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Crowdfunding Moves to the Middle
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Crowdfunding Moves to the Middle

Editor's Note: The following guest post comes to us from Joy Schoffler, founder of Leverage PR and board member of the crowdfunding professional associations CFPA and CFIRA. Schoffler writes in to discuss why the middle market sees a big opportunity in crowdfunding. You can find Schoffler on Twitter @joyschoffler.

While crowdfunding provides a great opportunity for the small business community, it also brings additional liquidity opportunities and technology advancements that provide economies of scale to the middle market—companies with annual revenue between $5 and $500 million.

At its core, crowdfunding is really not that different than traditional private placements—a securities offering that private companies have been using for decades. What is new and special is the cost savings that will be realized by moving the private placement process online, the advances in the investor relations, escrow, and other transaction and account maintenance costs that will allow for a reduced minimum investment.

This reduced minimum investment will allow investors the opportunity to diversify across a variety of private offerings instead of the typical $100,000 minimum investment required today.

- Don’t Count the Crowd Out Yet 

“With the expected emergence of crowdfunding portals enabled by the JOBS Act, middle market companies will likely have the ability to access a wide variety of specialized capital ‘products,’ which will compete with existing capital sources to improve the overall capital markets available to middle market companies,” says James Simpson, founder and president of LM2 Network.

The good news is these offerings do not need to wait for the SEC to release rules. Platforms like AngelList, Healthios, and FundersClub are currently executing 506 Regulation D offerings online through ‘crowdfunding’ platforms.

“The middle market is an extremely competitive asset class with billions of dollars available to be deployed in a scarcity of transactions,” said David Loucks, Chairman and CEO of Healthios. “With ongoing efforts of middle market fund managers to differentiate themselves, crowdfunding can be important in attracting ‘expert’ investors who, in addition to their capital, will contribute critical strategic and operating value.”

The increase in transactions on these platforms and the state-level legislation passing in Georgia and North Carolina will provide a good deal of informative data and case studies groups which organizations like The Alliance of Merger & Acquisition Advisors (The Alliance) are paying very close attention to.

“The Alliance’s membership is comprised of middle market investment bankers and M&A advisors. Anytime there are changes in regulations or technology advances that could help our members we pay close attention,” says Mike Nall, founder of The Alliance. “In fact, we’ve dedicated a sizable portion of our upcoming summer conference to educating leading M&A professionals and investment bankers about how crowdfunding will impact the middle market.”

While regulators mull over the rules for Titles II and III of the JOBS Act, rumors are already swirling that the U.S. House of Representatives plans to introduce a ‘JOBS Act 2.0’ bill this fall. While details have yet to be released, the purpose of this bill would be to provide additional capital-raising incentives and further amend current securities law. The “Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act of 2013” was introduced in June and is slated to be a part of the JOBS Act 2.0 bill. This legislation would significantly reduce regulatory costs incurred by buyers and sellers of privately held companies by lowering M&A transaction costs.

Currently, the cost of complying with existing broker-dealer regulatory requirements is substantial and is necessarily passed on to the business sellers and buyers who use the M&A broker’s services. Additionally, this would be a substantial boost to middle market companies.

Having spent last week in New York at the LendIt Person-to-Person lending conference, I was reminded that less than a year ago the major institutions, financial press, and public in general viewed the P2P space as a scam. Now, the likes of Google have invested over $100 million in the space and hedge funds, major financial institutions, and Wall Street insiders are rushing to get a piece of the action.

“It wasn’t that long ago that the P2P lending space was in the same place crowdfunding is now,” said Dara Albright, founder of NowStreet and co-producer of LendIt. “It was under the radar of most investors, but through increased recognition as a viable source of capital for small businesses as well as investments by major companies and financial institutions, P2P lending has grown into over a billion dollar industry that has forever transformed the global credit markets. Crowdfunding has the potential to have a similar impact on the equity markets.”

Crowdfunding is not just for the ‘little guy’; it is a revolution in the capital markets that will have a reverberating affect across many industries.

About the Author
Joy Schoffler is the founder of Leverage PR and currently sits on the board of the two leading crowdfunding professional associations, the Crowdfunding Professional Association (CFPA) and the Crowdfunding Intermediary Regulatory Advocates (CFIRA). Joy is a contributing author for the upcoming DealFlow Media, Wiley-published book, “Crowdfunding: The Definitive Guide to Raising Capital on the Internet.” As the Principal of financial services public relations firm Leverage PR, Joy and her team regularly work with leaders within the crowdfunding, investment and financial technology sectors.

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