Quick Take
Karsten Wenzlaff, Advisor
August 26th, 2025
Karsten Wenzlaff is a Crowdfunding and Fintech Expert from Germany. He is Secretary-General of Digit[...]
Category Archives: Online Funding / Investing Portals
Biden Administration to Review and (possibly Delay) Investment Crowdfunding Improvements
Crowdfund Insider | | Jan 22, 2021
Yesterday, Assistant to the President and Chief of Staff Ronald Klein distributed a Presidential Action by President Joe Biden that is poised to impact recent improvements to security crowdfunding including the Reg CF and Reg A+ exemption. Entitled Regulatory Freeze Pending Review, President Biden has ordered that rules that have been published in the Federal Register but have not taken effect will be delayed by 60 days of the memorandum which would be March 22, 2020. Rules that have been sent to the Office of the Federal Register but not published are to immediately withdrawn for review and, perhaps, approval.
On December 5, 2020, Representative Maxine Waters, Chairwoman of the House Committee on Financial Services, sent a letter to President-Elect Biden requesting a rollback of a litany of rule changes enacted by the Trump administration – some of which impacted Fintechs.
On January 15, 2020, Chair Waters sent a 2nd letter addressed to the incoming Biden administration asking him to
“temporarily suspend any midnight regulations” promulgated by the Trump administration.
This letter asked that any rules that have not yet been published in the Federal Register while requesting to
“postpone the effective dates of rules at least 60 days that have already been published in the Federal Register but which have not yet taken effect.”
See: Regulation Crowdfunding Cap moves from $1.07M to $5M on March 15, 2021
The Presidential action may impact improvements to the investment crowdfunding sector including funding increases to Reg CF and Reg A+, as well as some other areas of Fintech.
Reg CF is poised to increase its funding cap from $1.07 million to $5 million. Reg A+ may increase from $50 million to $75 million. Increasing the funding caps of these two exemptions make them more viable and in line with current requirements for younger firms. The updates by the Securities and Exchange Commission (SEC) were broadly lauded by the securities crowdfunding industry and many members of the industry view the changes necessary for survival.
The regulatory improvements also include several other updates that are designed to help entrepreneurs and younger firms. The entire list is viewable here.
So what happens next?
President Biden has appointed Gary Gensler to head the SEC. As was previously covered, Gensler has a solid knowledge of Fintech and, specifically, expertise in blockchain technology. Gensler has researched this sector of Fintech and previously taught a class on the subject at MIT. It is unclear as to when he will be approved by the Senate but his appointment should move relatively quickly. It would then be up to him to review the improvements to the crowdfunding ecosystem.
See: NCFA Response to CSA on NI 45-110 Harmonized Securities Crowdfunding Rules
Alternatively, Acting SEC Chair Allison Herren Lee could be asked to review rules. As a Commissioner, Lee disagreed with the changes stating her “concerns with the individual provisions of the final rule are numerous.” She questioned the “wisdom of increasing capital raising limits in offerings,” adding that “investors have demonstrated no interest, and issuers no need, for such increases.” But with Gensler on-deck, you can expect any determination will be made by him.
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Catching the Wave: Capitalize on New Opportunities in Private Placements
Katipult | Vuk Stojkovic | Dec 23, 2020
Private markets just completed a decade of explosive growth. According to McKinsey’s “A new decade for private markets” review, 2019 saw record numbers in terms of private placement volume, with global private deal annual volume reaching $919B. The opportunity is here, and it is enormous. This article covers select insights from industry thought leaders on the latest trends in technology-first private placement markets.
5 Private Placement Insights
Market Growth
Currently, forecasts are putting global alternative AUM at over $20 trillion by 2025, which is twice the value they were at in 2018. The number of deals more than doubled from 2009 to 2019. Behind these figures is strong investor demand, supercharged by recent regulatory changes.
Regulatory Changes
Recent SEC regulatory changes have served as a catalyst and provided more options for equity capital markets to source capital from individual investors, creating a necessity for organizations to prioritize building out compliance and syndication processes for retail participation. Due to the administration involved with the participation of larger numbers of investors, many firms have only made their private deals available to institutional investors, with retail participation hovering around 10%. Firms looking to capitalize on the new influx of retail investors are prioritizing efficiency improvements of internal processes.
