Crowdfunding is Growing
by Brian Kline
Most investors are somewhat familiar with a new way of investing through crowdfunding. It’s also referred to as “peer-to-peer investing.” To some degree, these emerging investment opportunities are displacing banks as investors gather online to pool their money to fund an untold number of potentially highly profitable investment opportunities that used to be relegated to bank loans.
One area you can expect to see significant growth for crowdfunding is from self-directed retirement accounts. These are tax deferred retirement accounts that invest outside of traditional stocks, bonds, and mutual funds. Currently there is $146 billion held in self-directed retirement accounts. These funds can be invested in almost anything from real estate to limited partnerships. Self-directed retirement funds make a great match with crowdfunding, which is looking for funding for a vast variety of projects. On one side you have the money and on the other side you have the investment opportunities.
New Report for Self-Directed Investors
PENSCO is in the self-directed retirement account business. PENSCO works with retirement account investors to make investments and assure they stay within the IRS rules. In anticipation of growth in crowdfunding, PENSCO recently issued the 2015 PENSCO CROWDFUNDING REPORT. The report looks into several investment opportunities including consumer products, filmed entertainment, healthcare, commercial real estate, residential real estate and sports. An important insight the report shares is:
“A quickly growing subset of crowdfunding offers ownership in private enterprise with the possibility – though no guarantee – of a payoff through an initial public offering (IPO), merger, or acquisition. This “equity crowdfunding,” “crowdfinancing,” “securities crowdfunding,” or investing through “accredited platforms” brings eligible investors together through technology for a private placement.”
The Rules Might Change
As of today, not all investors qualify to make crowdfunding investments. SEC rules require investors to be “accredited”. Being accredited requires an investor to meet one of these three requirements:
- You earned an individual income of more than $200,000 per year, or a joint income with your spouse of $300,000, in each of the last two years and expect to maintain the same level of income.
- You have a net worth exceeding $1 million (not including the value of your primary residence), either individually or jointly with your spouse.
- You are a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.
However, existing laws also allow for private equity investing by unaccredited investors under certain conditions as well as peer-to-peer lending for all investors. The SEC is working now on Title III, which could eliminate the last barriers between unaccredited investors and private placements.
If or when the SEC allows broader investment opportunities to the public at large, you will soon begin seeing general solicitations for crowdfunding. General solicitation will not change investing fundamentals. To identify quality deals, investors need to be familiar with the sector and conduct thorough due diligence. As the investor base expands, issuers have to get used to more transparency.
True transparency is new to private businesses. Many feel that it will reveal competitive advantages and trade secrets. Crowdfunding platforms have responded by guiding issuers through investor communications, including providing ways to keep information confidential and manage nondisclosure agreements.
Crowdfunding is clearly an emerging industry worthy of further study by investors. Another article is in development looking at what changes professionals in the industry think the SEC might be about to unveil. Please leave a comment if this article was helpful or if you have a question.