This is a guest post from Nate Nead, Crowdfundraiser.
It is this man’s opinion that crowdfunding has yet to become overcrowded or over-hyped. The breadth and depth of the industry will eventually prove more broad and and deep than even the market promoters may have imagined. That’s not to say industry growing pains are not on the horizon. Before crowdfunding reaches its full potential, there will be the occasional casualty, but stopping the tide of this fundamental financing shift is likely to prove difficult.
Complete acceptance and industry maturation will likely include the combining–by acquisition or creative engineering–of existing financing models together with newer crowdfunding tools, expanding business finance in ways we never imagined. Nowhere will this creative capitalism hit harder than in the bridge between private, crowdfunded businesses and the public markets. Due to its very nature crowdfunding is likely to create more public security liquidity than ever before. Large, existing shareholder networks, investor demand for more rapid liquidity, investment diversification and the ease and speed of Alternative Public Offerings are likely to push more private and successfully crowdfunded businesses into the public markets.
Total Equity Shareholders
Since the major securities acts of 1933 and 1934, the total number of shareholders any private company could have totalled 500. Once a business reaches this all-important threshold, the company is rightfully forced to begin reporting to the SEC. Once completely implemented, Title III (non-accredited equity/debt investing) of the JOBS Act will bump the private-to-public shareholder threshold up to 2,000.
The new rules are likely to create some challenges. Managers and founders are likely to find managing the expectations and desires of 2,000 private, potentially non-sophisticated investors a bit like herding cats. In essence, the private company will receive all the headache, management and reporting of a public company without some of the benefits (like business valuation accretion, treasury stock swaps and capital raising capabilities). Hence, the gap from private to public status is more justifiably bridged when crowdfunded businesses experience some of the headaches of a public company without the helpful benefits.
An Existing Market
One of the biggest hurdles for any public offering is gaining widespread market support for the securities. Already successful equity crowdfunded businesses are likely to bring a larger, existing shareholder base than many other stocks on the microcap exchanges. This is helpful in establishing a market for the company’s shares with the assistance of an experienced market maker.
Rewards-based crowdfunding portals are already seeing cult-like following and adoption for some of the products launched on their portals. Couple such enthusiasm with the potential of gaining equity shares in outlier companies like OculusVR and it’s likely going public will be a natural next step in the process.
An Exit Strategy for Investors
In addition to the change in the number of shareholders for public company status, the Title III of the crowdfunding bill also allows for shares sold to non-accredited to be sold in a secondary market. This means that investors will be permitted to sell their existing shares in a private company to anyone they wish, whether accredited or non-accredited, within certain parameters.
For most companies there are really only two reasons for ever going public: raising money and offering an investor exit strategy. Nowhere will this likely be more adamantly true than in the world of non-accredited investors. Non-accredited crowdfund investors are more likely to be impatient if a product or service doesn’t meet expectations on a short time-frame. Such a short-sighted focus on company performance at the expense of more rapidly-demanded investor liquidity is likely to further drive demand for public offerings. Going public not only guarantees some liquidity for investors, but it can also be a source of additional capital.
Alternative Offerings & Corporate Compliance
Some of the unique challenges of crowdfunding are likely to spur a greater number of public offerings, but not in the traditional IPO sense. Many successfully crowdfunded startups are more likely to opt for the faster-to-market and less expensive option for public offerings, including an Alternative Public Offering.
Like its sister the IPO, Alternative Public Offerings (or APOs) include a financing event and a public offering of shares, but the process, timing and cost is much different. For instance, an APO is often executed as a reverse merger with an existing or manufactured public shell corporation. This reverse merger event is often performed in conjunction with a Private Investment in Public Equity (or PIPE). The PIPE is typically used to raise the financing for a specific “go public” deal while the reverse merger takes a private company and combines the PIPE’s capital with a real operating entity–in this case a crowdfunded business. The timing of both the financing and the process are much different than an IPO. APOs are also much quicker (one to five months) than IPOs and the cost is significantly less (completed for as little as $35,000). In addition, Sarbanes-Oxley (SOX) compliance and SEC reporting from securities attorneys and PCAOB accountants can be performed for as little as $5,000 a quarter.
Crowdfunding represents one of the most profound shifts in the world of finance in a lifetime. The niches and opportunities that will eventually be created as the result of these changes will be life-changing for many. A big part of the opportunity involves solving the problems inherent to crowdfund investing. Luckily, only some of the holes in the equity crowdfunding investment model can be solved with public offerings. Many other issues still remain. I’m confident, however, that creative entrepreneurs will fill the gaps and eventually take crowdfunding from its current burgeoning existence to full-scale market maturity.
Nate Nead is the Managing Director of Crowdfundraiser.com, a company focused on providing liquidity for private and successfully-crowdfunded businesses. As a portal-agnostic consultant for businesses seeking to raise capital through crowdfunding, Nate works directly with some of the most well-recognized crowdfunding platforms in the industry. He resides in Seattle, Washington.