New Investor Class Emerging
According to Blackstone, the percentage of its capital contribution by retail investors will shift dramatically in the first half of the next decade. By 2025 retail investors are projected to have a level of capital contribution equal to that of institutional investors. This means that organizations seeking sustainable growth in the space need to couple their private placement strategy with internal technology projects that prioritize building out compliance and syndication processes necessary for retail distribution.
See: Top Investors Advice To Prepare For The Next Decade
Although the demand for private deals is reaching record highs, there is not enough accessible supply of investment opportunities. As a result, competition amongst quality firms is accelerating to fulfil investor appetite.
The Bottleneck: Manual Processes
Firms relying on spreadsheets, email, and physical mail in 2020 will find it increasingly difficult to scale their business. The main factor behind the low rate of retail participation in deals is the inability of firms to increase the number of investors they are able to service without significantly expanding their workforce. The largest culprit is the legacy systems and processes that bring inefficiency to workflows such as investor onboarding, document execution, signature collection, and payment reconciliation.
On top of not being scalable, these outdated processes often come with human error and correction efforts are tedious, expensive, and create opportunity cost. A situation such as COVID-19 only exacerbates these issues since the old processes are simply not equipped to handle the logistical challenges organizations are now faced with. Centralizing these workflows on an online platform is allowing firms to maintain business continuity while simultaneously removing old operational issues.
Top Firms are Digitizing
Even though there is now an industry consensus on the value added by digital solutions, many smaller firms have not yet committed to a necessary digital transformation strategy like the industry’s largest firms. There are various reasons keeping organizations from making technology a priority, however their competitiveness is declining as a result. While the goals of digitization projects may vary from firm to firm, some common business outcomes that need to be addressed include lowering operational costs, enhancing investor experiences, driving new revenue, and improving reporting and decision making.
See: Digital Financial Inclusion in the Times of COVID-19
Three Must-Have Solutions When Digitizing
Replacing labor-intensive, ad hoc tasks with standardized and automated workflows will deliver benefits across all business segments; accelerate growth through shortening the deal cycle, enhance investor relationships and drive cost reduction and back-office productivity.
It should be noted that back office efficiency is not the only facet of digitization that delivers value to firms; the adverse impact that manual processes have on the quality of investor experience is also eliminated. Whether it is during the onboarding process or after the fact, users should be able to complete all interactions with a firm conveniently and access all necessary information in a way that is intuitive and seamless. Platforms that help organizations achieve this are going to be much more than a productivity tool by the people using them.
1. Investor Onboarding
This crucial part of the investor journey is perhaps most visibly impacted by solutions such as the one offered by Katipult. The onboarding process is currently plagued with inefficiencies that can be entirely removed by digitizing the entire workflow. This includes systems to manage digital form submissions, ensure compliance, and automate KYC.
See:
SEC Proposes to Update Accredited Investor Definition to Increase Access to Investments
Alberta and Saskatchewan securities regulators seek comment on proposed new exemption designed to facilitate access to capital
2. Subscription Document Generation (smart forms)
Smart forms are a high impact feature of private placement software that allow firms to scale the volume of deals without expanding the workforce. Smart forms keep track of appropriate investment vehicles and investor exemptions, and merge all required information in a guided workflow to ensure accurate execution of signatures and initials.
3. E-Signatures
High on the list of priorities for leading firms has been replacing “wet” signatures with their electronic or digital counterparts. This allows firms to avoid playing tag with investors whose investments can’t move forward because of a missing signature. Collecting these electronically plays an important part in improving both the company’s back office efficiency as well as the investor experience.
It is important to understand the business fit of an e-signature solution before you go ahead with the implementation. There are many off-the-shelf solutions available on the market and companies need to plan in order to avoid going through a huge digitization project that ends up with disjointed solutions that don’t work together. A fully integrated solution is key, so whether you decide to integrate separate solutions or find one purpose-built for your platform, just make sure you have a clear path to making the whole ecosystem work together.
About the Author: Brock Murray is Head of Global Development & Director as well as co-founder and founding CEO of Katipult | TSXV: FUND. Under his leadership the company entered 20 unique regulatory environments, successfully completed a public listing, and attracted enterprise customers such as ATB Financial.
