By Vanessa Malone
As a quick refresher, equity crowdfunding is a capital raising method typically utilized by startups and small businesses, whereby a company uses the internet to sell securities (shares, debt, or other ownership rights) to a large number of customers and fans.
Traditionally, early-stage investment opportunities were reserved for high-net worth individuals. Equity crowdfunding works to level the playing field and give the everyday person access to those same investment opportunities.
Equity crowdfunding began making strides during the recovery years that followed the 2008 financial crisis. In the U.S., the JOBS Act of 2012 enabled Rule 506(c) of Regulation D (Reg D), Regulation A+ (Reg A+), and Regulation Crowdfunding (Reg CF) to go into effect in 2013, 2015, and 2016, respectively. The U.K. got a bit of a head start with the Financial Services Authority (FCA) giving regulatory approval to equity crowdfunding platforms Seedrs in 2012 and CrowdCube in 2013. Seedrs and CrowdCube remain the two largest equity crowdfunding platforms in the U.K.
Interestingly enough, equity crowdfunding is back on the rise after the economic downturn driven by the COVID-19 pandemic.
Wefunder recently reported its best three months in the company’s four-year history, with investor volume up 35% February through April. In early May, the site also recorded $2 million of investments in a single day, a new record.¹
In a recent interview with Crowdfund Insider, Seedrs reported that they’ve seen meaningfully higher levels of fundraising and investment activity than the same time last year.²
This general uptick is promising. We’ve also seen meaningful regulation happening on both sides of the pond to support equity crowdfunding. Nevertheless, to turn the equity crowdfunding wave into a tsunami, we believe the infrastructure is missing a critical element: liquidity.
In the current equity crowdfunding infrastructure, liquidity solutions for investors continues to be a missing link.
In the U.S., investors put in an estimated$2.4 billion in Tier 2 Reg A+ and Reg CF offerings in 2019 alone.³ Most of this has become locked liquidity potential as no liquid secondary marketplace exists to support these issuers and investors.
If you look at the graphic below, the securities offering journey runs smoothly through primary issuance — then comes to an abrupt roadblock when it comes to secondary trading.
Crowdfunded securities fall under the alternative investment category which typically get flagged as illiquid investments. While this may have been okay at the start, the market is evolving.
More companies are staying private longer than they have in the past. This trend can be attributed to a number of factors including high costs, stringent regulatory and disclosure requirements, and ongoing compliance costs that come with going public.
Companies are also finding access to the capital they need to grow in the private market without all those hurdles. In fact, the amount of new capital raised through exempt securities offerings outpaced capital formation through traditional, registered securities in 2019.⁴
The JOBS Act provided added flexibility as to when a company has to disclose financial statements which further increased flexibility on their IPO timeline.
This is all great news for the issuer, but not so much for the investor who already has to wait years for a potential return on their investment.
With more companies staying private, more investors investing in crowdfunded offerings, and a general capital raising trend that favors the private market; liquidity becomes a more glaring issue.
We believe that in order to support capital formation and retail investors in the U.S and globally., liquidity needs to be part of the equation. Further, regulated secondary trading venues should be encouraged by regulators and made available to investors.
This is why Horizon developed its integrated securities ecosystem that we’re licensing to U.S. broker-dealers and other global regulated entities to meet the demand for secondary trading from issuers and retail investors alike.
In finding the missing link, the Horizon team first delivered a secondary trading technology and worked backwards from there to deliver a complete, streamlined process from issuance and investor onboarding through to secondary trading.
We believe that equity crowdfunding issuers and investors deserve a complete marketplace, and that with liquidity added to the solution, equity crowdfunding will become a force to be reckoned with globally.
Horizon offers a suite of integrated securities software applications for compliant issuance through secondary trading of electronic securities. Truly a compliance-first business, our solutions combine Wall Street and Silicon Valley to power the next generation of exchanges and securities offerings in the U.S. and globally. Visit us at https://www.horizonfintex.com.
³,⁴ SEC Report 2020