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What’s next for title III equity crowdfunding?

A lot has been said about why equity crowdfunding for non-accredited investors hasn’t caught on. “It’s off to a relatively slow start,” said Dr. Richard Swart, CFO of NextGen Crowdfunding. “It’s actually a slower start than those of us in the industry expected it to grow.”

One of the major culprits for this slow start has been a lack of awareness on the part of both issuers and investors. Title III of the JOBS Act, which empowered non-accredited investors to get into the equity crowdfunding game, was passed back in May 2016. And yet, according NextGen’a Title III issuers listing, only 60 companies have signed up to raise up to $1 million in the first place.

However, issuers shouldn’t be painted as the sole hitch in an otherwise perfect investing system. Potential investors — which, under title III of the JOBS Act, means just about anyone — haven’t exactly been flocking towards equity crowdfunding ,either. According to Swart, the number of people investing  in equity crowdfunding projects under title III is somewhere on the order of 10,000.

The evolution of crowdfunding, then, is largely dependent on bridging this substantial awareness gap, and crowdfunding platforms have already begun to attack the problem from different angles. Bankroll Women, an equity crowdfunding platform for products launched by women entrepreneurs, believes that the answer to greater awareness for equity crowdfunding in general is in-person networking.

On the flip-side, other crowdfunding platforms are betting on better technology to move the needle on title III offerings. According to Newchip, a private equity investment marketplace launching in February 2017,  one of the key components missing from title III equity crowdfunding is an intuitive way to grow communities around campaigns. The company is pitching its marketplace toolbox, which matches users with their interests and helps them create and manage their own portfolios, will fill that need.

“We are building a community around private equity crowdfunding to form an investment marketplace composed of like-minded individuals, who are participating by investing in companies they can believe in,” said Ryan Ràfols, Newchip’s CEO.

Entrepreneurs are also an integral part of the company’s plans. “Kickstarter and Indiegogo became household names because they built something that gave entrepreneurs the tools to raise funding and engage their audiences,” Jason Schenker, Newchip’s CFO, noted. The company hopes its marketplace will help private equity entrepreneurs replicate Kickstarter and Indiegogo’s success. The latter could soon find itself on Newchip’s platform – Indiegogo launched its own equity crowdfunding service on November 15, 2016.

Whatever the strategy of equity crowdfunding platforms to get more issuers and investors onboard, an important stage that all proponents of title III will have to go through is the passage of time. “There was a lot of confusion about what was permissible activity for marketing, which are getting resolved with the FDC,” explained NextGen’s Swart. In addition, “FINRA has been slow-walking some of the platform applications, trying to keep the number of portals down.”

There are other challenges, of course, that simply aren’t resolvable. For instance, investors face a relatively high risk when investing through equity crowdfunding, and much lower risks when they invest in an ETF. Moreover, with roboadvisors growing and new offerings being launched, proactive equity crowdfunding is in danger of becoming a marginalized form of investment.

Still, if title III crowdfunding campaigns are successful in growing and maintaining passionate communities, these platforms could have a bright future ahead of them. NextGen isn’t put off by the initial numbers. “Compared to venture capital, it’s a tiny emerging market,” said Swart, “but having [around] 10,000 people within the first 6 months feels like we’re off to a good start to me.”

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WTF is the JOBS Act?

WTF is fintech

When equity-based crowdfunding platforms emerged around 2011, they, unlike their donation or rewards-based cousins, were restricted by law to accredited investors. The crowd, as it were, was quite selective. And while exclusivity has always played a major role in the finance industry, limiting equity-based crowdfunding to accredited investors meant that these platforms were exacerbating a funding gap for entrepreneurs who needed much less funding to get their businesses off the ground.

“Since 2008, it’s been so hard to get a bank loan,” said Tess Hottenroth, chief executive officer of BankRoll Women. “The venture capitalists have moved up in the amount that they are generally giving to companies, and as a result the angel investors have also moved up to a level where VCs used to be.”

Signed into law by President Barack Obama in 2012, the Jumpstart Our Business Startups Act sought to enable a greater number of entrepreneurs and investors to benefit from equity crowdfunding. The bill passed with bipartisan support; after all, Hottenroth noted, “Who’s going to vote against JOBS?”

Tell me what I need to know about the JOBS Act titles.

Title II: Makes it possible for small businesses and entrepreneurs to advertise their businesses or products and solicit investments on equity crowdfunding platforms. As Title II is a private offering, companies that choose to fundraise under this title can only accept investments from accredited investors.

Title III: Is for all of the little guys and gals out there who want to raise up to $1 million. This title is often likened to an equity version of Kickstarter, but with a system in place to make sure the general public doesn’t invest more than they can afford to in startups that might not make it. As David M. Freedman and Matthew R. Nutting wrote in A Brief History of Crowdfunding, Title III was considered particularly risky, because “it opened the riskiest area of alternative investing to tens of millions of investors who, because they were not wealthy, were presumed to be less sophisticated investors.”

