Investment crowdfunding took off when the JOBS Act regulation went into effect back in 2016 and has become a booming industry in short order. We saw some significant regulatory changes in March of this year, with the Securities and Exchange Commission (SEC) confirming capital formation increases for Reg A+ and Reg CF. These increases solidified just how impactful this type of crowdfunding can be.
Equity crowdfunding has garnered trust and legitimacy from issuers, investors, broker-dealers, transfer agents, and lawyers—and raised $239 million via Reg CF and $1.6 billion via Reg A+ in the first half of 2021. Today, there’s nearly $800 million invested across 64 FINRA-licensed Reg CF funding portals.
As the new generation of investors is looking for high growth and quick yield, they are increasingly unwilling to wait for value stocks and dividends to slowly build. The diverse investment opportunities that crowdfunding offers are exactly what these investors are looking for as they develop their portfolios.
These numbers are impossible to ignore: equity crowdfunding is here to say. But what comes next for this exciting space?
Here are three key equity crowdfunding trends that we anticipate to thrive in 2022 based on our work helping crowdfunding platforms and portals raise game-changing capital online.
Significant, positive economic ripple effects from equity crowdfunding
When it comes down to it, what 2020 and 2021 have clearly shown us is that investors want to participate in and support small businesses.
At my firm, we’ve seen 4,000+ issuers to date, including startups, small businesses, and medium-sized businesses. These SMEs are choosing equity crowdfunding instead of traditional, bank-led financing because they can control their offering and financing needs. No longer beholden to the mercy of a single small business banker with specific credit appetites, or a venture capital firm with narrow funding parameters, these entrepreneurs are now in the driver’s seat and their customers and supporters are riding shotgun alongside them.
Currently, the top five industries for issuers are software, distilleries and breweries, restaurants, internet and e-commerce, and movies, according to research from Crowdfund Capital Advisors. Ironically, all industries are significantly impacted by COVID. But investors in these spaces are eager to participate in crowdfunding for their favorite businesses, and in 2020 venture capital was particularly difficult to come by. The world watched as so many of our favorite restaurants, venues, and small businesses closed because they didn’t have the financial ability to stay afloat. But equity crowdfunding presents a chance for those businesses to get back in the game.
As we forge ahead into 2022, the impact of equity crowdfunding for COVID-affected small businesses will play out with positive ramifications in local economies by creating not only capital for businesses, but creating jobs as well.
Many types of businesses are being served by equity crowdfunding, meaning there is innovation across industries and greater competition—which in turn means more options for consumers and new jobs being created.
Ultimately, 120,000 local jobs have been created so far in 2021 as a result of successful Reg CF offerings, reported Crowdfund Capital Advisors. These salaries support government taxes, consumer spending, savings, and more. They’re supporting our communities and keeping food on our neighbors’ tables.
The rise of ATS
ATSs, or alternative trading systems, aren’t new. These are broker-dealers that have filed under Reg ATS to provide an electronic marketplace that creates an order book and matches sellers with buyers. ATSs have been around for a while, but are getting a renewed sense of interest—one we anticipate will carry well into 2022 and beyond.
ATSs, like tZERO ATS and StartEngine Secondary, enable investors to continue supporting issuing companies by giving them opportunities for liquidity. They’re the logical next step and the future of the crowdfunding industry.
The idea that you can invest from your phone while wearing your pajamas through a six-step widget is compelling for investors. ATSs offer a way for investors to stay in the investment ecosystem, liquidate their assets at a reasonable point, and reinvest as they choose. They open up the opportunities traditionally reserved for institutional investors to everyone.
What we are seeing is a cycle that benefits all parties. The ability to liquidate private securities increases the appeal of buying private securities. ATSs provide the financial breathing room that investors want to more easily buy and sell non-listed securities. In the same manner that one does trades with a large exchange, the secondary market is providing easier than ever access to investors who want to move in and out of private equity.
The industry has more support than ever from regulators, and we’re seeing a huge influx of interest to facilitate the ATS process. This will absolutely be a space to watch in 2022.
Accessible crowdfunding for all
As we move into 2022, the equity crowdfunding industry will continue to build a foundation for underserved people to gain access to the financial system in terms of meaningful investments. Anyone—regardless of social status or annual income—should be able to begin investing in companies that hold meaning for them. It’s about radical accessibility and execution. Looking to the future, we’re building a system that allows for more equal access for both the issuer and the investor.
Whereas only 1.2 percent of the venture capital invested in U.S. startups in H1 2021 went to Black founders, and just 2.3 percent to women in 2020, women and people of color make up 40 percent of issuers using Reg CF.
These numbers point to a gap of businesses not receiving capital and offer incredible insight into the power of crowdfunding and the hope it can provide. We hope to see that 40 percent figure grows in 2022.
As an industry, we have a duty to provide a service and product to an underserved market of people that may otherwise never gain access to these opportunities. We have great hope for the future and in 2022, we believe we’ll see equity crowdfunding have a positive impact on the economy and the job market. We’ll continue working to make the world of finance and crowdfunding more accessible to all. And ATSs will play a huge role.
Is it only ATSs? Absolutely not. ATSs are just one of the possibilities to keep growing and offering new solutions that benefit all the parties involved in equity crowdfunding. It’s so important that we continue to be innovative and pioneers in this space. Push boundaries. Knock on doors.
As members of this industry, the onus is on all of us to continue pushing into new frontiers so that we can be better and do better—for ourselves, for our industry, and for our communities.
Erin Holloway is President of FundAmerica by Prime Trust. Recently appointed, she brings extensive experience in financial technology to the role, with expertise in payment platforms, compliance, banking regulations, business networks, investment banking, and international treasury. Prior to joining FundAmerica, Erin was a global Vice President at SAP Business Network, leading the Strategy team for North America. Before that, she was Vice President at JPMorgan where she managed the global team of B2B relationship managers in the commercial card line of the business as well as international treasury and securities services.