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Private Equity Strategies

Crowdfunding and the JOBS Act: The Next Wave In Private Capital Funding

Tuesday, July 23, 2013

By: Bailey McCann, Private Equity Strategies

Earlier this month, the SEC proposed to lift the 80-year-long ban on general solicitation of accredited investors, pursuant to Title II provisions of last year’s JOBS Act. With the new rules, entrepreneurs will now be able to advertise and promote their capital raise activities online (and even offline with billboards and TV ads) to court accredited investors – making the capital raise process somewhat like a new Match.com for businesses and investors. The SEC ban lifting will also affect hedge funds, as Opalesque previously covered, in addition to generating much more deal flow for angel investors.

However, even though there are approximately five million accredited investors in the US, only 10% are actively involved in the investment process. Since businesses will now be able to advertise their capital raises to these investors, this could lead to a boom in driving more accredited investors to participating in the investment process through crowdfunding.


Even before the vote on Title II, some platforms were available for crowdfunding. These first movers now have the outlets in place to build on the next wave ushered in by this vote. EquityNet is one such platform, and has raised more than $200m dollars from accredited investors for entrepreneurs. EquityNet will also be one of the first funding platforms for entrepreneurs to capitalize on the advertising components of the SEC’s adoption of Title II as the company has been anticipating this move for some time.

“Companies can now advertise in a much more profound way their need for capital at all stages of their lifecycle,” says Judd Hollas, CEO of EquityNet in an interview with Private Equity Strategies. “I think this vote is going to result in more capital being available, and will be most impactful for the individual-to-individual relationship.”

The question for many concerned parties is the potential for fraud. Will there be an increase in unscrupulous activity? What experiences do other countries have in dealing with securities-based crowdfunding? It is interesting to note that while the SEC did lift the ad ban, it placed the bar for accredited investor verification higher—eliminating the “self-verification” option. What does that mean -- in practical terms for accredited as well as non-accredited investors?

“I think the fact that entrepreneurs have to verify that investors are accredited is a positive step. Arguably the same questions were raised about companies like eBay or PayPal in the early days, but there have also been a lot of technological advancements driven by those companies. Those technologies and community self-policing will come along here too, some solutions are already in place,” he says.

“At EquityNet we’ve already devised and patented a system of algorithmic verification, similar to what Morningstar did for mutual funds. I think right now, the situation is analogous to the early 1990s when companies like E-Trade started pulling people away from the Merrill Lynches because they lowered the fees and provided the opportunity to be self-directed. Those same people want the opportunity to self-direct private capital investments.”

Hollas notes that these allowances could also disrupt current funding cycles throughout the lifecycle of a company. Platforms like SecondMarket could well complement early stage platforms like EquityNet, making the need to go public less urgent.

“This could have a revolutionary impact on the IPO market. Right now, the IPO market very narrowly focused and these platforms provide companies with the opportunity to find equity investments throughout their lifecycle from the private sector, saving a lot of the headache around reporting requirements like Sarbanes-Oxley for companies that go public.”

This could be welcome news for sound private companies that don’t fit the mold VC firms and Angels have come to expect. “I’m not saying all angel investors, VCs and private equity firms are going to go away, but I do think there is a significant market of companies that need funding and can’t always find it. In a lot of ways I think this will create more opportunities downstream for these firms. Ultimately, it is a democratization of financial markets.”

 
This article was published in Opalesque's Private Equity Strategies our monthly research update on the global private equity landscape including all sectors and market caps.
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