COMMENTARY | COLUMNISTS | JOHN PATRICK FORD

Online crowdfunding updates capital markets

A new word and concept came to my attention last year when a group’s fundraising efforts saved San Diego Opera. Now I am aware that crowdfunding has other applications to raise money for a cause or to create a market.

Initially I was familiar with crowdfunding only as a creative way to support charitable programs. Certainly it was what was necessary for a quick recovery of the opera by raising $2.4 million dollars in two weeks. The formula was digital technology connected to social networking to quickly get the plea out for financial help to a wide base of donors.

Now I learn that crowdfunding can be applied to political campaigns, real estate ventures and seed money for startup companies. The technology has advanced rapidly over the past 10 years and is widely known under various titles other than crowdfunding.

I find references to peer-to-peer financing, the backing of “angels” as a form of private equity and as featured in a recent issue of The Economist, the finetech revolution.

The article describes how geeks in T-shirts from Silicon Valley have disrupted the financial industry by creating a generation of startups taking aim at the heart of the finance industry, from wealth management, peer-to peer lending and crowdfunding.

Like other disruptors from Silicon Valley, finetech firms are growing fast. Goldman Sachs estimates that the market is $4.7 trillion. No wonder the crowdfunding platforms are anxious to get a piece of it.

I use the word platform because it is the new buzzword for a crowdfunding website. Several skeptics worry that finetech ventures will become the playpen for fraudulent targeting of the poor and inexperienced investors. Companies will no longer have to list on a Securities and Exchange Commission-accredited exchange, which requires onerous disclosures.

According to promoters of digital fundraising, this type of financing is safer for the investor, has less government regulation and reduces the cost of raising money. If a crowdfunding project is successful, the founders and original investors retain control of the company’s future and avoid SEC oversight, disclosure and cost to launch an initial public offering.

The earliest recorded use of the word crowdfunding as a defined strategy was in 2006. As a concept, the idea pre-dates the Internet, going back as far as 1884, when the public was asked to support the installation of the Statue of Liberty. Publisher Joseph Pulitzer opened up the editorial pages of his newspaper to support the fundraising effort. His campaign of harsh criticism was successful in motivating the people of America to donate.

Historians can also provide an earlier crowdfunding effort promoted by Jonathan Swift to raise money for the Irish Loan Fund in the 18th century. However, the methods used to raise money for a cause under 21st century technology is quite different.

Some early websites to support fundraising projects showed up in 2003 with Kickstarter, EquityNet and IndieGoGo among the larger ones on today’s Internet. The fundraising of these websites increased dramatically from 2010 at $89 million to $1.47 billion in 2011 and $5 billion in 2013.

When a new venture is looking for capital infusion, it used to rely on a private equity type of investment pool after the founders had exhausted their first source of funds: friends, family and fools.

Burnham-Moore’s Center for Real Estate hosted a conference two weeks ago on crowdfunding for real estate investments. Apparently only a few, if any, attendees had previously used the online technology to raise private capital for a real estate venture.

One of the panelists, attorney Richard Weintraub, said the traditional real estate syndication was an inefficient way to raise capital. Advertising and use of email is restricted. Crowdfunding promotion is less regulated.

The passage of the JOBS Act (Jump Start Our Business Startups) in 2012 lifted some limitations and created increased crowdfunding to attract investors.

In 1980, Massachusetts banned selling shares to the public through early crowdfunding technology. The officials were concerned that gullible residents could be swept up by the hype surrounding the venture, according to a report in The Economist.

One of the startups prevented from selling stock was Apple, which is now the most valuable public company in the world. However, for every Apple, there will be many more lemons.


Ford is a freelance writer in San Diego and can be reached at johnpatrick.ford@sddt.com.

User Response
0 UserComments