2,800 crowdsourcing and crowdfunding sites
Disclosure: CommunityLeader advertises on Crowdsourcing.org, and is a vendor of our sister firm Massolution.
Despite the industry's increasing maturity, there's still much to learn about crowdfunding.
Sure, we know what Kickstarter, Indiegogo, and their ilk do. And financial (debt- and equity-based) crowdfunding looks like much of the same, except backers will invest money in exchange for a piece of a company, a debt position, or a part of the startup's future income, instead of one of a company’s products.
Such assumptions, however, are misguided. Financial-based platforms may evolve and specialize as its industry niche matures. And while true equity-based "crowdfunding" may not yet be fully implemented in the US, the emergence of online platforms soliciting and selling securities provides us little idea of how and to what extent it will be used by both established companies and startups.
Crowdfunding provides financial services firms and professionals with a new way to re-engage existing customers, as well as an opportunity to find new clients. As CommunityLeader’s Joseph Barisonzi wrote in a recent white paper, the “integration of technology and crowd-based pressures” have caused a ‘Market Margin Flip’ for capital acquisition, investment banking, and other financial services. (If you're unclear on some of the terms used, you can check out relevant terms that CommunityLeader has defined, here.)
Prior to widespread internet adoption, Barisonzi explained in the white paper, investment banks have traditionally worked with a small number of customers, providing a high level of personalized services, charging high prices for their services. Now, as online financial transactions become the norm, the model is changing.
“Companies leverage automation and technology to work with a greater number of clients, but the actual time they need to spend with each client is dramatically reduced,” Barisonzi writes. “The end result is that for each individual client, the resulting margin is lower.”
On top of this, crowdfunding, an activity that is enabled by social media and online communication, allows companies to build deeper connections with customers. These customers can be existing clients, or new ones, enticed by the possibilities that the democratization of investment capital that comes with crowdfunding.
While some companies will be able to build out their own portal platforms to service crowdfunding needs, many others will need to purchase the services of a white label crowdfunding solution. (Our Software and Solutions Report covered the buy vs. build decision in great depth.)
When it comes to available private or white label crowdfunding portal platforms, a wide spectrum of solutions is available on the market. These range immensely. On one hand, there are relatively straightforward crowdfunding plug-ins like IgnitionDeck that come for a flat fee. The platform works simply: put it on your page, add any of the available features, and invite backers to your page to gather funding. Roberts Space Industries used IgnitionDeck (in addition to Kickstarter) to collect over $30 million for its upcoming game Star Citizen, proving that a simple cash collection tool may be just what a campaign needs.
At the middle of the spectrum are companies like Invested.In and Launcht. They provide customized crowdfunding portals for companies looking to get into the space. That means they’ll customize the look and feel of the platform to a client’s needs, and provide the back end capabilities to keep track of the backers and the cash coming in. These are straightforward solutions that can be very useful for certain clients (like universities, for example) who need the technological capability of collecting cash but can operate the platforms without much outside help.
Standing opposite of the white label plug-ins are entire crowdfunding ecosystems specifically designed for financial-based crowdfunding. These systems are designed to become end-to-end solutions for clients. CommunityLeader, for instance, provides companies everything from regulatory compliance and e-signature support, to report-building capabilities and escrow services. The company has emerged as one of the leaders in this space and it employs an interesting model that deserves further exploration.
CommunityLeader’s co-founders — CEO Barisonzi, CMO Scott Bachman, CIO Jennifer Amys, and the Chief Compliance Officer Rick Weintraub — come from diverse backgrounds, but have crossed paths through prior business ventures. Barisonzi and Bachman, for example, had previously been working with immigrant investor communities by helping individuals come to the US on EB-5 visas. (Indeed, the platform and due-diligence they used there to track and manage the investments became the “core” for CommunityLeader’s platform.)
When the co-founders came together, even before the JOBS Act came about, they realized their software had to be based on two key principles. The first was a strong belief in communities (as opposed to simply disorganized “crowds”), which share a sense of commonality and common purpose.
“What brings us all together is the belief that our communities are healthier when business ownership is as connected to the community as possible,” Barisonzi told Crowdsourcing.org, “We are committed to creating a situation where people in the community have the ability to invest in the businesses in their community.”
The second founding ideology is the emphasis on regulatory compliance, and not just within the scope of the JOBS Act.
“Our platform can support multiple investments of different exemption types: both concurrently and consecutively,” Barisonzi said.
That can be of immense help to a business, according to CommunityLeader’s CEO (pictured right).
