While it’s flown under the radar for the wider public thus far, I think that one of the most intriguing pieces of legislation in some time emerged from a congress so beset by partisan gridlock that it’s most notable trait is a failure to pass bills. And in an election year, no less. I’m talking about the JOBS Act.
Investing in the Internet Era
For those working in finance, the JOBS Act and its potential effects have been discussed ad nauseum since it was passed in April of 2012, but that’s because it’s really exciting. The long-term effects are far from clear, but the potential it contains has those people close to the world of finance very interested in what pans out. Most particularly, the act of opening private capital markets to the average investor.
Since 1933, the ability to take a big chance on a very small company was restricted to a small cadre of wealthy investors. However, with the JOBS Act, these exciting chances to get involved with emerging growth companies in the earliest stages of their development has been opened up to the public at large.
The reason for this is because the JOBS Act is, in a certain sense, an acknowledgement of the information age. The Securities Act of 1933, which still defines much of how our capital markets work, was built to protect retail investors from the huge risks associated with these sorts of investments, and at the time is was very necessary. Finding reliable information on companies like this was difficult, and fraud simple to commit. However, with the internet, information disseminates at rates that would have been mind-blowing to someone living in 1933. The sort of information that a fund manager in 1933 would spend weeks gathering at great costs is now at the fingertips of anyone with an internet connection.
The Democratization of Finance?
That’s why it’s at this juncture that a clear decision has been made: investors of any level are now free to take whatever risks they see fit. Armed with more information than even the savviest investors would have lacked a few decades ago, average investors our now free to make their own mistakes,
And that’s what makes the current upswell of crowdfunding sites so exciting. It’s the free market existing in its purest form. An economy of ideas and creativity where creator and investor connect simply, directly, and organically. It holds the potential for the democratization of a new section of our society that is tremendously compelling.
So, here’s a look at some of the most notable crowdfunding sites operating now. These platforms carry a variety of different opportunities, leaving it to the investors who visit their sites to determine where and when they can make the most of their efforts.
Founded in 2010 by Naval Ravikant and Babak Nivi, AngelList is one of the older and better established of the portals. Originally geared towards angel investors and venture capital, AngelList now offers myriad options, including invidual company investments, investing in funds that cover broad sectors, and syndicates, which are funds managed by venture capitalists or angel investors.
Led by founder and CEO Chance Barnett, Crowdfunder is designed to take advantage of the new equity crowdfunding rules and has raised more than $100 million for its various campaigns. Investors make pledges on the site but complete the transaction off the site. The site tends to feature more innovative consumer products.
SeedInvest tends to focus on more vetted deals, accepting just 1% of deal flow, and also limits participation to accredited investors, focusing on savvier, high-end venture capitalists and angel investors.
Seedrs is a European equity crowdfunding site that allows anyone to invest as little as €10 in start-ups they feel is promising. Companies on the platform must hit their fundraising goals in order to get any of the pledged cash. The site was created as a part of an MBA project at Oxford by Jeff Lynn and Carlos Silva.
The rules restricting equity crowdfunding are considerably more relaxed (and less expensive) provided the fundraising takes place in one state. As such, moving beyond start-ups, there’s a lot of opportunity for small businesses to raise money and issue debt through the people living in its community.
Cue Localstake, which is focused on helping small businesses raise the money they need to expand their business and capitalize on their popularity. Investors can either invest in companies in exchange for equity, or they can also engage in revenue-share loans, which are open-ended maturities that return fixed amounts.
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