdfinance and local economies in various ways.  Some investors will realize that they might as well try for more local investments since the national markets will be declining. Others will be more comfortable with a little higher interest in their savings accounts, and will be more worried about the risks of investing in general.  They will be less inclined to invest in anything and will decide to keep their funds safe earning just a little more interest.

– John Katovich, founder & president, Cutting Edge Capital

Online Lending

Peter Renton, Lend Academy
Peter Renton, Lend Academy

Banks will continue to partner with online lending platforms. Banks have lost the ability to make small, $25,000 loans efficiently, yet that’s what most small businesses want. In the wake of the Chase-OnDeck deal—the biggest partnership of the year—we’ll see more of this. I’d be surprised if Lending Club wasn’t working on a similar deal.

– Peter Renton, Lend Academy

To learn more about the various types of crowdfunding, see our guides for Investors and Entrepreneurs.

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Comments

  1. I’m interested in a larger conversation about the creativity of local deals at the state level. I’m creating a session now for our ComCap16 conference in April on this very topic. There are ways to involve multiple owners in new companies, including nonprofits; there are bank partnerships that can help back crowdfunding offerings; there are ways of leveraging new funding programs such as those that help mediate brownfields that seem like great candidates… I’m interested in ways we can offer up actual deal ideas to people and entities who might not have considered how these laws can be leveraged in these ways. Thoughts anyone? A few other examples at the state level?

    1. Agree! Lots of opportunity for innovation here. I always point to Michigan’s Public Spaces & Community Places program as a potential model for bringing together multiple stakeholders, including economic developers, to support projects that benefit a community. We wrote about it here. It involves donation-based crowdfunding, but I think could be applied to securities-based crowdfunding as well. I’d also be interested in hearing of other examples or ideas.
      AmyC

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