“How the SEC wrote the rules means doing a 506(c) offering, even though you get the benefit of general solicitation, you now have the extra burden of verification of the accredited investors, and you no longer can have a small group of unaccredited investors participate in the raise,” he explained. “You can’t have your friends, can’t have your family, can’t have any of your employees or your suppliers or your vendors, many of the people who helped build the value of your company now can’t participate.
“From a community perspective, a 506(c) raise often undermines the core principle of connecting the business to its community,” Barisonzi continued. “But the proposed JOBS Act Title III crowdfunding rules will allow you to concurrently run a 506(c) and a Title III raise in a way that strategically attracts both non-accredited, community-based investors and verified accredited investors.”
A company will need a compliant platform to manage the associated complexities, he added.
The responsibility for ensuring that a CommunityLeader built platform is compliant falls on Weintraub, the company's CCO, who has over 30 years of experience in working with emerging growth businesses on complex securities transactions.
“We said, ‘Let’s go through and mechanize the traditional Reg. D market,” Weintraub said.
Weintraub likened the process of putting together a private offering to herding cats: cumbersome and time consuming from an investor tracking and compliance standpoint. To him, what makes CommunityLeader a great service provider is the ability to streamline and greatly expedite that process.
“We take what happens at a syndicator’s office with a broker dealer, and we reduce that to an electronic office, essentially,” he said.
The compliance officer has already examined the JOBS Act rules; the company guarantees that the moment Title III rules are finalized, clients will be able to support issuers to raise money from unaccredited investors in a compliant environment. Barisonzi said Title II rules were, indeed, ready for use by issuers and investors as soon as they went into effect.
Once the laws, rules, and relevant cases are examined and clearly understood, CommunityLeader converts the laws into business practices. Adding these business practices into the platform ecosystem involves close collaboration with the IT team, which is led by Amys, the CIO.
“As new regulations were proposed, we’d sit down with legal counsel and work through the process,” Amys said. “If there is a new feature of the law that we can take advantage of on behalf of our clients, we work it into their platform.”
For clients, the process of setting up a custom portal is straightforward. CommunityLeader’s executives work with each potential client to determine whether a partnership makes sense; if so, they work with the client on the five steps shown below, which prepares the new platform for launch.
Each platform is personalized to the client’s business requirements, and each customer has the ability to pick out the specific “modules” (or capabilities) that he or she requires. Typically, the platform-building process is quick, as the back-end is already in place. Amys said a platform can go live in as fast as one week. But that doesn’t mean the company takes a hands-off approach when dealing with its clients — one client, Amys noted, had continued to change the platform’s business plan, and her team tweaked the software over the course of six months.
CommunityLeader is made up of three distinct parts. There is the Campaign application for issuers; the Community Investor application that investors interact with; and Apicista, the back end software engine that holds everything together. The first two components are available as mobile apps, meaning issuers and investors can manage their offerings and transactions on the go.
The Campaign application offers issuers the ability to set up their fundraising campaign, in hopes of securing the capital to grow their business. There are a number of features available to the issuers: document management tools, due diligence services, social networking integration, investor tracking, and more.
When potential investors sign in through the Community Investor application, the deals are presented in a “personalized environment,” as opposed to a “marketing environment,” Barisonzi explained. This means investors only see the opportunities that are appropriate to each individual.
“If someone is doing intra-state crowdfunding in North Carolina, they can only offer securities to somebody in North Carolina,” he explained. “If we’re doing a Reg. S offering, the prospective investor has to be outside the United States. The profound understanding of the nature of those rules built the system the way it is.”
Part of that also involves a preference-based matching score, which allows investors to look at the investments that interest them. This was done to make sure that clients using the platform were not providing any sort of investment advice when presenting the offers to potential investors — an investor chooses which types of offers to learn about, instead of the platform promoting offers in a way that regulators may perceive as subjective.
“We wanted to make sure the system would not have subjective criteria for determining suitability,” Barisonzi explained. “We wanted to make sure that the system was not determining suitability, only qualification.”
While the look and feel of the platform can be configured and customized by CommunityLeader's clients, in general, the components are much like what potential backers would find on Kickstarter or Indiegogo. There are campaigns to browse through and each campaign profile displays the relevant information about a company or product. Though the layout is similar, CommunityLeader doesn’t build reward-based crowdfunding portals only — there are a number of solutions out there better suited for that need, Barisonzi explained. (His compliance officer, Weintraub, also mentioned that the regulated environment of equity- and debt-based crowdfunding offers potentially less risk for clients.) But, if a client wants to have a reward-based crowdfunding aspect, that can be worked into the platform.
