Equity crowdfunding is proving to be a global phenomenon; it's making way for a brand new sector that is full of new and exciting opportunities for a wide range of stakeholders.
Unlike other forms of crowdfunding, equity crowdfunding is emerging with an entire corequisite eco-system that's designed to support all practitioners involved. The sector’s rapid expansion is creating a wide variety of business opportunities.
Equity crowdfunding portals operate in a way that's similar to stock exchanges. Indeed, like any stock exchange, a plurality of services are required to support the exchange operators, its investors, the involved securities issuers, and the accompanying equity crowdfunding platforms. A key distinction between traditional stock exchange and equity crowdfunding platforms is the sheer number of equity portals that are launching around the globe in comparison. As of Q3 of the 2014 fiscal year, over 540 such equity portals have begun to operate.
This rapid growth in the number of equity crowdfunding platforms has the potential to provide great opportunities to those who have long remained on the sidelines, wondering what they can do to get involved and participate. As the sector emerges, issuing companies and service providers need help locating each other using commonly agreed-upon industry terminology. Investors need to be confident that they are part of a well-integrated eco-system to ensure they feel readily equipped in the face of the emerging business opportunities that come with this new crowdfunding platform.
Equity Crowdfunding currently presents six key opportunities that benefit potential investors and consumers alike:
1) Vertical Markets
When equity crowdfunding first launched, it was a commonly held belief that technology companies would be the dominant users of this form of capital-raising. Having tracked equity crowdfunding’s scope and momentum as it evolves around the globe, we see a very interesting trend emerging.
Investors are moving towards vertically-based equity crowdfunding portals. These equity portals provide investors with opportunities in one vertical, with qualified teams capable of building trust and expertise in the deals they eventually to list on equity crowdfunding platforms.
The verticals that are gaining traction the fastest are real estate, bio-tech, and consumer goods. Industry observers who were previously on the sidelines, thinking that equity crowdfunding was confined to technology companies, are now realizing the range of capital raising options available. These opportunities remain, and in fact, they're multiplying.
In 2015, we expect to see more equity crowdfunding portals launching in other verticals such as mining, agriculture, oil & gas, manufacturing, marine industries, automotive industries, Cannabis, restauration, renewable and solar energy, and fashion retailing.
The vertical integration embedded in the structure of equity crowdfunding deals are increasing consumer and issuers’ confidence in the quality and resilience of recently listed deals: a sustainable trend that can be banked on.
Cross-border equity crowdfunding is now a real and global industry trend. In North America recently, WAFU (a Canadian company) did a simultaneous equity crowdfunding in Canadian and American securities markets, simultaneously using two different equity crowdfunding portals (CircleUP, OCMX).
Dentons, a major international legal advisory player, advised on this deal. It boasts the requisite infrastructure to assist companies in both US and Canadian markets. This has substantial cost-efficiency and savings implications for equity crowdfunding clients who opt to choose this path.
This is an ongoing trend in Canada’s legal landscape. Firms in Canada and the United States are now creating equity crowdfunding teams as part of their capital markets practice. First movers are Ellenoff Grossman & Schole LLP, Seyhavth, Borden Louden Gartn, Burnett Duckworth, Baker MacKenzine, with many more to come. This trend benefits issuing companies and investors as they gain a variety of trusted advisors with the expertise to assist in their capital raising efforts via equity crowdfunding.
Parties interested in equity crowdfunding now benefit from more and more advisory firms, accounting, operational consulting, and other specialist service providers extending their services to potential issuers and capital-raising companies.
In business, we all understand the value of partnerships. It can be the differentiating factor between a successful fundraising effort and very public flop.
Equity Crowdfunding is no exception to this longstanding rule. These emerging equity portals are regulated by securities agencies. They will have stringent restrictions on the types of partnerships they can feature. This is to ensure that there are no violations of securities law. There is, however, one type of partnership that equity crowdfunding portals currently favor in this next stage of their evolution.
Equity portals are looked favorably by private equity groups, venture capital firms, angel investors, and other large corporate financial investors. They focus on the new platform’s two fundamentals in equity crowdfunding: deal flow and talent flow, according to Jason Best at Crowdfund.
Equity crowdfunded deals bring these two key investment criterion in a way that is uniquely compatible with these investors’ strategic objectives.
We see great examples of these uniquely compatible partnerships with CircleUP; the very first Equity Crowdfunding portal in the USA, which entered into a groundbreaking partnership with Proctor Gamble. To date, CircleUP has helped consumer-focused companies raise more than $US 30Million. It has now gained two additional partners in its efforts, Johnson & Johnson (JNJ) , and Virgin America Inc. (VA). This success validates CirclueUp’s team in its choosing this new capital-raising platform. The CEO of CircleUp showed the entire equity crowdfunding sector that this partnership model works.
Another successful example is the Israel-based OurCrowd, which partnered with GE Ventures. These happened in the past year, with no sign of relenting. Observers can expect to see more cases of this partnership model to occur as they become industry practice. OurCrowd has helped companies raise $100M US to date.
So what do these partnership bring to the equity crowdfunding portal? Recognition, legitimacy, and trust.
4) Global Portal Expansions
Equity Crowdfunding portals are not content with staying in a single listing market. More practitioners are considering locations around the world prior to announcing a deal, a trend that is likely to stay. Equity portals increasingly expand globally by finding broker dealers in multiple countries of their interest, and having them service their particular brand. Equity Portals such as CrowdCube, Seedrs, OurCrowd, Invesdor, KlondikeStrike are already making these steps in their global expansion.
This operational model is preferred by equity crowdfunding platforms as a precursor to their eventual plans to acquire the capacity to raise capital globally and simultaneously, in a few years. This objective also provides tremendous price-discovery opportunities for consumers as they scour the world for the best equity crowdfunding deal.
5) Secondary Markets
Potential investors are often reluctant to commit their scarce capital in companies without some semblance of an exit strategy present. Some elements of liquidity must be present to entice investors. This concern is now being addressed as more secondary markets for crowdfunded-equities emerge as a result of the model’s popularity.
The United States and Canada now have established secondary markets for these particular equities, allowing for more flexibility and liquidity, along with a third type of exit option for already-committed investors.
Equity crowdfunding’s main operational objective is to optimize its value chain and provide the lowest-cost equity issuing opportunities for investors, portals and issuers alike. Reducing transaction cost across the board is one of this capital-raising model’s key priorities. This directly translates into seamlessly integrated partnerships and lines of operations.
The entire eco-system features a seamless infrastructure from A-Z to facilitate the process of equity crowdfunding, from Pre-Raise, During-Raise, to Post-Raise. Compliance and overhead costs are also kept at their very minimum thanks to the rich eco-system of service providers embedded in its operations’ network.
Technology is the key factor responsible for equity crowdfunding’s competitive pricing and low-cost operational profile. As such, practitioners are taking advantage of every cost-cutting opportunity made possible by advancements in cloud and data-mining technologies. As a result, equity crowdfunding’s operations will become seamlessly and cost-efficiently global in nature, allowing it to grow as in the industry mainstream as a standard.
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