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Crowdfunding’s Impact on the Finance Sector

Crowdfunding-intlCrowdfunding is a popular but complex term. To some, it refers to a large campaign to raise money for charity. To others, it involves pre-ordering products that will be financed by the received contributions. Another form is equity crowdfunding, also known as crowd investing.

The concept of crowdfunding is not new. For hundreds of years, similar local models included citizens of a village or town have coming together to fund a project. These days the Internet makes it possible to operate similar models on a larger scale. It is an effective, transparent and democratic model to raise financing.

During the last two years, we have started to see securities-based crowdfunding models appear, such as peer-to-peer lending and equity crowdfunding. These models have also required changes in regulations and laws in many countries. The recent Jumpstart our Business Startups Act brings about regulatory change to investments in private securities and the marketing of private securities offerings. But securities crowd investing is much bigger than only small startup investments. The JOBS Act makes equity crowdfunding possible, meaning one can now market and advertise private securities offerings. The final part of the JOBS Act (Title III) should be finalized this year, which will allow non-accredited investors to take part in these activities.

Equity crowdfunding platforms must be real finance platforms. They must be able to handle payments, check backgrounds of investors, have access to credit ratings, fulfill KYC (Know Your Customers) requirements, the Securities and Exchange Commission’s requirements, possibly handle escrow accounts for investors, track share registries and have integrations to accounting systems. Companies have emerged to offer this type of finance platform as a service for equity or lending crowd investing portals.

Equity crowdfunding is now expanding to other securities and assets, such as real estate crowdfunding. These platforms enable people to invest smaller sums into commercial or residential real estate, which makes it easier for someone to get started in real estate investing and diversify their holdings. Crowdfunding services also exist for export finance, commodities and energy technology and sources.

Now the traditional finance sector is also interested in crowdfunding or similar ‘marketplace’ concepts. For example, investment banks and broker dealers are setting up online marketplaces to get their investors and deal flow online, increasing transparency and efficiency.

Some pension fund management companies are setting up online marketplaces for pension fund managers and their deal flow. Those are not open to the public and the deal size is much larger. In addition, some LPs (e.g., funds of funds, family offices) look for models to bypass funds as they represent a rather expensive option in some investment classes, replacing them with automated investing platforms that can work with other investors and follow their rule-based investment criteria.

Equity crowdfunding is still in its early days, but we are truly seeing a global paradigm shift. It is not only about startups and small sums of money from ordinary people. Using similar online concepts, the private securities investment markets are becoming more effective. These models are changing the value chains and roles of the entire finance sector. Early legislation is good, but the finance sector must work together to ensure activities are regulated well and platforms offer tools for transparency and tracking.

Jouko Ahvenainen, Co-Founder, Grow VC Group. Jouko is a serial-entrepreneur and has participated in changing U.S. finance regulation, getting the Senate and President to allow crowdfunding and has worked with EU finance regulation. Jouko started his work with crowdfunding models in 2008. Before Grow VC Group, Jouko started and exited several startups in the U.S., Europe and Asia. He has M.Sc. in Computer Science and an MBA in Finance. Grow VC Group has ownership in some companies mentioned in the blog post.

Crowdfunding image via Shutterstock

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