Crowdfund | Raising Private Capital: Clearing Up the Confusion and Debunking Myths
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Raising Private Capital: Clearing Up the Confusion and Debunking Myths

A flurry of changes in regulations, as well as the continued onslaught of technology, has disrupted the way private capital is raised.

Call it crowdfunding, peer-to-peer lending, or direct investing. Whatever term you choose to use, the end result is clear: this new way of raising private capital is more efficient for all parties involved.

It allows issuers to reduce their overhead, meaning better returns for their investors. As a result, investors are more likely to allocate this additional capital to alternative strategies, making it easier for issuers to create even more investment opportunities.

But with all these recent changes comes a lot of confusion (and resistance) involving the future of raising private capital. Let’s clear up this confusion and set the record straight on everything you should know about the future of raising private capital.

Investments are still restricted to accredited investors

There’s a belief that online portals are “crowdfunding” ventures open to any type of investor.
Here’s the truth. The JOBS Act is often referred to as crowdfunding, and while issuers can use the 506(c) exemption to generally solicit an offering, investment is still restricted to only accredited investors.

The 506(c) exemption can’t be used for non-accredited investors, thus it prohibits these investments from being made available to the “public” crowd.

The push to online securities isn’t just reserved for Millennials

Many veterans of the industry believe that online securities transactions will never be widely adapted by accredited investors and seasoned pros. They believe that this new technology is reserved only for Millennials. True, the younger generations are always quick to adopt new technology. However, data suggests people of all ages are adapting. Why is that? Simply put, new technology makes things more convenient and streamlined.

Even the most conservative banks on the planet are moving online. Online banking is easier for customers and allows these companies to eliminate paper-pushing positions on their workforce.

At the same time, it’s important to note that technology hasn’t replaced the functions of a broker dealer. One only need to look at the online retail boom of the 1990s to see what we mean.

During the 90s (and into today), consumers began to shop online. And even though these transactions occurred on a computer, there were still people behind the scenes filling orders, collecting payments and more.

The same goes for broker dealers. Technology isn’t replacing the process nor the people involved; it’s just making the whole system more efficient.

Online securities can be effective for larger issuers raising tens or hundreds of millions of dollars

Many seasoned vets who are resistant to integrating new technology into their businesses believe that only longstanding tried-and-tested strategies will work. They believe that an online approach might be okay for small issuers (looking to raise a few million dollars) but not for the big guns.

But the move to online private security transactions will actually benefit larger issuers more so than their smaller counterparts. Why’s that? Because the benefits of technology are more appreciated by larger issuers. Benefits such as organizing information, maintaining tracking of documents and messages, gaining access to real-time visibility and auditing – they make it easy for larger issuers to manage multiple offerings, investors, escrow accounts and document libraries.

Integrating new technology does not mean you have to reinvent yourself and start over

Just because you choose to integrate new technology doesn’t mean you have to completely alter how you do business. This misconception is a driving force for so many staunch opponents of the changes in raising private capital.

Here’s a tip: Don’t think about it as a revolution, but rather an evolution. The most successful companies out there are those that are able to integrate new technologies into their existing businesses. Let’s look back at online retailers again as an example. When online shopping was introduced, the longstanding vets of the industry (think Walmart and Walgreens) didn’t do an about-face and completely changed how they ran their business. They took a long-term approach to evolving and growing, even with newcomers like Amazon nipping at their heels.

The use of online securities doesn’t mean you have to change your business model overnight in order to stay relevant. But it does mean you need to start working this new technology into your overall strategy.

Embrace new technology to deliver results

Successful companies are always on the hunt for new ways to improve client experiences and increase business efficiency. Technology is a key component of that. Any company that is raising private capital can – and will – benefit from this latest trend. The use of online securities can lower your cost of capital and provide your investors with a better overall experience.