Nasdaq: going for its own slice of the private market
On a cloudy day in October, dozens of crowdfunding professionals gathered at a hotel in central San Francisco to discuss the up-and-coming sector. More than 150 years after thousands flocked to the US west coast to prospect for precious metals, crowdfunding is presenting another gold rush of sorts.
Buoyed by new US regulation and the advances of modern technology, crowdfunding platforms are developing momentum and potentially providing investors with hefty returns.
“People in this room are going to make a lot of money,” Mark Roderick, a lawyer who specialises in crowdfunding and who sponsored the San Francisco gathering, told the assembled throng.
To their supporters, such platforms represent the democratisation of a financial sphere hitherto reserved for professional investors. To their detractors, they are a lightly regulated minefield rife with the potential for fraud.
The incumbent financial institutions – particularly the big stock exchanges that have dominated equity-raisings – view the rapidly evolving crowdfunding landscape as providing both competition and opportunity.
Kickstarter and Indiegogo, which have used the power of the internet and social networks to create a place where people can donate money to start-ups and other projects, are perhaps the best-known platforms.
In places such as San Francisco, the crowdfunding possibilities are potentially limitless, with myriad loans, debt and land purchases up for grabs.
The effects of the “Jumpstart Our Business Startups” legislation passed by US lawmakers in 2012 are likely to increase the popularity of such crowdfunding portals substantially.
Known as the “Jobs Act”, the new law is meant to simplify the complex web of rules that govern US capital raisings and securities sales and will allow equity and debt raising to take place on crowdfunding portals.
Crucially, the act paves the way for platforms such as Kickstarter to move away from their traditional model of exchanging money for small gifts and allow donators to take equity stakes in the projects they are funding.
Yet large swaths of the act, including the provision that would allow crowdfunding platforms to raise equity, have yet to be implemented by the US Securities and Exchange Commission. The SEC appears to be concerned that loosening securities laws could lead to a wave of crowdfunding platforms with the potential to defraud investors.
In the meantime, the pillars of the Jobs Act that have been finalised have so far proved to be an opportunity for large stock exchanges, which are using them to augment their bread-and-butter business of facilitating public listings.
Under the Jobs Act, the number of shareholders a company is allowed to have before being required to register its stock with the SEC has been raised from 500 to 2,000.
The act has also lifted a long-time ban on “general solicitation” of private placements – a rule that limited certain deals to a select group of professional, or “accredited”, investors.
Sensing the winds of change, both Nasdaq OMX and the New York Stock Exchange – the two biggest US exchanges – have created their own private market offerings to take advantage of the changes introduced by the Jobs Act. NYSE has invested in ACE Portal, a platform that connects investors, broker-dealers and private companies, to help capture its own slice of the growing private market. Nasdaq created Nasdaq Private Market, or NPM, earlier this year.
“Companies are definitely staying private longer,” says Jeff Thomas, NPM vice-president of sales. He estimates that during the late 1990s, companies would wait three to four years from founding to listing; now they might remain private for as long as a decade.
As for longer-term disintermediation by crowdfunding platforms once the entirety of the Jobs Act is implemented, most financial industry professionals are hopeful that the emerging industry will complement their existing business rather than disrupt it.
Peter Williams, chief executive of ACE Portal and a former investment banker, says: “Theoretically there is a risk, but there is a lot that incumbent investment banks do – it isn’t just matching investments with investors.” He adds that banks are responsible for performing due diligence, managing regulatory issues and sourcing transactions.
In San Francisco, home of Silicon Valley and its army of venture capitalists, the sense of excitement over crowdfunding possibilities is palpable. Yet there is concern that a nascent industry could be tainted by a few bad apples.
“I’m going to ask you, as you go out and crowdfund, just to bear in mind these risks,” Mr Roderick said at the gathering. “We can all help make it work and, conversely, if there are bad actors, we can really ruin it.”