This article appears as a featured article in NCFA's digital magazine, Fintech Confidential (Issue 3 Dec 2020). Click to read the latest thought leadership, insights and trends about Fintech in Canada:
Checkout NCFA's digital magazine, Fintech Confidential (Issue 3, Dec 2020) --> here
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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How to Choose the Right Financial Partner for Your Business
Loop | Dimple Lalwani | Dec 7, 2020
While this may be simply-stated, we're not oblivious to the fact that such a task can be a true undertaking. There are plenty of financial options out there to consider, but the true challenge is finding the one that will be most beneficial for your business.
In this article, we'll discuss a few of the most common financing options, so you can get a better idea of what's available and what might work best for your D2C brand. Read on to learn more.
Importance of the Right Growth Capital from the Right Financial Partner
As you begin searching for and comparing inventory financing solutions for your eCommerce brand, there are a few points you'll want to consider. Here are three items to keep in mind as you select the best option for you:
1. Expert advice on managing cash flow. Some financial partners don't offer this type of guidance—rather, they offer a purely transactional relationship, with little to no guidance or advice. Some financial partners will solely offer capital without any additional services, either because of the way their business model is structured or because their business does not generate sufficient revenue to provide additional resources beyond the capital provided.
See: Managing Finances in a New Startup
Even if you believe you can do without the extra financial services, it may end up benefiting your business to have a financial partner you can turn to for advice on maximizing your revenues and margins, as well as providing inventory loans for growth.
2. As a new, high-growth brand with a limited history, you can expect to pay a higher cost for capital than more established companies (generally from newer financial companies that operate on a revenue share model). Effective cost of capital could be costing you substantial dollars, ultimately impacting your margins, valuation, and your ability to scale your business profitably.
3. The ability to borrow funds for inventory and generate revenue in the short-term is paramount. In doing so, you can unlock the necessary cash for other working capital expenses, such as marketing efforts, ads, salaries, and more, which will help promote brand awareness and allow you to expand.
Types of Financial Partners Available to Your D2C Brand
1. Banks
Though a bank loan might seem like the most straightforward route to securing funds, a bank's business line of credit is typically on the low side—especially for new businesses that have only a few years of financials. Typically ranging from $1,000 to $250,000, it's likely that a business line of credit from the bank won't supply the growth capital you need if you are growing your business substantially month to month. Banks can also be quite slow to replenish funds at the end of a fiscal year—it would not be uncommon to receive additional capital toward the middle or end of the following year.
Pros vs. Cons
There are a few advantages of using a business line of credit. For one, they are fairly flexible, allowing you to pay only for what you actually use. It also may be convenient for you that a loan from a bank is tied to other products and services, such as credit cards, bank account, savings, and more, which will serve to keep your finances more streamlined. You'll also be able to build business credit and develop your credit history, which will speak to your reputability for future loans.
See: Lending Loop Surpasses $50 million Milestone and helps thousands of Canadian Businesses and Investors
Equally important to consider are the disadvantages of a bank loan. Specifically, banks offer less money upfront due to a lack of understanding of eCommerce business models. The challenge for high-growth eCommerce businesses is balancing cash flow for their Direct-to-Consumer and wholesale needs. Specifically, high-growth eCommerce brands often need to fund substantial purchase orders placed by large retailers or other subscription box services, and often, payment from these orders isn't received for months. The inability to process these orders due to a lack of initial funds can result in missed revenue opportunities, hence slower growth from year to year.
Banks also present the problem of higher currency exchange rates for international business, which is unavoidable in the world of eCommerce. In fact, it's likely that a good deal of your business may be conducted with overseas entities—whether it be for your products themselves or your packaging costs—so higher currency exchange rates can end up significantly hurting your profits, and may even impact your ability to qualify for more affordable capital elsewhere.
2. Merchant Cash Advance Products
Also known as revenue-sharing financing, merchant cash advances are not the same as using a revolving business line of credit. Rather, this process basically entails receiving funds from a financing company in exchange for a cut of your future sales, including a fee.
Pros vs. Cons
The primary benefit of a merchant cash advance (MCA) is that it's fast—you can have the funds you need (typically up to $500,000) in as little as one day. It's also easy to qualify for, even without excellent credit. Repayment is flexible, and depends upon the amount of sales you make during a given period.
