By Dara Albright
Tis the season when I sit beside the festivus pole, reflect upon another year passed, dust off my crystal ball and prognosticate the future of crowdfinance.
2013 will be remembered as a pivotal year for the crowdfinance industry. Significant achievements helped lay the necessary foundation for crowdfinance to receive wide mainstream recognition and expand dramatically in 2014.
Google led a $125 million deal to buy a stake in Lending Club from existing shareholders. The Google/Lending Club transaction valued the world’s largest p2p lending platform at $1.55 billion, nearly tripling its valuation from its last fund-raising round less than a year ago. Prosper, the nation’s second largest p2p portal, added financial behemoth, Blackrock, as a strategic investor. Venture capital investment entered the equity side of the industry with CircleUp raising funds from Union Square Ventures and Google Ventures. The SEC officially removed the 80 year ban on general solicitation for private companies and finally proposed its rules for Title III crowdfunding. The nation’s inaugural unaccredited equities crowdfund raise was completed via the intrastate exemption. And for the first time in history, a quotation system for private offerings has been developed and made publicly available on major financial media channels to investors across the globe.
While 2013 went out with a bang, below are four predictions that will make 2014 even more remarkable than the last.
1. CAPITAL WILL BE REALLOCATED FROM TRADITIONAL FIXED INCOME PRODUCTS INTO PEER-TO-PEER (P2P) LOANS
2013 was an extraordinary year for p2p lending. The domestic market grew 177%, the global market exceeded $8B, and the industry began winning over an initially skeptical media. As the financial press increasingly draws attention to p2p’s greater and more stable returns, we should experience an exodus from bond funds into p2p. This past year, many active bond managers underperformed their benchmarks, and investors began withdrawing money from bond funds at record paces. According to Lipper US Fund Flows data, over $60B has been pulled from municipal bond funds alone in 2013 – the most since 1992. With p2p garnering mainstream attention, conventional fixed income asset classes languishing, and wealth managers becoming more knowledgeable about p2p investing, more capital is likely to find its way into a diversified portfolio of p2p loans.
2. EQUITIES CROWDFINANCE WILL GERMINATE THROUGH SELL-SIDE CHANNELS
Whereas p2p lending sprouted from the yield-hungry investing public before being chased by the institutional buy-side, the equity side of crowdfinance is more likely to germinate through sell-side channels such as boutique investment banks and small cap underwriters who possess decades of experience selling “story stocks”. In 2014 brokerage firms will quickly discover additional revenue streams emanating from corporate crowdfinance products such as PIPRs (“Private Issuers Publicly Raising) and crowdfinanced IPOs. Instead of leaving money on the table, BD’s will embrace these new products that not only contain more attractive commission structures, but mitigated compliance risk.
3. OTHER CROWDFINANCE STRUCTURES WILL PROVE MORE VIABLE THAN TITLE III CROWDFUNDING
Despite what most crowdfunding enthusiasts would like to believe, Title III Crowdfunding, as proposed by the SEC, will not be the holy grail of capital formation. There are more feasible and cost-effective options available to issuers such as PIPRs, intrastate crowdfunding and even rewards-based crowdfunding. Title III Crowdfunding will likely undergo a number of legislative iterations, such as increasing the $1M offering threshold, before it becomes practicable for most emerging businesses. While national securities-based crowdfunding remains in flux, “locavesting” or intrastate crowdfunding will be a better way for most regional businesses to raise funds. As more states follow Georgia and Kansas in bypassing the SEC and implementing their own crowdfund legislation, more businesses will have an opportunity to reach out to their community for growth capital.
4. VENTURE CAPITAL WILL CHASE CROWDFINANCE INFRASTRUCTURE PLAYS
Venture capitalists, looking for ways to capitalize on crowdfinance, will recognize that a vast amount of wealth will be generated in infrastructure plays. In 2014, venture capital will flow into those companies that provide settlement & clearing functionality, supply market data to the global investing community, and facilitate secondary transactions of crowdfinanced offerings and p2p debt.
Finally, it must be asserted, that no nation has ever succeeded, or will ever succeed, by printing or taxing its way to prosperity. Nor can a nation stimulate its economy by restricting its middle class investors and entrepreneurs from accessing portfolio yield and growth capital. However, employing the doctrines of crowdfinance – granting all citizens the ability to freely invest in the ingenuity and invention of fellow citizens – has proven to be a winning formula. In fact, it is what enabled a simple farmland to become a global innovation leader and the greatest economic superpower in the history of the world. And it is crowdfinance that what will fund the innovation that will fuel the next economic boom. As the crowdfinance industry crosses these new milestones in 2014, it will be paving the way for new medical cures, technological advancement and greater wealth equality.