The glue that connects the issue application and the investor application is Apicista, the backend built on patented technology that clients work in to manage the three stages of a campaign: development, raise, and support. One of Apicista's responsibilities is recording each event and transaction that takes place on the applications. This allows the platform to automatically create a dynamic checklist of tasks that need to be completed before an issuer can create an offering or an investor can finalize an investment.
The fact that Apicista records each action also allows CommunityLeader to create custom reports on just about anything that takes place within the platform. While this may stir up some confidentiality concerns, Amys explained that none of the information that might show up in a report would be personal. So, if a customer wants to see how many investors pledged money to energy-related campaigns on the platform, the system would take only general information about investors and their profiles, without sharing any confidential data.
In order to offer the compliant, sophisticated services that it provides, CommunityLeader has partnered with a number companies that have built custom solutions for the platform and its clients. The partnerships help to make CommunityLeader a truly end-to-end solution.
Take, for instance, CrowdSignature. It allows clients and issuers to provide a verifiable and legal digital signature from their computer or mobile device. For portal operators and issuers, this provides security that a malicious investor, for instance, won’t pull out of a funded deal that goes awry, pleading ignorance.
“We specialize in high-volume, high-value transactions,” founder Jay Jumper told Crowdsourcing.org. “At the end of the day, [our] documents allow that document to stand up in court independently.”
The company’s founder says that while SIGNiX or CrowdSignature have yet to appear in court, in a few cases maleficent signers tried to back out of their signatures. After they saw the security and verification steps that the service provides, however, they felt compelled to drop any threat of a lawsuit.
Then, there’s cTrade, CommunityLeader’s preferred broker/dealer service created in partnership with Midtown Partners LLC. cTrade handles the services required by the issuer to ensure that all due diligence is complete, an offering is signed in a fully compliant manner, and every investor is qualified to put funds in a campaign.
In the latter case, “we would do all the work,” said John Clarke, Managing Partner at cTrade. “[The client would] want to help specific projects get funded, and they want to make sure that the money turns around and creates jobs, and they would want us to be the broker/dealer.” Together, cTrade and CommunityLeader can offer clients six distinct deployment models. These range from a purely software and service portal offering for someone who is already registered as a broker dealer, where cTrade plays little to no part, to cTrade actually becoming a client’s broker dealer of record.
The due diligence time frame for each issuer, Clarke noted, varies by company, but generally takes from a week to two weeks.
To facilitate the actual movement of money, CommunityLeader has partnered with BancBox, an escrow and payment service. BancBox, which was created in 2004, built a core layer for collection, storage, and disbursement of funds. The company was created as a technological layer on top of a bank, where the accounts are created and the money held.
“Our secret sauce is that we create all these FDIC-insured accounts [quickly],” VP of Product Marketing Vineet Mathur said. “You know that opening an account at a bank is such an archaic and paper-based process. We make it much easier for you to open any kind of account.”
BancBox, which also works with platforms in addition to those built on CommunityLeader’s platform, says it can facilitate both equity and debt-based crowdfunding deals, giving issuers flexibility in how they want to get funded.“When the JOBS Act was signed, there was a definite payments need that was required here,” he continued. “When we looked into the depths of the JOBS Act, we saw that… any platform matching issuers with investors can’t touch the funds. They need to have a third-party payments and escrow solution where the funds can be held. So, we’ve created a solution heavily focused on that.”
CommunityLeader’s partnership with IRA Services Trust Co. led to the creation of the CrowdfundIRA. The solution allows individuals to set up a free crowdfund IRA account, or for those with an existing IRA account to set up a crowdfunding aspect to the IRA. The solution is geared particularly toward unaccredited investors participating in Title III or Reg. A+ raises, said IRA Services trust officer Michael McNair.
Transferring the funds from an existing self-directed IRA account to the CrowdfundIRA takes a human element in order to be compliant with the relevant regulations. Once the funds are transferred, though, everything is fully automated to effectuate a crowdfund investment.
“One of the cool things is that people who make a standard $5,000 or $6,000 contribution to their IRA, that’s enough to get involved in four or five deals,” McNair said. “They can invest as little as $1,000 to these crowdfunding opportunities.”
CommunityLeader’s partners all expressed excitement about being integrated into the solution’s ecosystem, primarily because they were keen to be a part of a complete funding solution, versus simply a technology portal. CrowdSignature’s Jumper summed up the sentiment best: “We felt CommunityLeader had the true end-to-end solution. They understood that it’s not just a portal, but that you actually have to fulfill a whole transaction.”
“The clients can swap out the features provided by the partners for their own services,” Barisonzi noted. “But, the customers who want to manage the deals on their platform and let CommunityLeader handle multiple aspects of a transaction have that option.”
Because CommunityLeader's platforms are used for various types of private placement deals, the complexity and flexibility of the software and services are quite extensive.
