Small business lenders have fallen off the cliff. Investment crowdfunding to the rescue?

I've bumped the post planned for this space this morning in order to point the Counselor @ Law community to an essay Jonny Sandlund has just posted to The Crowd Cafe. It looks to be the first installment of a planned five part series he titles, "Crowdfunding Main Street."

As usual, Jonny gathers and analyzes research. In this particular post, the data is not the original information about investment crowdfunding players Jonny has gathered himself (see e.g. this list), but a side-by-side aggregation of data from the SBA and the Federal Financial Institutions Examination Council, respectively. 

Bank loans posterBig picture? "Bank financing, the living water to so many of our small businesses," Jonny concludes, "is barely 60% of what it was — 8 years ago."

Enter the promise of investment crowdfunding.

Jonny touches on the accredited investor crowdfunding that will be enabled by Title II of the JOBS Act, including the presumptive lifting of the ban on general solicitation under Rule 506 offerings.

Here on the west coast of the US, where I live, people perhaps too quickly assume that angel investing is already ubiquitous and rendered increasingly non-mysterious by organized angel groups, AngelList and other programs and online platforms. But listen to how Jonny talks about angel investing, in the context of what the lifting of the ban on general solicitation might do for the rest of America:

"For wealthy investors, Title II will deliver enormous opportunity by leveraging the internet to break down physical and financial barriers to investing in private businesses. Today, only ~10% of accredited individuals invest in the private markets. Largely because it’s such an onerous and frictional process. Particularly in more rural areas, i.e. anywhere between the coasts, it’s super difficult to invest in private companies. Angel investing infrastructure is extremely limited, if not not non-existant.

"This all changes with accredited crowdfunding. The internet will become the backbone of a new private market infrastructure."

As a matter of democratic principles, Jonny doesn't think non-accrediteds should be left out of investment crowdfunding, so he's frustrated by the delay in implementation of another section of the JOBS Act, Title III, crowdfunding for everyone. Truly democratic investment crowdfunding is where Jonny puts his highest hopes.

If you follow his posts on The Crowd Cafe, you know Jonny pays particular attention to any available information on how experiments in investment crowdfunding are going, in parts of the world that permit it. In today's post, Jonny focuses on the experience of one company in the UK.

"FundingCircle is a UK debt-based crowdfunding platform that launched in August 2010. Under the auspices of a supportive regulatory regime, as of today, it has crowdfunded over $110 million, across 1,370 loans, to traditional small businesses. It’s a truly democratized marketplace, liquidated by investors both accredited and non. And it’s growing ferociously. By my calculations it grew 12% month-over-month between November and December this year, an compounded annualized growth rate of 290%.

"The UK Government isn’t blind to the profound implications of this. Thousands of small businesses being democratically funded by investors and all. While our regulators stalling is causing countless entrepreneurs to go un-funded, and job creation foregone, our friends across the Atlantic recently announced it will invest 100 million pounds in peer-to-peer financial marketplaces in the UK, $20 million of which will go to FundingCircle."

We won't have the appetite for government funding of crowdfunding platforms in the US, but the larger point is, the model is working to supply growth financing to small businesses.

Now, regular readers here know I don't think Title III is capable of producing the kind of robust, free experimentation with non-accredited investment crowdfunding that ought to be ventured. The fault lies not with SEC intransigence, but with the Senate's gutting of the McHenry bill. But that's a different sub-debate within the larger mission. Jonny has his eyes on the prize, and I admire that.

Image: Richard Parker / Flickr.


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