See: NEW REPORT: Small Business SOS – It’s Time to Supercharge Local Crowdfunding to Unlock Needed Capital
Unfortunately, merchant cash advances come with higher fees than most loan options, ranging from 6-20% of the amount borrowed. The more sales you make, the quicker you have to pay back what you've borrowed, which dramatically increases your effective cost of capital. If you have a particularly slow month, be prepared for your MCA provider to take the majority of your profits. There is also little regulation for this method of lending due to the fact that a merchant cash advance is not actually a business loan. Between the high fees and minimal regulation, it may be easy to fall into a cycle of debt.
3. Royalty Financing
Another popular option to consider for your business is royalty financing, which involves receiving funds based on future revenue. The amount borrowed is then paid back as a percentage of your business's revenue. In some ways, this process may sound similar to a merchant cash advance, though the two differ because royalty financing is a loan.
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Binance has begun to block U.S. users from accessing its exchange platform
The Block Crypto| Yogita Khatri | Nov 9, 2020
Quick Take
- Binance has started blocking U.S. users from accessing its platform, The Block has learned.
- An email obtained by The Block directed a user to withdraw their funds within 90 days if they were based in the U.S.
- The move comes more than a year after Binance first announced that it would stop serving U.S. residents from September 2019.
Crypto exchange Binance has begun blocking U.S. users from accessing its exchange platform, The Block has learned. As Binance takes measures to block U.S. users from accessing its exchange platform, it's a reminder of the importance of having a strong legal foundation for any business, especially in the crypto industry; utilizing the Best LLC Services can help you establish and maintain that foundation for your venture.
The move comes more than a year after Binance first announced in July 2019 that it would stop serving U.S. residents from September of that year.
Until now, the exchange was still effectively allowing U.S. users to access its platform. As The Block reported recently, a U.S. resident just had to click "I'm not [American]" to set up an account on Binance.com. It remains possible to create an account in this fashion.
See: 5 Trends to Watch in Fintech Regulation
Binance is now sending emails to U.S. residents based on their IP addresses like 192.168.1.1 in what appears to be a significant step toward enforcing its previously announced blockade of such users. . One such email, sent Sunday and obtained by The Block, reads:
"We noted your account may be associated with the U.S. due to an IP address you connected from in the past. In-line with regulatory requirements, we are unable to provide services to U.S. citizens or residents."
"If you are a U.S. citizen or resident, please transfer your assets out of your account within 90 days. You may consider using Binance U.S. or other U.S. platforms," the email continues.
A member of Binance's customer support team told The Block that "once our system detects the access of account or the factors mentioned in the email are detected within the account then the following email notification will be sent out to users."
See: The case against BitMEX is a compass pointing towards the future of crypto regulation
Recent issues
Binance's move comes soon after the U.S. government launched twin legal cases against crypto derivatives exchange BitMEX.
The U.S. Department of Justice and the Commodity Futures Trading Commission recently charged BitMEX and its founders for violating know-your-customer (KYC) and anti-money laundering regulations, among other allegations. In light of this case, BitMEX accelerated its KYC program, requiring all customers to be verified by November 5 — three months earlier than its original deadline of February 2021.
BitMEX rival Deribit will also require all users to become verified before the end of this year, as The Block reported last month. (Deribit already blocks U.S. residents based on IP addresses).
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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CEX.IO’s Executive Director Predicts the Future of Crypto Exchanges
Finance Magnates | Oct 19, 2020
Crypto assets continue to be some of the most promising instruments traded in 2020. To better understand this growing space, Finance Magnates spoke with Konstantin Anissimov, Executive Director at UK cryptocurrency exchange, CEX.IO for his perspective.
CEX.IO Has Become One of the First Exchanges to Onboard Institutional Clients. What Was the Impetus behind This Strategy and What Are Your Goals in Doing So?
I’ll start by saying that the strategy for onboarding institutional clients is related to the situation in the market. More and more corporate and institutional investors are moving towards crypto as an alternative investment asset.
And in doing so, they are looking for trusted, reliable partners. Our strategy has been to create the tools and the platform for institutional clients which provides a way to invest in crypto assets that is trustworthy, secure and in-line with their expectations for compliance and effectiveness.
