Dara Albright is the Managing Director at Crowdnetic, the Editor and Chief of NowStreet Wire, a regular contributor to Equities.com, and an expert on all things related to crowdfunding. We caught up with her to discuss the end of the comment period on the SEC's proposed Title III rules and where the industry's bright future might lead.
EQ: Hello Dara, thanks for talking to us. It’s a very exciting time for crowdfunding.
Albright: Indeed. There’s a lot of momentum in the space right now. Most of it is building off a number of game-changing events that occurred during the last two years — most significantly being the new regulatory landscape and venture money entering the industry. The crowdfinance industry is set to explode mainstream in a big way.
EQ: We’re nearing the end of the comment period on the Title III rules proposed by the SEC. What have you been hearing? Do you anticipate them making any changes?
Albright: Given that the rules for Title II took over a year to finally be implemented from the time they were proposed, I think we have ways to go before title III is eventually implemented. And I do think that they are going to make changes. In fact, I think they need to make some changes.
The way that it’s written now, it will prove too burdensome and costly for most small companies. The original bill introduced by Congressman McHenry was a lot less restrictive. It was made quite a bit more cumbersome for issuers once it went through the Senate.
Here’s where I think the problem lies: for an issuer to utilize Title III, raise anywhere from $500,000 to $1 million, they have to have audited financials. And that’s going to be really expensive between the audit, the legal fees, and filings. I don’t know why an issuer wouldn’t just raise capital via a PIPR offering (“Private Issuer Publicly Raising”) using Reg. D 506c. This way, the company could advertise to the general public (making sure to only accept capital from accredited investors). They don’t need audited financials and the filing requirements are simply a form D.
So I think that we are going to see some legislative changes – such as increasing the capital raising threshold.
EQ: The other side of that is that people at the SEC have significant concerns about fraud or unscrupulous financiers taking advantage of small-time investors who are new to the space. Would you just call it an overreaction on the SEC’s part?
Albright: I wouldn’t call it an overreaction. I can see where they’re coming from. Unfortunately, Wall Street has not been immune to bad actors – especially in the penny stock market. It’s the SEC’s job to make sure that investors are protected from fraud. I just think they need to be careful and not go overboard by trying to shield investors from failure. Some companies will succeed. Some will fail. Risk is inherent to a free market system. It’s what built America.
The SEC also needs to look at crowdfinance with a different set of lenses. Crowdinvestors are not pink sheet investors looking for a quick buck. Rather they are long-term shareholders who see businesses as opposed to tickers, and their interests are far more aligned with the issuer.
Regulators also need to better understand the power of social media. Today, investors have the ability to discuss and share their investment experiences. There hasn’t really been fraud in places around the world where securities crowdfunding is legal.
Even on Kickstarter, on the reward-based side, we’ve seen companies that have tried to defraud people with their campaigns and they’ve been exposed within days before any money was lost.
EQ: What sort of changes would you like to see to them and why?
Albright: I would like to see the thresholds for both issuers as well as investors raised. To give you an example, here in Georgia we have the Invest Georgia Exemption (IGE). Crowdfunding is legal in Georgia under the intrastate exemption. IGE is kind of modeled after the federal law, but it’s a lot less onerous. Although issuers are capped at raising $1M, audited financials are not required, and the only filing requirement is a one-page form with the state.
The difference is that Georgia-based unaccredited investors can invest up to $10,000 per offering (not year). And accredited investors are able to invest as much as they want. So if a company here is raising $1million under IGE, it could have 1000 investors at $100 each, and one accredited investor at $900K. I think IGE is much more advantageous for small businesses.
EQ: It seems like there’s two schools of thought on what direction this is going to take in the market: start-ups using crowdfinance in their early stages and the small business, locavesting approach where people start using their community and local customer base to fund expansion on a smaller level. Do you think one of these has more promise? Do you think this is an either/or situation?
Albright: I love the locavesting concept. I foresee securities crowdfunding being very successful on the intrastate level. Here’s why: let’s say a local restaurant is looking to raise capital to expand. It’s so easy for them to just go out to their local community, their existing customers who frequent the restaurant and who love the food, and basically say to them “Hey, you know what, in exchange for your investment, you’ll not only receive equity in our business, but we’ll also provide you with some other perks and dividends.” Those additional perks could be meal coupons or even something intangible like a vanity plate or a menu item named after them. And I think you’re going to see a lot of these “hybrid financing structures”.
EQ: How do you see this altering the business loan industry? Do banks need to be worried that this piece of their book of business could be reduced?
Albright: It’s almost impossible for small companies to get a loan right now anyway. So I don’t think banks, even the community banks, really care because they’re really not lending. Crowdfinancing presents a unique opportunity for banks to actually mitigate risk by lending money to those companies that have already raised capital and validated consumer demand through successful crowdfund campaigns.
EQ: How do you see peer-to-peer lending fitting into this picture? Will it ultimately compliment the crowdfinance sphere or operate separately?
Albright: I think p2p lending is an integral part of the crowdfinance industry. As more companies look for alternative lenders, they’ll start turning to “peers” for credit. I believe the peer-to-business (P2B) space will grow exponentially. Right now, there is far more investment demand for p2p loans than there is supply. I would not be surprised to see supply coming from business borrowers.
EQ: Which industries and sectors do you see being affected the most by crowdfinance? Do you think there’s going to be an advantage for certain types of companies?
Albright: Although consumer companies are currently achieving the most success with crowdfinancing, I think ultimately we’re going to see it spread across all industries. Crowdfinance is not much different from traditional finance. Instead of capital coming from big institutions or government entities, it’ll just come from the people – people who share similar passions with issuers.
As the crowdfinance industry matures, it will be used to capitalize a lot of more capital-intensive industries such as renewable and health care. Consumers are much better at picking winners than the government. Case in point: consumers picked Apple, the government chose Solyndra.
Dara Albright
Chief Communications Officer of Crowdnetic, Editor of NowStreet Wire, Co-Founder of LendIt
www.nowstreetwire.com, the leading publication for Crowdfinance
http://www.lendit.co, the preeminent p2p & online lending conference organization
Twitter: @nowstreet
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