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PCBB Banc Investment Daily March 21, 2016
Banc Investment Daily
March 21, 2016

Crowdfunding Coming To A Location Near You

New York City has a long and well-known history of organized crime. Lately, however, the Big Apple has been fighting bandits of a different nature - a burgeoning raccoon population that's been wreaking havoc throughout the five boroughs. We recently read about a raccoon that was captured aboard the USS Intrepid, while several others were caught trying to bust into a Bronx-based Chinese restaurant. These bold, masked marauders are highly adaptable creatures; able to thrive pretty much anywhere there's food and shelter. Construction-generated disruption to their habitats is only making things worse. Accordingly, there's a bigger market for raccoon trappers these days as residents have been calling for back-up to purge the streets of these undeniably cute, yet potentially dangerous, new neighbors.
With the new equity crowdfunding rules coming into force soon, banks may also need to seek reinforcements. As crowdfunding becomes more commonplace for retail investors, it's possible that more start-ups will seek this type of funding and some will bypass bank loans in the process.
By way of background, starting May 16, 2016, US companies can use crowdfunding to offer and sell securities to the investing public. Prior to this, only accredited investors (wealthy or sophisticated) had the option of buying shares of start-ups and early stage companies. Soon anyone will be able to get in on the action, provided they satisfy certain SEC guidelines.
However, many businesses still don't seem to understand the risks involved with crowdfunding. As such, this is an area banks have an opportunity to help their customers make more informed choices. For starters, explain to small businesses that crowd funding could be risky because if the full amount isn't funded, many online markets don't allow the start-up to receive any money at all. So if you set a goal of $2k and you raise it, the money is yours, but if you only raise $1k, you get nada. Start-ups may not realize the importance of reading the fine print, so community banks have an opportunity to provide value.
Consider also that small businesses may not get the math. A bank loan can be had at 4% to 5% in many cases, yet marketplace funding channels seem to run up to 10x or more above those levels. Small business owners need money to continue to operate, so every dime counts.
Small business owners may not understand that raising money through equity crowdfunding isn't as simple as building a webpage and signing up investors. About six months before launching a campaign, businesses need to do the necessary legwork to build a network and gather the contact information of potential investors. Small business owners will have to be really careful here or perhaps not reach their goals.
Additionally, banks can add value by pointing out that start-up businesses often need ongoing advice and support. This hand-holding and firsthand knowledge based on real experience from bankers isn't available through equity crowdfunding. Funding alone does not ensure the success of a new business. Even promising businesses fail without proper and continual guidance, and by taking the equity crowdfunding route, start-ups could be more prone to failure.
Certainly, there may be benefits to using equity crowdfunding as a means to fundraise, so bankers will have to acknowledge these and prepare a counter offering to deal with this lending challenger.
In the meantime, have conversations with customers to help them understand that you're looking out for their best interest, and can provide things such channels just can't do. The more you can do to help small businesses make smart choices, the less masked invaders will continue to try and encroach on community banking.