See: The case against BitMEX is a compass pointing towards the future of crypto regulation
In terms of our goals within this strategy, at CEX.IO we feel that the institutional space is going to grow tremendously in the next 2-3 years, and we plan to be at the forefront of this growth.
Our goal is also to further balance out our portfolio with institutional investors so that we can offer more efficient markets and better pricing for all the user categories.
Regulation Is always a Hot Topic Issue in This Industry. Will Regulatory Concerns Plague This Industry or Help Improve It Moving Forward?
How do you even start to regulate something that doesn’t have a place of jurisdiction and a legal entity?! It has happened with cryptocurrencies to an extent, but I believe that with DeFi things will be even more challenging.
However, in order to build reputable, trustworthy businesses, it should comply with some rules, and customers need assurance that their funds are well-protected.
And, ideally, are protected by the government, up to a point – like with the bank deposit protection schemes, for example. So I think that there will be quite an acceleration in terms of regulation of cryptocurrencies worldwide.
See: 3 Ways Digital Assets Will Reshape The World
We are seeing it now in the U.K. and other countries: France, Germany, Austria, etc. We have also recently seen the leaked EU-wide cryptocurrency regulation draft – MiCA, which I believe has already been submitted to the European Parliament for the first iteration of the review.
The flip side to the security aspects of regulation is that it will get harder for the small market players to survive. I personally foresee a period of mergers and acquisitions between the medium and small exchanges.
I also think that after that there will be a process through which regional leaders will emerge – maybe the top 10-15 market players for the whole of the EU region – which will keep on growing.
The regulation will bring stability, trustworthiness and security to the market, at the cost of losing some of the competition, making this less of a free market.
At CEX.IO we have been taking the route of a trusted and regulated market participant for many years now. This is why we now have MTL (money transmitter licenses) in almost all of the States in the USA, we are FinCEN registered and hold a DLT license in Gibraltar.
See: Canada’s first public Bitcoin fund hits $100M mark
We are also in the final stages of the FCA registration in the U.K. In addition to this, our applications are being reviewed in Singapore, Germany, Austria, the Netherlands, France and Canada.
Many Experts Peg Crypto as the Future of Investing. In What Ways Are These Assets Going to Eventually Define This Industry?
What I would like to say to this is that I am a strong believer that, in the near future, cryptocurrencies will become a full-blown asset class within the investment industry.
In my mind, it will probably be somewhere close to high-risk equities or high-risk FX currencies to start with.
This assumption is devised partially due to the progress in regulation, partially due to how the markets are deforming and the fact that the interest rates and yields of other investment instruments are very low or negative.
More and more institutional investors and funds have to find new investment opportunities in order to make the ROIs that their investors (LPs) expect from them.
Will cryptocurrencies dominate the financial industry – I really doubt it for the near future. The reason is that, unless the majority of the countries in the world decide to use blockchain technology to issue bonds, shares, and other financial instruments, I don’t see how cryptocurrencies can challenge the status quo.
See: 6 Things to Consider Before You Make Investing Decisions
Blockchain technology may be able to, but it will probably have to be a mixture of private permission and public blockchain technology and we are still far from that right now.
I’m more of a believer that cryptocurrencies are now very close to becoming a full-blown investment asset class.
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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How banks can help companies restructure for growth
WEF | Michael Spellacy, Alan McIntyre, and Derek Baraldi | Sep 28, 2020
- The banking industry has to walk the tightrope of balancing relief with financial responsibility.
- Where private investors are unwilling to step in, governments are filling the void.
- Structured correctly, pension funds and other long-term investors might be the “patient capital” required to support local community businesses.
The fallout from COVID-19 continues to challenge and disrupt economies around the world, but the banking and capital markets sectors can help steady the ship. Through new, innovative liquidity plays, they can support small and medium enterprises (SMEs), struggling industries, and emerging markets to ensure that all sections of the global economy emerge successfully on the other side of this crisis.
