Blog‎ > ‎

The Promise -- And Challenges -- Of Equity Crowdfunding

posted Jun 30, 2014, 12:45 AM by Siamak Ebarhimi

When it comes to investing, a colleague often reminds me, “We’re not doing anything here that hasn’t been done for hundreds of years.” Technology may change, but investing will always revolve around opportunities and capital.  He’s right, of course.crowdfunding marketing

I’ve spent the better part of the last five years creating the infrastructure that will allow investors to access private opportunities using the internet, including vetting them and executing transactions that are secure and compliant. So far, it seems to be working. But there’s a long road ahead. The complexities of online private equity are real.

That said, and at the risk of shameless hyperbole, if we can achieve the potential that exists in “crowdfunding” private securities online, we may just change private investing as we know it forever.

“Crowdfunding” is an exciting space, and yet, it also can quickly become confusing. The size of the market is hard to pin down. Daily media reports conflate donation-based crowdfunding, venture capital investments in crowdfunding portals and online private equity investments.  All these semantics make the market sound more like something on Pinterest than a wealth-creation opportunity.crowdfunding advertising

The consequence is a cacophony of enthusiasm for the idea of raising capital using “social” tools without any real information that would help wealth managers and banks direct capital with confidence. The primary goal of building equity through crowdfunding is not the “crowd,” per se. Yes, we want and need participation, but we first need to secure the efficiencies gained by processing these transactions online by reporting them accurately. Only then will we draw more investors into the marketplace and create more opportunities for entrepreneurs. But to get there, this new market will first need to look and operate a lot more like the existing public markets.indiegogo marketing

So, how do we get there?  Institutions will want to see credible, robust data that paints a more complete picture of the crowdfunding space. The obvious place to start is with the volume. To date, there has been no credible estimate of the amount of capital being invested online in exchange for equity. There have been attempts to capture this data point, but they are hampered by a lack of transparency in reporting and the semantics issue noted above.
Consider some of the architecture surrounding the public markets: centralized research, transaction hubs, clearing/settlement for securities, consolidated tape (marketing/price discovery), DTCC (settlement and valuation), to name just a few. In contrast, the online private securities market is too new to have many points of credibility. There is no equivalent infrastructure for this emerging asset class…yet.

By our estimates, private equity crowdfunding is actually much smaller than is currently being reported. This table shows some of the most active portals, their area of focus and our best estimate for how much they have raised online.kickstarter marketing

The totals above (accurate as of April 30, 2014) paint a picture of a much smaller, more nascent market than some of the estimates being reported in the media. But, I believe, it’s much more accurate. And, as we aim to build this new marketplace, transparency must trump hype.kickstarter project

Virtually all portals offering private securities list active and closed deals on their website along with the fundraising history. An examination of the 27 most active securities crowdfunding portals (full disclosure: 10 of which I work with directly) shows that, in many cases, cumulative reporting highlighting the total amount of capital raised through a portal is shared as an aggregated number that includes money raised offline through other unaffiliated fundraising efforts.

We are starting to see positive ramp-up in transactional volumes month over month, particularly from leading platforms like Realty Mogul which has been able to build origination, distribution channels and navigate regulatory complexities. That will continue. The “long tail” majority of the 27 active platforms we track have done less than $10 million historically.But venture capital institutions are investing in the portals to build the marketplace, not in the deals available through the portals. That’s an important timing distinction. Even portals with millions in venture capital may not be processing that much in transactions, at least not yet.
More to the point: Say Company X is selling 1,000 shares and raising $1 million. They have allocated 20%, or 200 shares, to crowdfunding and are using Portal A. Instead of reporting how much has been raised strictly through PortalA, a cumulative figure that includes the 80% of shares sold externally will be published alongside the offerings listing. That makes some sense, because it’s an indication of the overall success of the venture. But when no distinction is made between how much volume was processed online versus offline, we lose an important piece of the picture.CrowdFunding advertizing

The technology and banking infrastructure needed to power these portals and help them operate within their complex regulatory environment is still emerging. New rules and regulations still to be enacted (Title III, of the JOBS Act, for example) could help. But this is a market built by the participants and in need of good leadership to help standardize processes to increase volumes.CrowdFunding marketing

Once processes are standardized and participants can understand the types of securities trading and the information available, more transactions will occur, including from institutions that will bring big purses and make dramatic increases in volumes transacted on these platforms. To help the marketplace mature more quickly and get to the point where big dollars are flowing through the portals themselves, let’s be accurate and transparent about the online private equity deals that are taking place.Kickstarter Marketing

If we can do this, then my colleague will have been wrong – we will be doing something new: unlocking equity crowdfunding’s true potential.crowdfunding websites

Posted from:

By David Khorram