Will Equity Crowdfunding Appeal to the Non-Rich?
In September of 2016, Title III of the JOBS Act, commonly referred to as Regulation Crowdfunding (CF), was passed, allowing both accredited and non-accredited investors to invest in emerging, early-stage growth companies through FINRA-registered broker-dealer platforms. Notable platforms include SeedInvest, Fundable, StartEngine and Wefunder. Now, start-ups can raise up to $1 million in a 12-month period from both rich and non-rich (“non-rich” refers to a non-accredited investor who makes $200,000 or less in annual income) individuals looking to invest, thus democratizing capital for up-and-coming businesses. Note that before Title III, start-up investments were limited to only the rich. Since passage of the JOBS Act, over 20 online funding platforms have registered with FINRA as broker-dealers. So now that laws and an established web of platforms exist, will equity crowdfunding take off and become a popular, new alternative investment among the non-rich?
Prior to its inception, Anand Sanwal, Co-founder and CEO of CB Insights, asked it well; “Is there really a lot of latent demand to invest in startups for equity?” Since May 2016, roughly $45 million was invested into Regulation CF offerings, through the industry’s leading platforms. Wefunder, the leading Reg CF offering platform by investment dollars ($26 million), also pointed out the median income of their individual investor was $90,000. So yes, it seems there was a sizable amount latent demand among the non-accredited in equity crowdfunding’s infancy.
However, I argue this is merely a honeymoon phase. Why? Because investor recurrence will dwindle as these new investors lose money, eliminating much of the industry’s traction. And yes, statistically, they will lose money. On top of that, startup investments are extremely illiquid assets so the average non-accredited investor can’t afford to invest year-over-year without returns. These two factors hint that increased non-accredited investment or even sustainability of current levels will be hard to attain.
Of course, one might argue that millennials’ investments in the public equity markets are dwindling by the year because of perceived uncontrollable risk factors, such as the 2008 financial crisis or sudden, historical drops in the DOW. Thus, the largest American demographic has more cash on hand to invest in companies they believe in. (Insert equity crowdfunding here). This argument is flawed. Millennials aren’t investing because they can’t afford it and are saving at an alarmingly low rate. So if they aren’t investing in a safer market in stocks with minimal assets, why would a rational investor choose to continue to invest in a less-safe investment with the same level of assets?
Given the above, it seems to me that the rich will ultimately decide the future of this new investment vehicle. And this will depend on innumerable factors such as the effects of increased accessibility that these platforms provide. But that’s a conversation for another day…