Krishan Arora is CEO & Founder at The Arora Project, a globally recognized leader in crowdfunding & scaling high-growth ventures.
Equity crowdfunding came onto the scene to transform an economy starved for innovation and change. The market has seen some recent developments that have changed the tenor of the space, especially with the SEC increasing the equity crowdfunding cap back in November 2020, which was just recently realized in March 2021.
Now, a well-known crowdfunding platform is pivoting to allow investors to trade investments just like shares on the stock market. While it joins the ranks of a select few other platforms, it’s a move almost as groundbreaking as the concept of equity crowdfunding itself, and I’ll discuss here what the greater implications are going forward.
A Little Background
On October 30, 2020, the crowdfunding platform StartEngine introduced a secondary platform, StartEngine Secondary, which allows “non-accredited investors to trade investments in startups that have raised via Regulation CF or Regulation A+.” At present, investors can only trade shares in companies that used StartEngine to raise funds, and one of the first companies to utilize Secondary’s features is none other than StartEngine itself.
As an alternative trading system, StartEngine Secondary is registered with both the SEC and FINRA, and first required the parent StartEngine to obtain a broker-dealer license and transfer agent status. A transfer agent “is a liaison between a company and shareholders that handles bookkeeping and communications between the company and its shareholders around important issues like corporate voting.”
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StartEngine, with its secondary public trading marketplace, joins the ranks of other international equity crowdfunding platforms like Seedrs (based in the U.K).
The ‘Wall Street’ of Startup Investing?
The launch of StartEngine Secondary, and the anticipation that more crowdfunding platforms will soon follow suit, has given rise to a new era and marketplace for equity crowdfunding. If it reaches its full potential, it could be akin to having a “Wall Street” of startup financing, and its implications would be both far-reaching and potentially very disruptive.
The strengths of equity crowdfunding are well-documented. Founders are able to have access to capital they never would have been able to get previously while still retaining control of the business. Investors, either accredited or not, are able to back companies they believe in at an early-stage, ground-floor level, with the potential for outsize returns in the distant future. There is real empowerment on both sides.
But if ever this arrangement seemed slightly imbalanced, it would be the investors who feel stuck in limbo waiting for ROI in their equity investments. The rise of trading platforms like StartEngine Secondary could change all this. Investors could cash out on any growth in valuation (by trading or selling their stake) rather than having to wait for an IPO or exit event.
Liquidity, Liquidity, Liquidity
The following quote from StartEngine sums up the equity investor’s plight to a tee: “Today if you invest in a company on StartEngine, typically you can’t exit your investment until that company experiences a liquidity event, such as being acquired by another business or an IPO. Those events can take anywhere from 5-10 years to occur, if they occur at all.”
There are, of course, exceptions. In my last article, I highlighted New Zealand-based Thankyou Payroll, one of the first companies to produce dividends from equity crowdfunding, occurring in 2020 just three years after a successful 2017 fundraiser. But again, this was hardly representative of the usual trend. The more common scenario, as StartEngine alludes, is to wait several years before any ROI manifests.
Cash reigns supreme in virtually every financial context imaginable. Being able to pay the bills in a timely manner with sufficient cash on hand is still the easiest way to prevent going out of business. In the investment sense, too, liquidity — and the pursuit of it — are worthy and legitimate end goals of a well-diversified portfolio. You simply never know when a sudden and unexpected need for quick cash will strike.
Any true believer in equity crowdfunding would tell you that there’s no limit — nor should there be — on how large a founder’s supporting crowd can get. Cap the dollar amounts maybe, which the SEC obviously has done, but don’t stop founders from attracting as many new fans as they can reach.
What It All Means for Equity Crowdfunding
As my director of advertising, Jose Renteria, has found from studying and interpreting data over numerous campaigns, this trend presents a unique opportunity from a marketing perspective.
Newer investors with limited liquidity will now be able to dabble in diversified investing without tying up their funds for five to 10 years. Having the option to sell their shares and recoup their investment (or more if the valuation has gone up), could make equity crowdfunding exponentially more attractive for them.
These smaller investors are typically the most valuable investors in the equity crowdfunding space because they help build credibility around the brand that’s raising funds. They become loyal brand ambassadors who usually bring in their friends, increase the total raised and help brands get more exposure. Essentially, the more they participate, the faster the success of equity crowdfunding accelerates.
What This Means for Agency Leaders
The equity crowdfunding space will have more regulatory hurdles to overcome before alternative trading platforms can become truly impactful, but the building blocks have been laid.
What shape this future will take poses the bigger question: Will individual platforms (such as Wefunder and Republic) follow in the footsteps of this trend by each hosting their own trading locales, or will we see one centralized platform evolve?
Business and agency leaders should continue to watch this trend and act accordingly as it evolves. This means addressing short-term as well as long-term outcomes in any pitching materials and keeping tabs on the values at which close competitors are trading.
Put simply, the evolution of equity crowdfunding continues. The SEC’s regulation changes in March 2021 also provided an obvious boost and, with the addition of trading platforms, we’ll come that much closer to achieving the democratized investing dream. In short, equity crowdfunding is gaining traction, is a force to be reckoned with and will likely continue to disrupt and innovate the early-stage fundraising space.
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Author: Krishan Arora, Forbes Councils Member