This article originally ran in the Philadelphia Business Journal on July 14, 2016.
Equity Crowdfunding has arrived, in three flavors:
- Title II, which allows companies to raise an unlimited amount of money from accredited investors
- Title III, which allows companies to raise up to $1 million per year from anyone through a streamlined online process
- Title IV, which allows companies to raise up to $50 million per year from anyone in a mini-IPO
Fortunately, all three flavors of Crowdfunding come with enough details to keep securities lawyers busy. But no one should miss the forest for the trees. Crowdfunding is actually just one thing: the Internet, finally come to the capital formation industry.
Think about what the Internet does when it comes to industries. Think about the retail industry (Amazon), the taxi industry (Lyft), the dating industry (Match), the hotel industry (Hotels.com or Airbnb). The Internet directly connects buyers and sellers, pushing middlemen to the side.
Now think about the American capital formation industry or, more exactly, how a real estate developer or entrepreneur in Philadelphia goes about raising money. She maxes out her credit cards first, then borrows from friends and family. She goes to the bank but the bank turns her down. She calls her lawyer and her accountant, looking for more contacts. She hires a “finder” or an investment banker. And each of those folks reaches further, out into the labyrinth of loosely-defined, inefficient, opaque private networks.
These private networks are terribly inefficient, expensive, unreliable, and unfair. If your Dad’s in the country club, it’s a lot easier to find capital than if you grew up without a father. If you live in Villanova, it’s a lot easier to find capital than if you grew up in Tacony.
The Internet – Crowdfunding – changes all that. Today, our entrepreneur uses the Internet to connect directly not only with every investor in Philadelphia, not only with every investor in the Delaware Valley, not only with every investor in the United State, but with every investor in the world. And it doesn’t matter what her father does or which zip code she calls home. Entrepreneurs are sellers and investors are buyers and it’s just the Internet, simple as that.
This is actually happening, right now. More than $40 billion has been raised using Title II Crowdfunding alone. More than 100 companies have filed mini-IPO offerings under Title IV. Title III became legal only on May 16th, and already dozens of companies have lined up to raise money. I spend all of my time in Crowdfunding and have for the last several years, representing clients across the country and actually around the world.
Virtually all of the new jobs in this country are created by small businesses. By giving entrepreneurs easier access to capital, like rain on parched earth, Crowdfunding promises to deliver sorely-needed jobs to the American economy.
But Crowdfunding isn’t a one-way street. It’s not just that developers and entrepreneurs have easier access to capital. It’s also that normal investors, for the first time in history, have access to invest in the kinds of deals that have previously been reserved to the wealthy. That’s why we refer to Crowdfunding as the “democratization” of American capital.
Beyond all that, what I find most exciting about Crowdfunding is the special relationship it can create between companies and investors. Here’s what I mean:
- A microbrewery is coming to Fishtown. For the first time in history, the microbrewery can raise money from neighbors, from the customers who will be its patrons. But it’s not just the money. The microbrewery will get feedback from those patrons as to the kinds of beer they want to drink, what they want the space to look like, even what they want to be playing on TV as they drink. The microbrewery might say “Invest $1,500 and get a free craft beer every Thursday.” The very process of raising money helps to ensure the success of the business.
- On a more serious note, a startup at the Science Center is trying to develop a therapy for cystic fibrosis. For the first time in history, the startup can look to the entire cystic fibrosis community – victims of the disease, their family, their friends, their survivors – as investors. The community can be a ready-made pool of enthusiastic and supportive investors. In addition, the startup will hear feedback from its investors that it couldn’t hear anywhere else. It will hear about which therapies the community wants most, how cystic fibrosis victims and their families live their lives day-to-day, the things they wish they had but don’t have. The people who care most get a voice.
This intimate relationship between a company and its investors is brand new, something that has never existed before in the history of capitalism. In my opinion, it is going to redefine how we think about business.
Like so many new things, Crowdfunding is centered in California today, with growing pockets in Texas, Florida, and New York. It’s time for Philadelphia to join the future of American capitalism.
Mark Roderick is an attorney at Flaster/Greenberg PC. He concentrates his practice on the representation of entrepreneurs and their businesses. Expanding on his in-depth knowledge of capital raising and securities law, Roderick is spearheading Flaster/Greenberg’s Crowdfunding Practice and is one of the leading Crowdfunding lawyers in the United States. He also writes a widely-read blog on Crowdfunding at www.crowdfundattny.com.