Rich Man's Crowd Funding

Jan. 15 2013

Private Equity, funds, angel networks and broker dealers are embracing the technology underpinning crowdfunding with its standards of deal presentation and distribution channels to potential investors. According to Jouko Ahvenainen, Chairman and co-founder of Grow VC, “At Grow VC Group we work with many broker dealers to offer our platform as a service for their use. Through GrowVC they can easily transfer many offline activities and investors to an online marketplace as a strategy to get more investors and make their operations more effective." Although crowdfunding for equity is not yet legal, the technology facilitating campaigns is widespread and already affecting millions. The layout protocols and distribution technology of these sites are what investment industry leaders want to use with the clients, investors and deals they already have. "New market infrastructure will continue to be developed that will allow for efficient and effective distribution of offerings, while embedding investor education and awareness into the process, resulting in investor protection,” says Vince Molinari of GATE Technologies. “This is the difference between capital raising and capital formation."

Currently you raise private capital mainly through SEC exemptions. Most common is Regulation D, 506 which allows you to have only 35 non-accredited investors and an unlimited amount of “rich people” allowed to invest. To be accredited you have to have earned $200,000 ($300k for married couples) in the last 2 years or have a net worth over $1 million (and you must exclude the value of your home). Reg D, 506 as we call it, stood for $900 Billion in capital raised in 2011.

The deal presentation (since sites allow entrepreneurs to attractively supply background, documentation, images, videos, presentations and FAQs) and large online distribution capacity promised by crowdfunding technology is what will empower broker dealers, funds and asset managers to differentiate and use crowdfunding as a tool for their clients. Steven Cinelli, founder and CEO of PRIMARQ, describes the salience of crowdfunding technology to broker dealers in the following terms - “In essence, financing is a business of information flows, between investor and issuer, and applied technology allows one to accomplish such on an accelerated and global basis. Think analog moving to digital." He has described an early experience which demonstrated how significant the shift to an online platform can be. “Back in 1999, we developed OffRoad Capital, which was an online market for Reg D private placements. For those that knew the private placement process, we changed the game by enabling through our platform the raising of up to $15 million in a matter of a week or so.”

The use of this technology by broker dealers was presented to the National InvestmentBanker Association in Spring 2012 and today we have seen recent movements with SoMoLend and CrowdFunder signing up with the leading broker dealer Gate Technologies, whose back end crowdfunding platform is run by visionary CEO Vince Molinari. We will see the two to three dozen dedicated crowdfunding for equity sites partner up with broker dealers in Q1 2013 and start pursuing SEC broker dealer transactions under the “Rich Man’s Crowd Funding” option in wait for crowdfunding for equity to become legal.

Leading players in the market like Crowdfunder, SeedInvest, CircleUp, Launcht, Early Shares, WeFunder, Fundable, Indiegogo, Rockethub and Crowd Valley will be the new broker dealers joining the industry in 2013 although Kickstarter will not enter this segment. These firms are the new blood in the market and are leveraging this technology. "I believe the jury is out on who the winners will be in the long run relative to the crowd platforms,” says Steven Cinelli. “Much like an investment bank, issuers will opt for those platforms that build a history of getting deals done. It's all about successful distribution." CircleUp has already done half a dozen projects as a broker dealer with their license held by WR Hambrecht & Co. The fact crowdfunding for equity is delayed pushes these sites to start brokering “Rich Man’s Crowd Funding”.

We predict crowdfunding for equity will not become a legal SEC / FINRA regulated program in 2013 - rather, it will be introduced by January 2014 due to the processes in place needed for SEC and FINRA to interpret the JOBS Act and implement the law (see Obama’s 10 Steps with SEC & FINRA to Legalize US Equity Crowd Funding). Vince Molinari has highlighted the depth of the changes to come with crowdfunding for equity - "The implementation of Title II 506C will be the beginning of the paradigm shift in the distribution of securities in the US. The advertising of private securities will harness the power of Web 3.0 and Social Media."

Meanwhile, funds, angel networks and asset managers are already reaching out to us and asking us how the technology can allow them more efficiency in offerings and opportunities as well as for their investor network. In the words of Vince Molinari, "Small to mid sized broker dealers will see a boost in their distribution via 506C which will result in more access to capital for small and middle market companies resulting in US job creation and economic recovery and expansion."