Title IV: There are two types of Title IV, Tiers 1 and 2. Tier 2, which allows entrepreneurs to raise up to $50 million, is pretty exciting, because it basically allows companies to form mini IPOs funded by the general public. These offerings are liquid, and can be traded if listed on a stock exchange. Mini IPOs are much, much less expensive and complex to set up than actual IPOs.

Who can benefit most from the JOBS Act?

On the investor side, the average Joe and Joanna Public could potentially win big with the JOBS Act. Unaccredited investors can’t invest in Title II of the act, but they can invest in Titles III and IV. In other words, the crowd went from a complete shutout to be able to invest in nearly every type of equity crowdfunding, much as they can in mutual funds and other types of stock.

On the entrepreneur side, any entrepreneur that fell outside the funding scope of VCs and angel investors are now able to use crowdfunding platforms to raise equity. Crowdfunding equity has joined a growing number of fintech financing solutions for entrepreneurs looking for funding outside the traditional bank channels.

Of course, these are the people who can in theory benefit from the JOBS Act. In reality, very few startups have applied for this type of funding so far.

So you’re saying that from 2012 the JOBS Act has completely changed equity-based crowdfunding?

Not exactly. The SEC has been slow to implement the rules, much to the chagrin of professionals in the equity crowdfunding business. While Title II has been legal since 2013, Title IV wasn’t legal until 2015, and Title III until 2016. Not all of the blame lies with the SEC, though. Many entrepreneurs and investors probably just aren’t aware that the JOBS Act happened.

 

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Ladies who Lunch 2.0: The case of Bankroll Women

Many of today’s non-profits and social campaigns have ‘Ladies who Lunch’ to thank for at least some of their financial backing. While in popular culture, ladies who lunch may not be revered (see Company and SNL), in reality, women’s organizations and groups — and their luncheon settings — have been the financial catalysts for a lot of social action.

“The concept of ‘Ladies Who Lunch’, women who gather over meals, drinks or coffee to discuss and potentially fund worthy endeavors, be it nonprofit organizations or women/minority led-startups, continues to grow but in new and innovative ways,” said Susan McPherson, founder and CEO at McPherson Strategies. “No longer are these gatherings the purview of the ultra wealthy and no longer are they only in-person get-togethers. Rather, with online crowdsourcing, mobile technology and listserves of like-minded women, fundraising is happening in all sorts of ways.”

A case in point is Bankroll Women, an equity crowdfunding platform that’s specifically for products launched by women entrepreneurs. Both Bankroll Women and its parent company Bankroll Ventures were made possible by the 2012 passing of the JOBS Act, which opened the crowdfunding playing field to new sorts of entrepreneurs and investors alike.

“Between title III and IV, the JOBS Act is really opening up the ability [for entrepreneurs] to get funding not just from really wealthy people, but from people who are brand ambassadors who are helping you grow you your business at the same time,” said Tess Hottenroth, co-founder of BankRoll Ventures and chief executive officer of BankRoll Women LLC.

It’s not that Bankroll Women is building a crowdfunding oasis powered only by women. While the board is comprised solely of women, Bankroll cofounder Kendall Almerico has been a integral part of the platform behind the scenes, and Bankroll Women fully expects men to play an important role in championing women-led businesses. Still, Hottenroth maintained, women who “have succeeded in the business world and are passionate about creating opportunities for others are naturally going to be the strongest advocates and faces of that goal, as is reflected by the board composition.”

And so, unlike the traditional Ladies who Lunch, Bankroll Women is going after women entrepreneurs with social media. “Social media is an incredibly important part of how crowdfunding succeeds,” Hottenroth noted, but Bankroll Women is also sticking with actual P2P, or women to women, by hosting seminars and networking events that are geared specifically towards women.

The company hasn’t abandoned its original social fundraising model. The women’s arm of Bankroll had its soft launch at a dinner in May 2016, in which high-profile New York women were introduced to the concept of crowdfunding. So far, there is only one project up on Bankroll Women, though Hottenroth projects that in the next 6 months the platform will feature several more crowdfunding campaigns by women entrepreneurs. Since the SEC took a while to get the crowdfunding rules up, the whole process has been slower than the company would like it to be. But Bankroll Women hopes to involve more and more women in the crowdfunding process, from mentoring to entrepreneurship to investing, and it is in the face-to-face, and not screen-to-screen, where the firm is focusing its efforts.

It’s “very much [about] word of mouth and expanding the networks along the way,” said Hottenroth. For now, that means that alongside the powerful and traditionally male players in VC firms, angel networks, and other funding groups, the Ladies who Lunch (or Dine) are a growing force to be reckoned with on the fintech funding scene. Or, to quote McPherson, “Essentially, the ‘lunch’ model has exploded.”