Below is an article by Opalesque entitled "Insiders View: M&A, Crowdfunding Trends"
Insiders View: M&A, Crowdfunding Trends
By:Bailey McCann, Private Equity Strategies
August 26, 2013
After much feet dragging, the SEC has started to deal with the rules surrounding crowdfunding, as included in the JOBS Act. The regulator was fundamentally opposed to crowdfunding, well before the JOBS Act, and still seems hesitant to put any weight behind it as an investment vehicle. However, some say crowdfunding could have real impact for M&A, growth equity and the IPO markets as well.
Critics of crowdfunding say that the opportunity for fraud is too high, and that investors in this space may not always understand what they’re getting into. While supporters argue that crowdfunding can help democratize finance and provide capital for businesses that would otherwise have a hard time.
“It’s the new money, that tends to overpay in transactions, that’s what concerns us about crowdfunding. Investors that aren’t as sophisticated might see downside from those increases in multiples,” Sensiba notes.
Both sides have solid points. In our last issue we interviewed Judd Hollas, CEO of EquityNet, who is a proponent of crowdfunding, and in that interview he noted that similar concerns were voiced when self-directed investment platforms like E*TRADE and eBay first launched in the 1990s.
“I think the fact that entrepreneurs have to verify that investors are accredited is a positive step. Arguably the same questions were raised about companies like eBay or PayPal in the early days, but there have also been a lot of technological advancements driven by those companies. Those technologies and community self-policing will come along here too, some solutions are already in place,” he said.
Companies like E*TRADE and eBay may be good examples for the crowdfunding conversation. Critics and supporters alike tend to focus on whether the average retail investor will understand the inner workings of a transaction. On platforms like E*Trade, and even to an extent on eBay, users are almost annoyingly informed by these firms about what they are getting into, and the consequences for fraud.
The same practices could be replicated on crowdfunding platforms, or, better still, regulators could engage in conversations about how to simplify and improve financial disclosure rules which are often arcane even to “sophisticated” investors and their sizeable legal and accounting teams. Financial journalists could easily only cover the steady stream of regulatory changes that are meant to provide more transparency, and instead often just result in more, and conflicting reports. In all, only holding retail investors responsible for their ability to navigate this system seems a bit disingenuous.
“There is a huge opportunity to simplify accounting practices internally and externally when you look at some of the disclosures that are required,” Sensiba says. “Many times those disclosures mean nothing to average users of financial statements. When you look at Craigslist, people show the dents on their cars and they explain what they’re selling, what is wrong, and why they think the value is fair. But we don’t do that in the business world, instead we keep changing regulation around instead of just being transparent.”
Structurally, crowdfunding may play an increasingly important role in a low liquidity environment. Crowdfunding could have implications business decisions in terms of growth opportunities, whether to stay private, or when to sell.
As banks consolidate, and are required to keep more cash on hand, providing small lines of riskier credit, rubs up against new regulations. This reality is already opening up new opportunities for private equity firms and hedge funds. Still, there are some businesses that may be sound, but aren’t going to fit the mold for alternative investment firms. (Consider the troubling trend of some VC firms considering women owned businesses innately too risky, as one example.) Could these firms be a good fit for crowdfunding? Maybe. Crowdfunding may be a way for businesses to grow into something that is a better fit for investment firms. Watch this space.