Consider, for instance, NextGen Capital, which recently went live. The company, headed by Elliott Nunez and Kent Martin, wants to create a global marketplace (“a dating service, if you will,” said Martin) that brings together institutional investors with companies that require funding, from early stage startups to $100 million deals.
Instead of focusing on unaccredited crowd investors when they are allowed to invest in startups (or even accredited investors, who can currently invest in deals), NextGen Capital has established relationships with “venture capital and private equity groups, hedge funds, corporate venture fund arms, some larger institutional-type foundations, those kinds of investors,” Martin said.
“What we’re bringing to the table is… an extremely rigorous due diligence process and that culminates in a third-party analyst report,” Martin explained. “That’s one of our trademark ideas. It also has a summary report that give the warts and all of where the company is at the moment, and what they can do to improve.
“One of our biggest pitches on the investor side is that we can kill some of their inefficiencies in their existing process, which is basically their deal flow process,” he continued. “It’s relationship-driven, there are a lot of unsolicited business plans and cold calling; we basically take that process and allow them to more precisely pivot and figure out who they want to spend their own time to get their due diligence processes going. So instead of looking through a stack of 100 pitch decks from a highly paid associate, they can winnow it down very, very quickly.”
Martin says that while NextGen Capital will not make use of crowdfunding in the “traditional” sense, the CommunityLeader platform allows its network of investors to go through deals in an efficient matter.
NextGen Capital was going through the process of creating a proprietary platform for its investor network, but decided to partner with CommunityLeader when they learned of its integrated software and service solution.
“We did an immediate cost-benefit analysis, and CommunityLeader was much further down the road than anything we had seen in terms of a really robust platform that's created with compliance in mind, from an existing regulatory standpoint,” Martin said.
On the other side of the spectrum lies VroomBank, which will target individual investors (accredited for now, unaccredited when Title III JOBS Act and Reg A+ rules are approved). The platform, created by the Braeger Financial Group, will open up pre-vetted auto finance opportunities to investors, something founder David Braeger has been closed off to them in the past.
“Individual investors will have the ability to invest in Vroom Bank, and we take that monies and invest them in credit facilities for automobile dealers,” he said. “The investor can get returns on three, four, and five year notes, of seven, eight, and nine percent. It’s really that simple.”
The platform, which is fully compliant with FINRA and the SEC, is currently in beta but will open up to accredited investors soon, Braeger said.
These portals represent only two current uses of CommunityLeader. But their sophistication and clear business models point to the possibilities that the current regulatory environment, as well as the finalized JOBS Act, can create. “Why we think [the focus on compliance] is fantastic is that as an investor, you know that your money is safe,” Braeger said. “I have 24 years of investment banking experience, and I wanted to make sure we’re doing it right. I don’t want the SEC or FINRA to come in and say, ‘You’re not doing it right.’ Because of the fact that we have CommunityLeader, and the brokerage firm [cTrade], we know we’re doing it right. That’s one of the most attractive features that we really, really enjoy.”
Crowdfunding allows companies to recruit new customers, deepen relationships with existing ones, and fundamentally alter the way financial services firms run their business. As regulatory uncertainties clear up with the finalizing of JOBS Act rules — which is likely to happen in 2014 — more and more financial services companies will take advantage of the new regulations. Those who want to get a head start within the current regulatory landscape, however, can already work with CommunityLeader to bolster their business opportunities.
That’s not to say CommunityLeader works with each company that approaches them. Given the executive team’s experience with startup companies and investing, the company has the acumen to figure out which clients to take on.
For those that do not quite fit the mold, CommunityLeader is soon launching a new service, called Portal Squared. The service’s purpose is to create a network of entrepreneurs and future portal operators who can come together and build out their teams or partner on portal development projects.
“It’s for people who are in this space but haven’t finalized their niche,” said Bachman, CommunityLeader’s CMO. “It’s a good place to engage with people, partner with people. It’s also a way to fund good ideas — it’s a portal to fund other portals. It’s a good way for qualified portal operators to get into this emerging space quickly.”
Also on the horizon for Q1 ‘14 are the Single Issuer Portal — a personal portal that will allow individuals to get up and running for a low price — as well as CommunintyLeader’s self-run funding raise, which seeks to raise $3 million for its own growth capital.
It’s an exciting time for the crowdfunding space, with established portals evolving to meet new challenges and new portal platforms taking advantage of market gaps. CommunityLeader’s fully-compliant, community-focused solution can help financial professionals meet their growth objectives in a quickly evolving market, so look out for the company to make a lot of noise in the upcoming year and beyond.
You can watch a CommunityLeader platform presentation below!