The caliber of underwriting firm is often an indication of the quality of the issuing company. The investment banks are paid well for that implicit endorsement, but that puts their reputations on the line. Their success is tied to the execution, after market performance and perception of the deals they complete –so they had better be selective and smart.
However, the Banks are not infallible. The capital raising process has been inexorably altered by many different changes to the funding environment. I am not talking just about the botched Facebook IPO either. But the banks are pretty good.
The playing field between institutional investors and “mom and pop” is not level. The market is driven by inefficiencies and the average investor is generally on the wrong side of the spread. The differential comes down to knowledge.
Ironically, retail investors have access to more information today than ever before, but often lack the ability to draw any useful conclusions. Information comes at the tap of a browser. Knowledge is a result of years of experience and access to peers and professionals with insights that go well past the prospectus and can’t be found on Google.
Crowdfunding will be a game changer for thousands of companies that are unable to find capital through traditional means. But I think that the more profound impact will be realized by small investors that will benefit from analysis, both formal and informal, from their peers.
While I know there are many pols and regulators out there who will argue that Crowdfunding will turn into crowdfrauding , I will remind you of the many professionals, analysts and sage financial institutions who got it all wrong.
We forget too quickly the analyst stars who led so many astray. Do you recall Jack Grubman? Paid $25 million a year for his valued opinion, Grubman was banned from the financial industry for life in 2003. The list is long. Jack just happens to be a colorful favorite of mine. As the Wall Street Journal reminds us from time to time, the dart board method of stock selection usually fares pretty well versus the pros.
Let a transparent market evolve for crowdfunding and do not allow a group of mandarin gate-keepers control the outcome. There will always be a place for Investment Banks to create markets and deliver value to their customers. Smaller businesses need access to capital too. These companies will never be efficiently served by large banking groups – at least not in the near future. Let Crowdfunding go live in 2013.