Equity Crowdfunding Has Landed
Now Anyone Can Participate In StartUp IPOs.
Investment Bankers? Prepare To Be Disrupted And Displaced.
Promising New Companies Have A New, Easier, Cheaper Source Of Capital
NOTE: THE INFORMATION CONTAINED IN THIS ARTICLE SHOULD NOT BE CONSTRUED BY THE READER AS BEING LEGAL, FINANCIAL, TAX, ACCOUNTING, ECONOMIC OR INVESTMENT ADVICE. NO OFFERING OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY IS MADE HEREBY, NOR IS A SOLICITATION FOR THE PURCHASE OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY MADE HEREBY. THIS ARTICLE IS INTENDED FOR GENERAL INFORMATIONAL PURPOSES ONLY AND REPRESENTS THE VIEW OF THE AUTHOR ONLY.
THIS ARTICLE IS COPYRIGHT 2015 BY DOUGLAS E. CASTLE, WITH ALL RIGHTS RESERVED. ANY REPRODUCTION, TRANSMITTAL OR DISTRIBUTION OF THIS ARTICLE, EITHER IN WHOLE OR PART, IS UNAUTHORIZED AND MAY BE UNLAWFUL, UNLESS FULL ATTRIBUTION IS GIVEN TO THE AUTHOR AND ALL LINKS IN THE ARTICLE REMAIN INCLUDED AND “LIVE.”
The Securities & Exchange Commission (SEC) has now approved and promulgated (by publication) the Final Rules for Title III Equity Crowdfunding under the JOBS Act legislation. In a few months, any investor, regardless of income and net worth, will be able to participate in a startup company by purchasing shares or debt (bonds, etc.) and earning a return on investment in the form of capital gains, dividends or interest.
This is truly revolutionary in the world of crowdfunding, which has been dominated since its inception by rewards-based and donation-based funding approaches. These offerors, featuring their pavilions on such sites as Kickstarter, Indiegogo and GoFundMe, were not permitted to offer securities to participants. Now, that has all changed.
If a startup or entrepreneurial enterprise wants to raise money by selling its shares, bonds or notes to the public, it may now do so on one of any number of duly-licensed internet-based platforms, often referred to as “portals”. Equity crowdfunding will disrupt the traditional capital markets, and will eliminate much of the expensive and extensive compliance requirements associated with typical private placements (offerings to a limited number of investors pursuant to the terms of a private place confidential offering memorandum), and initial public offerings (sold by prospectus through investment banking and securities brokerage houses).
There are, of course, certain rules and restrictions on the amounts of such offerings, and on certain other aspects of raising money through securities offerings orchestrated through internet-based crowdfunding, which can be done by licensed and registered securities broker-dealers and a new class of less-restrictively regulated entities called “funding portals”. Some of these restrictions are highlighted briefly in an article in Fortune magazine:
Another article which sheds some further light on this dramatic change in the possibilities for startups to raise operating capital through securities crowdfunding can be found in an article in Forbes magazine:
The most comprehensive outline (merely a hint) of the newly adopted rules and restrictions is set forth in a press release put out by the SEC itself:
A quick synopsis of some of the potential changes anticipated to trend through equity crowdfunding via investment bankers and portals follows:
=> There will likely be a decline in the percentage of entrepreneurial companies seeking funding in excess of $25,000.00 - $50,000.00 through the traditional rewards-based crowdfunding platforms, and a dramatic increase in the number of startups listing themselves on portals, especially those nascent enterprises and projects seeking capital of between $100,000.00 and $1,000,000.00;
=> There will be a decline in the percentage of total startups seeking money from venture capitalists, angel investor syndicates and private equity sources. These last three categories of capital sources will still be seeing their share of larger (i.e., in excess of $5,000,000.00) fundraising deal prospects, especially where disruptive technological innovations are valuable proprietary intellectual property are involved; and
=> Some entrepreneurial offerors will be “working,” “gaming” and otherwise testing ceilings on crowdfunding offering amount limitations by experimenting with offering units featuring layers of warrants, aggressive conversion features and other ingenious ways of working within the written legal framework of the regulations, while possibly pushing the intended regulatory envelopes. Some of these crowdfunding experimenters will be seen as pioneers and others as outlaws (naturally);
=> There will be an economic stimulus to the US economy through a variety of channels including an increase in private sector permanent jobs creation in the small business sector;
=> A goodly portion of the fees generated by traditional investment banking firms will be shifting over to the owners of licensed and registered portals. Investment banking will be significantly disrupted, especially in the IPO market, while portals will be inundated with both supply-side and demand-side business and the income which is ordinarily associated with underwriting.
As always, thank you for reading me,
Douglas Castle for Global Edge International Consulting Associates, Inc. and The Global Edge International Blog
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