Crowdfunding Platforms and Broker Dealers: An Evolving Relationship

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Posted by:    October 23, 2012

The wave of crowdfunding platforms partnering with broker-dealers (“BDs”) continues with Earlyshares announcing a partnership with Point Capital Partners. This partnership will birth Earlyshares Pro, a crowdfunding platform for accredited investors, set to launch upon the implementation of Title II of the JOBS Act. Title II will lift the ban on general solicitation and advertising of security offerings to accredited investors – and while delayed – it is largely expected to be promulgated by the end of 2013. This will allow Earlyshares Pro, and other crowdfunding platforms with broker-dealer licenses or affiliation, to begin crowdfunding investments from accredited investors.

A number of portals in the broad investment crowdfunding space have elected to go down the BD route:

Rest assured, this is only the beginning. Food for thought: this highlights only crowdfunding portals choosing a broker-dealer solution; what about the 4,000+ broker-dealers who may choose a crowdfunding solution? (Hint: white-labeled, turn-key products are being developed by a number of players to make this easy-bake easy. Also, note ConfidentCrowd’s strategy.)

The advent of crowdfunding for accredited investors is great. It will allow crowdfunding platforms to leverage the best of technology and the internet to bring dramatic efficiencies to financial markets; investors and companies will be connected more transparently and ubiquitously than ever. The private fundraising market today is horribly fragmented, with intermediaries often the perverse beneficiaries of asymmetric information and market inefficiencies. It’s ripe for disruption. Enter crowdfunding.

I don’t think many of the incumbents understand just how momentous this disruption will be (1). Not the first year, or even the second, but as the seeds of disruption spread – and we experience a fundamental shift in how capital market information is shared and interacted with – I believe the disruption will hit with magnificent speed and force. It’s not a coincidence the intellectual father of market disruption was an early investor in a leading crowdfunding platform.

One consequence of this that deeply resonates with me is the opportunity it will bring to geographically-disadvantaged regions. Imagine being a promising startup in Columbus, Ohio: accredited investor crowdfunding will exponentially magnify your visibility and access to investor networks across the country, and potentially the globe. And less we forget traditional small businesses; they too will benefit as accredited investors are given a more efficient mechanism to invest in private businesses. This stands to be particularly impactful for more rural regions where wealth surely exists (read: investable capital), but private capital markets are often underdeveloped. The internet, with all of its efficiencies, will become the development these regions desperately need.

But we can’t stop here. We must ask ourselves: is this the full realization of the democratization of capital the JOBS Act envisioned? The answer is no. The markets will only be democratized when investors of all economic classes can participate. Title II and the upcoming genesis of accredited investor crowdfunding is a great beginning; we just need to make sure it’s not also the end. And on this note, jump over to two relevant posts by Mark Mohler of CrowdfundingLaw and Bill Carleton of Wac6, respectively: (i) Investment Crowdfunding in the U.S. is Dead Before Arrival; (ii) The McHenry Do-Over: Summary of the Interim Draft

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