The end of one year, and the entry into another, typically brings a cacophony of predictions for the new year along with lamentations and accolades for the one ending. At the beginning of 2015 (January 2nd to be precise), I peered deeply into my crystal ball to discern what the forthcoming 12 months had in store for those engaged in new forms of finance. Most people tend to avoid comparing predictions to actuality because inevitably we get it all wrong. This year, a rather momentous one in disruptive finance, has compelled me to review, and attempt to score, how well I did in powering up my psychic abilities. Now I am the first to admit making predictions is more fun than serious prose but let’s go back and review how my prognostications ranked as we wait for next years predictions.
Ok. Hope springs eternal even with an exceptionally dysfunctional legislative branch of the government. The SEC had also hoped that Congress would ride to the rescue and address the shortcomings intrinsic to Title III retail crowdfunding. In the end, the SEC realized that time was short and they had to proceed without the help of the House and Senate. They released final rules that, while not perfect, have been deemed workable. Yes, I know, the cap is way too low and the fact you cannot have an SPV is wrong but maybe Congress will wake up in 2016? I will save my predictions for a later article.
2. Title IV finally comes to life. RIGHT
This one was pretty easy as the SEC had more leeway to craft workable rules. Announced in March of 2015, the Regulation A+ “Bombshell” finally allowed for non-accredited investors to gain access to early stage companies in a type of mini-IPO structure. Several prominent investment crowdfunding platforms have since leveraged Reg A+, along with its ability to Test the Waters (TTW) to see if there is sufficient investor interest prior to raising capital proving issuer demand. It will be very interesting to see how the new exemption evolves in 2016 but with the relatively high issuer cap ($50 million on Tier II), Reg A+ has captured the interest of some impressive financial firms.
Old Regulation A never worked because of the state Blue Sky review process. Nobody in their right mind wanted to kiss the ring of each state where they wanted to offer shares when you could just file a Reg D offer. Title IV of the JOBS Act allows preemption for Tier II offers (while rendering Tier I pretty much useless). It is unfortunate though that state securities regulators, via their proxy NASAA, have decided to sue the SEC to reverse the rule change. Not too long ago a wise man called this action a “Fools Errand”.
4. The UK will continue to be the innovators of new forms of finance. RIGHT
From the public proclamations from Chancellor of the Exchequer George Osborne, to the advocacy groups such as Innovate Finance, the UK sees itself as the epicenter of creative finance. Any why not? It may be difficult to compete with the sheer size of the US and the startup hotbeds of Silicon Valley & Alley, but the UK continues to hold its own by launching new firms and fostering a competitive environment that has challenged traditional financial institutions. The bigger question is whether this will continue into 2016 and beyond.
5. Indiegogo will move into equity crowdfunding. WRONG
While Kickstarter has professed its disinterest in offering shares in small companies, Indiegogo has consistently stated its intent to offer equity. In fact, that was part of their original business model. Unfortunately, the global rewards-based platform has moved slowly in allowing small companies to be funded by smaller investors. Most likely this has to do with the delayed rules under Title III of the JOBS Act which do not become actionable until mid-2016.
While traditional financial firms have largely tiptoed around disruptive finance they will have to move either soon or later. But 2015 did see some significant investments by established financial firms. Think about SoftBank pumping SoFi full of a billion dollars; the largest Fintech financing round ever. Or Standard Charter fueling Dianrong with a meager $207 million capital injection. No major acquisitions yet but they are coming.
7. The EU will propose a common approach to crowdfunding. RIGHT
The EU was largely crafted to create a large economic powerhouse to rival the US, China and other nations. Streamlining cross-border transactions and rationalizing the cornucopia of securities rules simply makes sense. The Capital Markets Union (CMU), published this past fall, touches many areas of finance – including internet finance. The CMU should be lauded and supported but as we said in 2015; “While a proposal may be forthcoming it will fall short. But it will be a start.”
8. Some investment platforms will merge or wither. RIGHT
Probably the most spectacular disappearing act was the drama associated with unfortunately named Trust Buddy fiasco. Trust Buddy filed for bankruptcy this past October, embroiled in controversy. On a more positive note, ThinCats was recently acquired by European Specialty Finance (ESF). There are more than a few platforms that have failed to live up to significant deal flow expectations. This is just part of the evolutionary process.
9. Real Estate will continue to lead the crowdfunding charge. RIGHT
This is more of a US phenomena but in reviewing the real estate platforms they, as a group, have tallied far greater deal volume than early stage platforms. RealtyMogul is nearing $200 million in deal volume (having returned over $20 million to investors). Prodigy Network is over $100 million in raised funding as is RealtyShares. The list goes on. The asset class is perfect for internet finance. Solid risk-adjusted returns opened up to a far broader investor based. The big question is what will happen when the real estate market starts to slow down.
10. Rewards based platforms will be more aggressive in campaign assurance. WRONG
Ok. This one could go either way as some platforms have tightened up offering requirements for dodgy crowdfunding campaigns. Indiegogo has even tested campaign insurance. Unfortunately, there is still more work to be done as too many campaign creators are posting projects that do not merit a single page view.
At the beginning of 2015, there was a lot of fear that policy-makers were determined to make the definition of an accredited investor even more exclusive thus disenfranchising a larger portion of the population. Hard to believe. But now some common sense has percolated to the top of the discussion as there is a bill in the House that will fix the rules and the Commission has received suggestions from SEC staff that may address a problem that has added fuel to the growing wealth disparity in the US. While the rules were not changed by the end of 2015 the policy trajectory is clearly on the right path.