Banks and capital markets firms need to play a leading role in the three distinct phases of this rescue effort – the sovereign phase, the debt phase, and the equity phase. Government support in many countries is likely to taper off this autumn, whereupon we will increasingly see economies transitioning into phases 2 (debt) and 3 (equity). During the debt phase, banks and fixed income investors will bear the primary burden of providing capital and liquidity. Whereas private investors and public capital will be the main players in the equity phase, when businesses, unable to service their debt, will need to be restructured and recapitalized.
See: NEW REPORT: Small Business SOS – It’s Time to Supercharge Local Crowdfunding to Unlock Needed Capital
Financial institutions that participate in both phases 2 and 3 will need to think beyond short-term shareholder returns and take a “big picture” approach – finding opportunities that can benefit the wider economy while making smart, responsible bets for long-term growth.
Dealing with debt
During the debt phase, financial institutions will initially need to evaluate the landscape by reviewing their existing credit book to understand their levels of exposure across different sectors, and proactively identifying where new credit is needed.
As they begin to extend debt, they’ll need to spread their risk among different credit businesses while continuously checking for viability and assessing their credit capacity. They’ll need to set criteria to decide who should get relief and who needs to be restructured, which will prevent the rise of zombie corporations that are allowed to stagger on when it would be in the broader societal interest for them to default and restructure. This will require a delicate balancing act as financial institutions will need to identify the true strugglers, while still striving to be fair and equitable.
During the first phase of economic stabilization, the banking sector, in addition to offering standard debt vehicles, has largely acted as a conduit for the central banks’ guaranteed loan programmes for SMEs. However, bank lending has remained limp since the 2008 financial crisis as a result of uncertainty, regulation, and monetary policy, which means that they’re not the market’s panacea when it comes to smoothing the passage of loans, even if they’re backed by the government. That has provided an opening for the shadow banking industry – capital markets players, including private equity – to increase their direct private lending, either in the form of debt restructuring or bridge financing. In markets like the US, direct lending by institutional credit funds has become a powerful force in SME lending and in some recent time periods the majority of credit extended has come from these sources of capital.
See: Debt vs. Equity Financing: Pros And Cons For Entrepreneurs
In phase 2, fewer loans will be backed by the government, so the industry has to walk the tightrope of balancing relief with financial responsibility. That will be especially true when it comes to dealing with struggling sectors. This is when Banking and Capital Markets players will need to be extra vigilant of economic indicators to constantly re-assess the depth of the crisis and their capacity to extend new debt to borrowers who are teetering on the edge of medium-term viability.
Roger Bieri, Head of Multinationals Clients at UBS, says: “The first thing that we focus on is trying to understand if a company is a designated survivor, i.e. has the company performed well before the crisis, and does it has a business model that is future-proof? If the answer is no, we help these companies, together with external advisors, to review their business model and potentially restructure the business and/or find new investors."
Needed: creative equity solutions
For many businesses, getting to the other side of this pandemic will require more than credit. In the US so far this year, 45 businesses, each with over $1 billion in liabilities, have already gone bankrupt. That number could double by the end of the year. In the small and medium-sized business sector, 50% of companies now consider themselves under severe financial strain and millions have indicated they may have shut their doors for good. To help these struggling businesses, the banking and capital markets industry will need to find creative, versatile solutions in the equity phase. These solutions will need to smooth the transition from phase 2 to 3 and benefit a large segment of struggling entities, from large companies and developed nations, to smaller businesses and emerging markets.
See: Advisory experts back P2P lending sector to become mainstream investment class
Bernie Mensah, President of Bank of America’s International Bank, says:
“Our capital markets colleagues are having a whole bunch of conversations with eligible borrowers about structures that give them access to the liquidity that is there and typically, you’ll see innovative structures.”
They will make use of three traditional equity vehicles. The most disruptive is bankruptcy and recapitalization, where existing shareholders are wiped out and new capital repurposes assets. The second is new equity injections from either private or public sources, typically in preferred structures that give the new investors more of the upside. The third option is converting existing debt to equity in order to strengthen company balance sheets and improve available cashflow. Through this process, lenders (both public and private) become owners.
With falling valuations and low interest rates, the current conditions present an attractive opportunity for private investors. However, being an active player during a period of restructuring will require the banking and capital markets industries to innovate and find new ways to reach deeper into severely affected sectors and go beyond the highly visible large corporate sector to support and reshape the SME sector that accounts for the vast majority of employment in most economies.
