The Capital
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The Capital

Covid has shaken up finance
COVID reshuffled the finance industry

Mad Money: How COVID Has Shaken Up the Financial Industry

By AJENE WATSON LLC on The Capital

The last time America faced an economic crisis of this magnitude, the electric shaver and scotch tape were considered new innovations. However, during the Great Depression, online investing wasn’t an option for any investors — accredited or not. Like a time machine, 2020 has replicated many of the socio-economic conditions of the 20s and 30s, but now we’ve got access to online investing, and thanks to the JOBS Act, unaccredited investors are permitted to enter the market early — even before a company goes public. And they’re entering in droves.

Retail trading

The guidelines for accredited investor status, along with the SEC itself, were created in response to the 1929 stock market crash with the intention of protecting inexperienced investors. Today this noble intention collides with a deluge of bored novice investors entering the market at record rates, hoping to get rich quick. COVID has resulted in a 90% surge in customer growth for Freetrade since March and retail traders now comprise nearly a quarter of the market, according to Citadel Securities. Just last year, that number was a meager 10%.

Day trading darling Robinhood has enticed an influx of first-time investors by waiving brokerage fees, but the stakes remain high. In June, a young new ‘day trader’, 20-year-old Alex Kearns, tragically died by suicide after believing he’d lost nearly three-quarters of a million dollars on the Robinhood app. In fact, his account had a net positive balance of $16,000. Waiving brokerage fees and trading on a mobile app have a profound impact on consumers because the money traded doesn’t feel real. Couple this mentality with the staggering lack of financial literacy in America, and we’ve got a recipe for financial disaster — or in situations like young Kearns’, a needless fatality.

Venture capital

The lights have been switched on at the club and we’re collectively sobering up to what we’re seeing from venture capital. They’re exclusionary Luddites with a rate of success so low it would be laughable if it weren’t so pathetic. Approximately 94%+ of venture capital money could be lit on fire and the results would be identical to the current returns from these ‘pros’. Yet, now, when startups and businesses need funding the most, venture capital has taken a massive step back. This year’s second quarter has shown a 30% dip in global VC funding and in America, VC rounds dropped 44% overall and 57% for seed-stage startups.

Embarrassing flameouts like WeWork, Juul, the Fyre Festival, and Theranos (to name a few), seem to have tarnished the ‘can do no wrong’ posturing put forth by VCs, as their unicorn investments are increasingly proven to be worthless. And now, COVID has revealed that the emperor has no clothes.

Equity crowdfunding

Unlike VC, equity crowdfunding received an unexpected assist from the COVID pandemic, that even resulted in the SEC approving a temporary cap boost to $250k from $107k as conditional relief to make raising money using equity crowdfunding, with minimum documentation, easier. In a unique position to help floundering businesses, equity crowdfunding has been providing relief by scaling its existing online investment structure. Many businesses have turned to crowdfunding to keep the lights on because federal PPP circumvented main street and young businesses drive America’s productivity, growth, and job creation. Even amidst the current economic uncertainty, equity crowdfunding has been steadily gaining momentum; even WeFunder recorded its best quarter ever, in Q1.

The equity crowdfunding landscape is mainly comprised of middle-class folks who are passionate about supporting their communities and the dreams of entrepreneurs. Many view investing in equity crowdfunding as an alternative to treating themselves to a nice dinner and a way to allocate their discretionary income. In fact, 80% of investments are less than $500 and the median investment is $200. For comparison, Robinhood’s typical account size is within a $1,000 to $5,000 range.

Equity crowdfunding has been surging during the pandemic because it’s in a particularly effective position to get money into the cash registers of small businesses, usher entrepreneurs through the Valley of Death, and fund the underfunded. Plus, it’s widely touted as a “proven jobs engine” and with no fraud reported to-date, equity crowdfunding is likely to be heavily leaned on by the financial industry over the coming months and years. As the dust settles in the industry, many believe equity crowdfunding could quickly surpass VC as they regroup and struggle to regain the upper hand, while weighed down by massive losses, being out of touch and unresponsive to the needs of the market and the people.

The financial landscape is certainly changing. Try not to blink, you might miss something!

If you’re curious to learn more about investing via equity crowdfunding, check out TruCrowd’s online investment portal

5 Questions About Equity Crowdfunding You May Feel Silly Asking — But Shouldn’t!

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AJENE WATSON LLC

AJENE WATSON LLC

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Business Management & Financial Services Consultant Focused on Development Stage Companies & Microcap Markets