As much as the emerging growth segment of the financial markets talks about Reg A+ and Equity Crowdfunding, it’s easy to forget that the two rules are still very young. Reg A+ is less than two years old, and Title III barely went into effect mid-last year. While the early signs certainly have pointed to many reasons for optimism of the potential impact for entrepreneurs, investors and the broader economy, there are also plenty of reminders that patience and diligence will be needed to nurture this new ecosystem within the capital markets.
Nonetheless, it’s an exciting new financial landscape for entrepreneurs and investors alike, and one that provides access to opportunities that weren’t previously there before. Equities.com recently spoke with expert Georgia Quinn, CEO and Co-Founder of iDisclose, to discuss the early positives and challenges she’s observed in the space, and what could be done to help accelerate the industry’s growth. iDisclose is a startup that uses new technology to streamline the regulatory process for crowdfunding companies and their prospective investors.
EQ: The crowdfunding space is still in the early growth stage. There is a lot of promise, but as with any new industry, there are also some things that still need to be worked out. In terms of the platforms, there are more and more niche players coming online, but there has yet to be one dominant platform. How do you see this aspect of the market playing out?
Quinn: I see two things happening. First of all, there will be a handful of dominant platforms that I’d say will be more generalists. They might have a slight affinity toward one sector, like what you see in investment banking, where you've got the five big investment banks that do deals. That’s what’s going to happen in the crowdfunding space. But in addition to that, you are going to have the niche players.
So, there will be a company that is like the healthcare platform, as an example. Because that is such a nuanced type of offering, there is a very specific investor base that invests in those types of businesses. Those types of opportunities are going to have a place where their investors want to go to. Now, who that’s going to be, I don’t know. I don’t think that player has yet to emerge, but that is going to happen.
Similarly, in consumer goods, Indiegogo actually might go toward consumer products. So, in the way that CircleUp has done it for the Reg D deals, I think somebody is going to do that for the Reg CF deals. Also, maybe something in the film, TV and theatre space, something that’s more performance-based, I think there will be a niche player there. But for the most part, I think they will be on more generalist platforms. Maybe it will be someone like Indiegogo or Wefunder; those are the ones that seem to be emerging at this point.
EQ: To date, a lot of the marketing and messaging from the crowdfunding industry has been directed toward companies and entrepreneurs. Has there been enough done to address the issues and education needed for the investment side?
Quinn: That’s an excellent question, and I want to tackle it in two ways. I think you're absolutely right in that people are getting out there and educating entrepreneurs more about this opportunity, and that has been where the focus has been. I don’t think nearly enough has been done to educate investors simply about the existence of this opportunity.
When the public thinks about crowdfunding, they think about Kickstarter and Indiegogo, where you get a T-shirt or you give to a good cause and get a good feeling in your heart. I don’t think people understand investment crowdfunding, where they can actually purchase stock or lend to an operating company. On the investor protection side, I do think the risks are clear to investors. The fact that they could lose all their money, and that this is a very high risk sort of investment is clearly stated. But I don’t think that everybody is providing adequate disclosure to comply with the SEC.
So, there are two different issues. It’s one thing to tell an investor, "Hey, you can lose all your money," but it’s another thing to also comply with the SEC rules. Because that investor, even though they did understand that they could lose all their money, when they do lose all their money, they're still going to look at whether you complied with the law, and if they could sue you or not.
EQ: What’s an example of this?
Quinn: If you look now at the Form Cs and the disclosure documentation that’s being filed with the SEC, it is all over the map. Some of it is excellent - and I honestly put iDisclose’s Form Cs in that category. But some of it is completely useless, not compliant and a real disservice to the industry. So, what I’d obviously like to see happen is for more people to migrate to iDisclose, and its solid and compliant disclosure so that they are adequately protecting themselves and, frankly, the investors, because they are giving them the information that the SEC has deemed important. I have no qualms with the general requirements of the SEC.
EQ: Do you feel that there is kind of a race against the clock for the industry to establish these best practices, so that there is no major legal blow up that could derail the industry’s progress?
Quinn: 100%. My biggest fear is that somebody screws it up for the rest of us and we end up killing this thing before it even has a chance to live. That’s probably the number one concern that I have. I see some people that are not behaving the way that they should be, but I also don’t necessarily want to run and tattle to the SEC, because I'd rather see these people convert to compliance.
On the other hand, if they are not getting caught and there's no penalty, why would they stop? Why would they start incorporating best practices? It’s a Catch-22.
EQ: In the grand scheme of things, we’re still in the very early stages of these new rules and the market is still figuring it all out. There is also some proposed legislation in the works that could bring about new changes. Could the landscape look radically different five years from now?
Quinn: The legislation isn’t transformative if we are talking about The Choice Act and the Crowdfunding Act being proposed in the US right now. But if you look at what is being done in the UK, it’s fantastic. But the currently proposed legislation that affects crowdfunding, that is not transformative. Those are just sort of catching holes and fixing gaps, and those types of things. So, that’s something that I don’t see transforming the landscape.
EQ: There’s also the Invest in America Act, drafted by Anthony Zeoli, which you helped create. It would essentially provide tax benefits for all investors that invest in qualified small business entities. Can you tell us about that?
Quinn: Now, the Invest in America Act, that would be transformative. I don’t know the odds of that happening, but I would love for it to happen. It would be an essential step toward educating investors and getting people excited and moving into this new asset class.
But as far as the overall landscape, I don’t see it so much as a transformation as just growth. It’s about educating people, getting them involved, getting them interested and embracing this as an asset class. So, if you think about it like, you've got your stocks, you've got your fixed-income instruments and then you've got your risk capital. You get to choose what you want to do with it, and this is one of your options. Especially for younger people, this gives them an opportunity to participate in the whole startup ethos while not taking on that much risk. It’s not money that they needed to pay rent, it’s their expendable income. So, I do hope for growth in the industry.
To learn more about iDisclose, visit www.idisclose.com.
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