Finding solutions for smaller businesses
Banks and capital markets have devised equity restructuring solutions before, but they’ve never had to deal with the scale of challenge that this crisis presents. This moment calls for the creation of new asset classes that can attract capital while ensuring that the impact of that capital is broad based. For example, investors could take direct equity stakes in large corporations that supply liquidity to SMEs through trade credit.
See: FintechBeat Podcast: Save the Money
Or they could invest directly in SME-focused exchange traded funds (ETFs). Additionally, private investors and private equity firms could provide lower-risk liquidity for SMEs by taking minority stakes in businesses, which lessens the valuation sensitivity and reduces the risk of ownership by maintaining existing shareholder control. There is also a role for the public sector in making SME equity investments attractive by changing the tax treatment of returns, or providing matching funds through business development schemes.
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Amex Acquires SoftBank-backed Kabbage After Tough 2020 for the SMB Lender
Techcrunch | Ingrid Lunden | Aug 17, 2020
Small and medium businesses have been some of the hardest hit in the coronavirus pandemic, and in many cases that has had a knock-on effect on the companies that provide services to them. Now, a startup that built a whole business around loaning money to SMBs has been acquired by a giant in the world of credit as the fintech industry begins to size up what the “new normal” will look like when it comes to doing business with smaller businesses.
Kabbage, which had built a platform that uses machine learning algorithms to assess and loan out money to small business owners, is getting gobbled up by American Express, the two companies announced today. Amex says it has “millions” of small business customers and the addition of Kabbage’s loan and other financial services tools signifies that it plans to double down on that sector with a much wider range of offerings.
See: Dealing with a crisis: FinTech versus Bank
The financial terms of the deal are not being disclosed, but reports earlier this month put the value of the acquisition at up to $850 million. For some context, Kabbage had raised nearly $990 billion in debt and equity (and at least $3.5 billion in securitizations), and was valued at over $1.2 billion in its last equity round of $250 million, in 2017, led by SoftBank.
The acquisition comes at a tricky time not just for SMBs but also the fintech companies that serve them, and specifically for Kabbage itself, with all of them weathering the storms of COVID-19.
Amex’s acquisition, tellingly, will include employees, technology and financial data, but “Kabbage’s pre-existing loan portfolio is not included in the purchase agreement,” Amex noted in its press release.
As for what happens with that loan portfolio, a spokesperson for Kabbage said there will be a separate entity that manages and services these loans at the time of close.
We don’t have a total amount of value for that loan book, but a spokesperson confirmed it includes not just loans that Kabbage had issued in its previous years of operation, but also loans made to SMBs in the U.S. under the Paycheck Protection Program. As of last week the latter totaled $7 billion across nearly 300,000 loans; and in 2019 Kabbage told TechCrunch it was on pace to loan out between $2.5 billion and $3 billion, so the pre-existing loan portfolio is not insignificant, and in current economic times, possibly one that comes with a lot of risk.
The news caps off an interesting run in the world of fintech that has seen Kabbage hit some significant ups and downs. The company attracted the attention of SoftBank and many other investors (and customers) on the back of a fast-growing business based around the idea of using artificial intelligence to speed up the process of small businesses applying for and subsequently getting loans.
See: Advisory experts back P2P lending sector to become mainstream investment class
Disrupting traditional banks and their slow and often frustrating approach to evaluating loan applications, Kabbage taps a wide variety of sources, from traditional accounting statements through to social media signals, into its proprietary machine learning algorithms, in order to determine eligibility for issuing loans, and the terms under which a business would pay it back. It was successful enough that Kabbage was also offering its product as a white-label service to other loan providers (including the banks it was disrupting).
“For several years, American Express has been expanding beyond our industry-leading commercial card products to offer our business customers a growing set of payment and working capital solutions,” said Anna Marrs, president of Global Commercial Services at American Express, in a statement.
“This acquisition accelerates our plans to offer U.S. small businesses an easy and efficient way to manage their payments and cash flow digitally in one place, which is more critical than ever in today’s environment. By bringing together Kabbage’s innovative technology and talented team with our broad distribution capabilities and over 60 years of experience backing small businesses, we can better help our customers successfully emerge from this challenging period and beyond.”
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