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THE INVESTMENT CROWDFUNDING MOVEMENT

Posted By Administration, Monday, July 27, 2015

Advantages and Insights for Professional Investors

The Movement – Background

            In 2011, with little fanfare, few spectators, and essentially no press concern, the securities administrator in the State of Kansas quietly enacted a new exemption from the registration requirements for public offerings of securities within its borders. The “Invest Kansas Exemption” (IKE), as originally enacted, permitted capital raises in Kansas of up to $1,000,000 by means of general solicitation (to both accredited and non-accredited investors) without registration and with minimal regulatory compliance features. Whether the administrator knew it at the time or not, Kansas had, in effect passed the United States’ very first securities based “crowdfunding” exemption.

            Even before that time, the term “crowdfunding” had begun to capture an increasing share of the American public’s imagination through several wildly successful and high-flying campaigns on rewards/donations based sites such as KickStarter and IndieGoGo. Since 2011, the emergence of both peer-to-peer lending platforms such as Prosper and Funding Circle and accredited investor platforms such as Angel List, Fundable and CircleUp have furthered the public’s growing appetite to support businesses and causes they believe in outside of the traditional financing channels. With the increasing success of these platforms, and the growing acceptance by start-up and growth stage businesses, as well as established companies who are beginning to use crowdfunding for product validation, industry professionals such as angel investors, fund managers, attorneys, accountants, brokers, bankers and investment advisers are beginning to take notice.

            What began in Kansas in 2011 has since spread to twenty-three other States (including Texas and Colorado) and the list is growing monthly.  

            Meanwhile, following on the passage of the JOBS Act in 2012, the SEC has rolled out two new transformative initiatives which directly implicate crowdfunding: Rule 506(c) and Regulation A+. Full interstate crowdfunding (Title III of the JOBS Act) is yet to come, but the trends are in the clear direction of a more permissive regulatory environment and a democratization of capital formation.

 

Why it Matters

            There is no general consensus as to what the future of crowdfunding in the United States will look like, but there are points of widespread agreement. Businesses as well as industry professionals seem to broadly agree that the awareness and the market for crowdfunding as a whole (donations, rewards, lending and securities based) is expanding rapidly.

            For angel investors and managers of investment funds, the benefits of staying closely focused on the crowdfunding movement are obvious. Professional investors want to maximize returns and minimize risks. Crowdfunding provides a pre-vetting opportunity for such investors. It simultaneously demonstrates product/concept validation (or failure), while allowing the ‘crowd’ to take on the first level of risk, which is diffuse by its very nature. A company that survives through an investment crowdfunding round will have a capital boost as well as a loyal customer based assembled. Subsequent Series A investors will have higher quality investment opportunities in businesses that are more likely to succeed, which is a recipe for better, safer investments.

          Professional investors who understand and align with the historic evolutions taking place in the capital formation markets—with crowdfunding as the vanguard of such movement—will have a distinct advantage over their peers for higher quality investments that maximize returns and serve the valuable social purpose of job creation and community development.

 

Jeffrey A. Bekiares, Esq. 

Jeff Bekiares is one of our regular contributors. Jeff is a Georgia attorney with over eight years of experience in securities and corporate law. He was one of the first attorneys in the nation to discover the power of intrastate crowdfunding, and has worked closely with regulators and experts in the state and national crowdfunding community through his start-up SparkMarket and his legal practice Founders Legal, to design crowdfunding campaigns that are compliant and safe for the issuers and the investors.

 

Tags:  2012 JOBS act  angel investors  crowd  crowdfunding  Founders Legal  funding  indiegogo  investing  investment  investment crowdfunding movement  jeff bekiares  kickstarter  SEC  smm global  SparkMarket 

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