Crowdfunding: Decentralizing, Disintermediating, Disrupting

Milken InstituteOver the past year, we here at the Milken Institute have explored and analyzed how the JOBS Act might open up new avenues for American companies – most notably job-creating startups and small businesses – to gain access to capital. At the same time, our work has underscored the importance of limiting downside risk through fair and efficient regulation, and ensuring that investors are provided with key information with which to make sound investment decisions. I am cautiously optimistic that the broadly defined crowdfunding industry empowered through the implementation of the JOBS Act will prove to be a disruptive innovator in capital markets.

For true disruption to take place in a market, three elements are required: 1) there must be a societal problem or need, 2) there must be a new technology or innovative process, and, critically, 3) there must be a cultural willingness to try or an affinity for something new.

These three elements all appear to be in place when it comes to crowdfunding, whether directed at high-net-worth accredited investors or the more commonly recognized “crowd.” First, since the Great Recession, startups and small businesses have increasingly struggled to get financing. Credit is tight, and traditional early-stage equity investors have become more risk averse. Seventy percent of entrepreneurs are using credit cards, home equity loans, or personal/family savings to finance their businesses.

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