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More a Whimper Than a Big Bang?

Reflecting on a slowish start for Equity Crowdfunding in the USA – are there real issues and, if so, what are they?

I engaged in an interesting debate a week or so ago which was responding to an article reflecting on what the author perceived to be a comparatively modest uptake of equity crowdfunding in the USA since its broadest introduction in 2016.

The key numbers for 2016 are (according to Sherwood “Woody” Neiss) 186 campaigns launched of which 79 were successful raising around $18 million.

The numbers are modest but not terrible and after all – size is not everything! That said it is fair to say that, because the gestation period from the fanfare of the JOBS Act to its full enablement was so long, the sense of anticipation was such that many, quite reasonably, expected something a bit more demonstrative.

Given the size of the market and the relative maturity of the reward based crowdfunding models in the USA, and further still the degree to which entrepreneurial activity has been driven by equity finance compared to the Bank led finance of Europe, it was reasonable to expect that it might have had a warmer reception.

The debate on the relative performance was, however, an interesting one and in large part seemed to fall into two philosophical camps. Those that regarded this as a failing born of an unwillingness to adopt more traditional methods of marketing and selling equities and securities and applying them to the nascent equity crowdfunding scene in the USA. The deep irony of lamenting the poor performance of intermediaries to adequately “sell” in a philosophically disintermediated process seemed lost on those advancing this view. The other camp, of which I was one, consisted of those that think that it is this very attitude of treating crowdfunding as being simply an extension of existing traditional finance and an unwillingness to see its distinctive philosophical and practical differences which is mis-setting expectations for participants and causing the growth to lag.

But, in a way, both sides of the argument are probably right and it is just a bit of a case of chicken or egg.

The origins and difficult birth of equity crowdfunding in the USA have, in my opinion, undoubtedly miss set the expectations for participants and stymied growth to the extent that equity crowdfunding in the USA, at a Federal level at least, does look like a timid version of the more unpleasant aspects of old world capital. The SEC’s reluctant and piecemeal introduction of overly complex legislation to make equity sales to retail investors possible delayed the “crowds” participation and allowed existing capital market players to get early site and activity in the process. This, in large part, seemed to set the tone of the interaction. This early misstep was exemplified by a rash of “World Conferences” in the US which presented the depressing sight of minor Wall Street veterans pontificating on a subject they really didn’t understand and simply viewed as an opportunity being presented as “experts” and “thought leaders”. This did not bode well and so it proved. Not least because these old players were able to portray themselves as the “trusted” intermediaries and kingpins as they got first dibs. Unsurprisingly they could present themselves as the “go to” advisers for retail “unsophisticated” investors when they were finally were allowed to become active in the equity crowdfunding sector. So you have a disintermediated process intermediated, and you have old world thinking driving the interaction. Not a good start. IF they are doing a bad job of selling the proposition becomes something of a moot point as the brakes were already on.

Similarly, the restrictions placed on the size of raise $1M in any given year – this is just too low and constrains the applicability of crowdfunding to too narrow a group of participants and suggests it is only of use to micro or new businesses. Secondly the constraints on how to present and pitch to the crowd being bound up in theolf=d world language and terms are both bad and serious impediments to growth for the sector. Here’s why. If you make it difficult for a crowdfund campaign to directly appeal to a wider set of motivations inherently present in a crowd you are constraining the whole essence of crowdfunding. This is an issue in the UK as well but the reticence of pitches to be more emotional and less financially rational is compounded in the USA by the highly litigious nature of society there.

In sum then we have a situation where poorly informed regulators have stymied growth by miss setting the terms, giving an advantage to established capital market players, constraining how appeals can be made, constrain ambition and to all intents and purposes set equity crowdfunding in the USA up as a poor relation of old world capital. Hardly surprising that the market isn’t booming. So if I were reflecting on the challenges faced by the emerging US Equity crowdfunding sector it would not be so much its modest start but the difficulty in distinguishing it from old world capital! If crowdfunding cannot differentiate itself from what has gone before it is truly missing the real opportunity, and so too are the investees missing out on the true benefits.

But let us not be too smug over here. In the UK we had the advantage that our Common Law system allowed equity crowdfunding to get underway under its own steam within existing frameworks. This meant that from the beginning it was a more renegade and counter-cultural approach as it was not driven by existing players but new entrants.  The FCA are, however, trying their best to turn back the clock by introducing similarly daft ill-conceived regulations. They still operate under the illusion that they somehow “made it happen” They didn’t, it happened in spite of them not because of them and they need the humility to learn a bit more about it so as their approach is properly informed.  That way they will avoid compounding their earlier mistakes where they sought to introduce“crowdfunding” specific regulation which fails to differentiate it from other funding in any meaningful way and nw, by their own admission, are facing challenges and risk created by “regulatory arbitrage” and lack of transparency and comparability.

And not all is lost in the US either. The entry of very popular platforms like Indiegogo into the equity arena has to be a good thing. It exposes the idea of equity crowdfunding to a wide range of people familiar with the reward or perk based model and, in so doing, “legitimises” it to the crowd. I wish them every success.

There are even moves to “FIX” the legislation with proposals making their way through the political process – but who knows how that will proceed.

I am also interested in the intrastate crowdfunding which emerged as a result of the delay in the full implementation of the JOBS act. A number of States wanting to push ahead introduced legislation for equity raises within the borders of individual states. The variety of model makes for an interesting laboratory worth reviewing and monitoring for new and novel ideas which might see wider implementation.

So maybe equity crowdfunding’s muted growth in 2016 is a reflection of poor “selling” and marketing by intermediaries. If it is it just shows how bad the US model is and how those charged with implementing it simply don’t get it.

Question is will it change? I have my doubts.

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