Recently I participated in the Third Annual Global Crowdfunding Convention and Bootcamp in Las Vegas and Ron Suber, President of Prosper Marketplace, a peer to peer or “marketplace lending” platform, spoke about the nine actions or initiatives that the marketplace lending industry in general and Prosper specifically undertook which led to the booming growth and success in the industry. His message was intended to be a “how to” guide, whereby through adopting this criteria, the much smaller crowdfunding industry may be able to achieve new levels of growth and recognition. Since the event, Suber has modified his nine initiatives in preparation for the AltFi Global Summit on Tuesday, November 4th. I appreciate Suber’s points and think they have greatly benefitted the marketplace lending industry. I am using this opportunity to further analyze such actions’ applicability to the investment crowdfunding space and provide thought, modifications or alternatives.
Provide predictable and appropriate returns as advertised.
While this makes perfect sense for a fixed income product like a consumer loan, this is much more difficult for an equity stake in a small or startup business. Such entities are by nature unpredictable and often without comparable investments to determine what the “appropriate” return should be. The part of this message to take to heart however, is to accurately “advertise” the potential return. This means the crowdfunding industry needs to ensure that the risks of investments, including total loss, are fully and understandably explained to investors.
Provide easy to access and analyze data and update over time.
This is essential with any type of commercial transaction and/or investor. The parties must have full information in order to make informed decisions and providing adequate information, also alleviates liability from the disclosing party. As Suber states, the information must be easily accessed and analyzed—meaning, neither brief salesy info nor a copious information dump will do. In addition, ongoing reporting and updates is essential to keep investors apprised of their investment’s performance.
Diversity of investors.
This is a great benefit of using the internet and general solicitations, which allow platforms the opportunity to reach entirely new types and classes of investors. This is essential for both marketplace lenders and crowdfunding platforms.
When matching supply and demand, you can see how important this is to marketplace lending. It also resonates in crowdfunding, as this is an opportunity for minorities and other people who have historically had difficulty raising capital, due to geography or background, the opportunity to source capital from a new breed of investors. It is statistically proven that people tend to invest in people like them with respect to race, background and gender. By diversifying both the investor and investee base, we can provide economic growth and prosperity to entirely new segments of the population.
Build an ecosystem and infrastructure.
This is a page that crowdfunding could really take from the marketplace lending industry playbook. Marketplace lending now has a robust system for the transfer and custody of funds and a host of third party data and analytics providers, which can assist both investor and borrower. The crowdfunding industry is still quite behind in this area, as people are trying to find competent escrow and account services which can scale to the transaction level necessary and no central repository for data relating to the multitude of crowdfunding platforms springing up daily has emerged.
I agree that this is the way things are moving but put this toward the bottom of the list, as we need to make sure that the pipes work before we allow unlimited access. Although I do envision a world of event driven investment, where you could be at a demo day and see a wonderful new product or idea and invest instantly with your mobile device.
Safety and Soundness.
Suber equates this with the use of bankruptcy remote vehicles for investments, which I am a fan of. I don’t think the investor should bear both the credit risk of the underlying investment and the credit risk of the platform itself. Regardless, this isn’t exactly applicable to crowdfunding, however the concept is important. We need to limit as much risk as possible for the investor. We can do this by ensuring that the listing companies are properly diligenced, that adequate information is provided and that investors are educated as to the general principals of investing. Also, a self-regulating organization for crowdfunding platforms to set of best practices and standard of ethics and of course a set of thoughtful and workable regulations set forth on a federal level are crucial to the soundness and success of the crowdfunding industry.
Existing Client Marketing leads to loyal repeat customers and word of mouth marketing.
This is important to any business, but especially when we are talking about transparent marketplaces in a social environment. Poor customer services, inequitable treatment of investors or listing companies, actual fraud or unsustainable failures could easily undermine any progress this industry has made. Existing clients must have a successful empowering experiences for this industry to grow and thrive. As we have seen, through the use of social media, clients can quickly become evangelists, but this of course cuts both ways and poor performance can just as rapidly be disseminated to the masses.
I am a firm believer in the marketplace lending industry’s dedication to education. It is important to raise awareness and understanding of the general population. So many people have never even heard of crowdfunding. Only 3% of this country’s eligible accredited investors invest in private companies. This is an education problem. We need to spread the word as an industry to explain the opportunities now available to both investors and potential issuers. This, I would actually put at number one of the list of industry initiatives.
Finally, you have to appreciate Suber’s optimism when he states “At some point we will not be new…we will become the way…a brand…like Uber…we will be known as the best way…to borrow.” There is a lot to be said about the power of positive thinking. I would love for the crowdfunding industry to implement the above recommendations and become the best way for small and startup business to access capital.
Georgia P. Quinn is a senior associate in Seyfarth Shaw LLP’s Corporate department. Ms. Quinn has led Seyfarth’s Crowdfunding Initiative, helping clients stay at the forefront of the enacted and proposed SEC regulations. Ms. Quinn has recently spoken to the Securities and Exchange and Commission, Congressional staff-members, leaders of UK crowdfunding portals and the Small Business Administration Roundtable; chaired a panel on crowdfunding for the ABA; presented to the Canadian Equity Crowdfunding Alliance, the Council of Development Finance Agencies, the Crowdfund Global Expo in San Diego and New York, the New York State Bar Association, at the New York State Securities Bar and in a websem for American Banker. Ms. Quinn is the subject matter expert behind Disclosure Dragon, the first semi-automated disclosure document generating software that helps prepare a PPM, Form C or Form 1-A at a fraction of the traditional time and cost. All views and comments above are strictly her own views and do not reflect the opinion or position of Seyfarth Shaw.