Will Crowdfunding Turn The Finance World Upside Down?
Depending on who I talked to at last week's 2nd Annual Crowdfunding Conference and Bootcamp in Las Vegas, Crowdfunding is either going to flame out and die, or it's going to be a massive disruptive force in the global economy, that may cause the extinction of entire industries. Somewhere in between lies a likely reality.
Before I render my thoughts on the subject, allow me to take a step back for a moment, and offer a clearer definition of Crowdfunding, as it's very apparent that the general population in the United States doesn't really understand what Crowdfunding is, or they have a vague notion that it's a way for people to solicit donations to get an operation for grandma's sick cat.
Crowdfunding was originally started as a "donation-based" platform, with sites like Rockethub, Kickstarter, and GoFundMe. Since then, hundreds of similar platforms have launched all around the world and billions of dollars have been donated to startups and other causes. When someone donates in this way, they have no expectation of being repaid, but they may receive some sort of real or intangible reward in exchange for their donation, such as a product, service, a mention, or some other non-monetary benefit.
Enter the JOBS Act of 2012. JOBS stands for Jumpstart Our Business Startups and the core intent of the bill was to allow for "equity-based" Crowdfunding whereby people could invest in startups and be given stock, a note payable, or some other promise for future repayment and benefit. In essence, they get to "go along for the ride" and share in a startup's successes longer term.
The rules governing the JOBS act were to be implemented by the SEC by the end of 2013. But, with the turnover of leadership of the SEC, and other fears and foot-dragging, these rules have yet to be implemented fully. But, things appear to be heading in the right direction.
One thing to bear in mind is that the JOBS act essentially contains exceptions in securities laws that date back to the early 1930's, ironically, after the last great depression.
There are really a number of key components to this act. First is the concept of "general solicitation" which prohibits the advertisement of investment offerings. In September of 2013, this ban was lifted until Title II of the JOBS Act (aka Regulation D, Rule 506c), which allows Crowdfunding to accredited investors only. So it is now legal to do equity Crowdfunding and to solicit, but only to people with substantial annual incomes or substantial wealth.
But Title II is really only the first step. Title III of the JOBS Act will open the equity Crowdfunding door to EVERYONE, with some limitations on how much an individual can invest based on income and wealth. How long the SEC will continue to drag its feet on Title III remains to be seen, but popular opinion seems to be that some time in mid to late 2014, Title III rules will be enacted.
A lengthy read on Marketreview not too long ago made deep analysis and pointed out that here is where opinions of Crowdfunding experts start to diverge. There are some who think the SEC will never implement Title III. Personally, I believe there is too much momentum in the industry now, and that Title III is inevitable. What remains to be seen are how odious the requirements will be for companies to raise funds via Title III. If the rules are too cost prohibitive or time consuming, many startups may simply look for other ways to raise capital.
One other wrinkle to equity-based Crowdfunding is that it will take place on SEC-approved website platforms that will give the SEC a tighter reign on what is happening in the industry. And, if the proliferation of these web-based platforms is any indication of the interest in equity Crowdfunding (and the fact that institutional capital groups are backing those platforms), I'd say the SEC would be foolish not to get things going as soon as possible.
So back to the original question - can equity Crowdfunding turn the finance world on its ear? In my opinion, the answer is a resounding YES!
Equity Crowdfunding represents the democratization and disintermediation of capital. Instead of global finance being controlled by the elite investment banks, retail banks, and wealthy private investors, it could be taken over by the "Crowd" of mom and pop investors, and everyday citizens who will gain unprecedented access to the next generation of startups - tomorrow's Googles and Facebooks.
And,the middlemen, the investment bankers, retail bankers, and others, who for decades have become fat by controlling the flow of transactions around the world, may well find themselves on the outside looking in. No longer will those intermediaries be necessary in a world where the Crowd and Entrepreneurs can work together directly to reach their individual goals.
Will this happen overnight? Of course not. It will take many months or even years before the rules and regulations are worked out and the players start to understand their roles in the new world of finance. There will be some fraud, but based on evidence in the 20+ foreign countries that already allow Crowdfunding, there will be very little of it. And, to be sure, some of those middlemen may see the writing on the wall, and do what they can to stop Crowdfunding.
I'm reminded of the line from Martin Sheen's character in the movie "Wall Street" when he scolds his son to "create, instead of living off the buying and selling of others". Well that advice may never be more appropriate than now, in the face of the inevitable oncoming wave of equity-based Crowdfunding.
Much like the sea changes created by the computer era of the 1980's, or the rise of the Internet in the 1990's, the dawn of a new era in global finance may soon be upon us. For those who position themselves in advance of these changes, life will be sweet indeed.