Industry experts have predicted that that equity crowdfunding industry may eventually increase to $300 billion if it can overcome a few hurdles. Equity crowdfunding allows individuals to have the ability to invest small amounts in promising entrepreneurial ventures or small businesses looking for funding. Crowdfunding has improved access to capital for businesses all over the world.
The popularity of crowdfunding is increasing as more small businesses seek alternative financing methods. There are several different types of crowdfunding available. Here in the U.S., businesses have only been able to take advantage of perk based or donation based crowdfunding until now. However, there is hope that equity based crowdfunding will be an acceptable option by the end of this year as a result of the Obama Administration’s Jumpstart Our Business Startups Act (JOBS Act).
The crowdfunding language of the 2012 JOBS Act began as the Startup Exemption, created by Jason Best, principal of Crowdfund Capital Advisors, and his two partners. Frustrated by the lack of capital available, he set out to rewrite the laws that regulated how people raise money, most of which had been written before the telephone was widely available. He believes that crowdfunding is the way that businesses will raise capital going forward.
Some venture capitalists believe that equity based crowdfunding will be able to draw substantial market share away from bank lending eventually. The alternative lending industry has received a big boost from the recent turmoil in the traditional banking industry. Many of these businesses may stay with this alternative financing option even when the banking industry turmoil ends.
Some others disagree. Some analysts think that it will take many years for crowdfunding to really compete with traditional banking. The entire category of alternative lending totals around $1 billion to $1.2 billion in funding annually. That compares to $642 billion small-business lending (loans with a balance of $1 million or less) by banks by the end of the third quarter, according to FDIC call data. Some experts say that they do not foresee crowdfunding edging out SBA loans or business lines of credit for mainstream businesses anytime soon.
Issues To Overcome
There is a great deal of uncertainty in the crowdfunding industry. Legal and cultural barriers have been causing problems and restricting growth. One of the difficulties facing crowdfunding is how to turn it into a long-term scalable business. The current processes are working well for startups and niche projects. However, they are less appropriate for large expenditures, such as buying equipment, capital improvements, and working capital, which are things needed by most small businesses.
Investors will want to know that a mechanism is in place to ensure their repayment before they begin investing heavily in the industry. Although there is risk with every investment, the current risk associated with crowdfunding is substantially higher than many investors are comfortable with. Until this risk can be lessened, many investors will simply stay away.
Another issue is that the regulations governing crowdfunding have not been completely figured out. As time passes, the rules are fine-tuned and tweaked, but regulators are nowhere near to having a complete set of regulations available for the industry. Until there are a set of regulations that governs the entire industry, many potential investors will most likely sit on the sidelines.
Derek is a writer for Startup Valley company.