Ordinary investors across the country can now lend money to small businesses, thanks to a regulatory greenlight given to online lender StreetShares.
The move comes as the industry gears up for Title III, the long awaited JOBS Act provision that will open up investment crowdfunding to the mainstream when it goes into effect on May 16.
“This is the closest thing we’ve seen to real crowdfunding,” said Mark Rockefeller, StreetShares CEO.
Rockefeller is making use of a different JOBS Act rule: Title IV, more commonly known as Regulation A+. He spent eight months working with the Securities & Exchange Commission to shepherd the offering through. On Tuesday, his company received approval from the Commission for the $50 million offering. That gives it the ability to raise money from the public to be lent out to small businesses, starting with those run by veterans and military professionals. StreetShares plans to expand its affinity-based model into other small business sectors, such as women-owned businesses or those in specific geographic areas.
Other marketplace lenders, such as real estate platforms such as Fundrise and Groundfloor, have also conducted Reg A offerings that allow them to market their investments to unaccredited investors. But the StreetShares crowdlending product is first such offering for small business loans. It allows people in all 50 states, regardless of income, to invest.
It breaks ground in other ways as well. Unlike other peer-to-peer lenders, StreetShares investors will receive a fixed interest rate, as yet undisclosed, that is not tied to the performance of a particular underlying loan. In that regard, it will operate like a CDFI loan fund.
StreetShares also co-invests in every loan it makes, giving it the “skin in the game” missing at most online lenders.
(StreetShares will continue to raise money from institutional and accredited investors who select which loans they want to back and whose returns are tied to the loans’ performance—as is standard practice in peer-to-peer or marketplace lending.)
Under Regulation A, issuers can raise up to $50 million every 12 months, providing a steady stream of capital.
Disrupting Payday Lenders
The offering is a milestone for StreetShares as well as the industry. Rockefeller, a lawyer who also worked in microfinance, and former Capitol One executive Mickey Konson, founded the company in 2013. The pair, both veterans, saw StreetShares as a way to help veteran business owners get the capital they were too often denied.
They also wanted to provide an alternative to the predatory lenders that target vulnerable vets. Rockefeller recalls the payday lenders that would set up shop outside military posts. He sees the same unsavory behavior in some of the loans being peddled to veterans and other business owners online, with complicated terms that obscure sky-high interest rates and fees.
“We see folks that are getting killed by these predatory loans,” says Rockefeller. “That’s what we’re trying to disrupt.”
That philosophy helped StreetShares snag $7 million in a still active Series A led by Fenway Summer, a venture firm founded by former deputy director of the U.S. Consumer Financial Protection Bureau Raj Date.
StreetShares plans to debut a new, easy to use portal for unaccredited investors, along with more details on its crowdlending offering, at LendIt, the annual industry gathering taking place April 11-12 in San Francisco. In the meantime, the company has been making loans (funded by accredited investors and institutions) at a rate of about $1 million per month, with interest rates in the single digits to high teens, according to Rockefeller. Comparable unsecured loan products, like credit cards, typically charge much higher rates.
Part of the reason StreetShares can keep its rates low is its affinity-based lending model. When it launched in 2014, the site attracted veterans and others with military backgrounds (and accredited investor status) who invested in vet- and military-owned businesses. “We quickly found that, when there were veterans backing the loans, delinquency rates plummeted much more than we ever expected,” says Rockefeller.
He chalks the low defaults up to the positive social pressure that comes with a tight knit community. “They don’t want to let down their group,” says Rockefeller. Vets, he saw, “would do extraordinary things for each other over there, so it makes sense that they would pay back their loans over here.”
Rockefeller sees an opportunity to expand that model to other affinity groups, such as women who back other women or communities that want to support their local businesses. This sort of investment goes on every day, through local investing groups, private deals or, more recently, state-based crowdfunding. “We want to take what’s going on already and bring it online in a very efficient way,” says Rockefeller.