By David Drake, LDJ Capital and The Soho Loft
To probe the legal intricacies revolving around the JOBS Act and how these new laws might impact the crowdfunding scene in the next months leading to and right after the much-anticipated full implementation of crowdfunding for equity, David Drake spoke with Candace Klein, CEO of SoMoLend.
Drake: Candace, you are a founder of the leading organizations in crowd funding and also CFIRA’s co-chair with Vincent Molinari from Gate Technologies. You are a powerhouse and a trained securities attorney now in debt-based crowdfunding. You were one of the first 5 founders of CFIRA and CfPA and currently sit as the founding Chair Person of CFIRA. In addition, you are one of the youngest members and some research showed me that you had actually won 25 out of 27 startup competitions you entered in the past. That is impressive.
What would you like to see change in the progress to implement the law and what can the readers do to help?
Klein: I’m coming at this from a unique perspective because I’ve already seen significant progress from the SEC Staff and FINRA. In my opinion, the biggest obstacle was the fact that Chairman Schapiro refused to call the proposed rules for comment. She recently retired and stepped down from the SEC on December 14th and since Chairman Walter has taken on her former position, I am confident that the staff has completed the draft rules. I anticipate potential and significant movement in early 2013.
Drake: Candace, what will be the impact on the US when crowdfunding for equity becomes legal?
Klein: I believe that the JOBS Act and securities-based funding (not equities-based funding) is the most significant piece of legislation I’ve seen in my lifetime. There are 20 million businesses in the US today that need money but can’t get it. Crowdfunding allows them to reach out to their own communities, customers and social network, even when traditional forms are not available.
Drake: What is the differentiation and challenges between crowdfunding for debt versus equity and what do you want readers to take away?
Klein: I think that crowdfunding for debt is a very different strategy, and for a different set of business owners than crowdfunding for equity. Debt-based crowdfunding is mostly well suited for existing businesses that are in retail such as with restaurants, health, beauty, fitness and other related industries. These types of businesses have cash flow, repeated and loyal customers and traditionally don’t see a 10x return to investors in the next three years. Targeted investors are those who are looking for liquidity or who may not understand equity investment, but who have made or taken loans in the past. Debt-based crowdfunding also is often much easier to understand.
Drake: How are you engaging communities in your business and entrepreneurs?
Klein: We’ve already engaged several cities, municipal governments, Chambers of Commerce and other local economic entities – each having committed a certain amount of money on the SoMoLend platform. We’ve had several thousand borrowers sign up because we can facilitate friends & family and accredited investor financing today. Our borrowers are helping us to find their most suitable lenders.
Drake: When do you guess crowdfunding for equity becomes legal in the US?
Klein: I anticipate we will see full implementation of JOBS Act sometime during the third quarter of 2013.
Drake: What’s going to be the total cost for issuers to do crowdfunding for equity when it is legal?
Klein: There will be a cost to use the platforms which on average is sitting at 7.8% of their raise, and they will need to provide a stake in their business or an interest rate return just like they would have in a traditional sense. What’s new with crowdfunding is that they now have a larger audience.
Drake: How will public companies get involved in Crowdfunding for Reward or Debt?
Klein: The only role I see public companies playing (at least in the beginning) is as serving as an investor to their suppliers, and or channel/distribution partners.
Drake: How can readers assist in your business – knowing that the readership includes international traders?
Klein: While the issuers in securities based crowdfunding must be US based companies, investors can be from anywhere in the world.
Drake: What are the two biggest challenges for the industry on crowdsourcing?
Klein: The media has quite broadly covered the concerns over fraud and failure. While it’s true that businesses fail and fraud occurs in all forms of investment, we’ve learned from companies like ASSOB in Australia, and Funding Circle in the UK that crowdfunding offerings have been quite successful in the past five years with zero instances of fraud and with less than 1.8% of defaults. While the concerns are great media fodder, they aren’t warranted in any fact.
Drake: What are two things obstructing the ability of crowdfunding for equity and debt to run efficiently?
Klein: Efficiency and government do not go hand-in-hand. Since securities-based crowdfunding is regulated by SEC and FINRA, portals will be required to provide significant data to regulators, and issuers will be required to disclose large amounts of proprietary information to an infinite audience of undisclosed potential investors.
Drake: How big do you see crowdfunding to be in dollar amounts in 2014?
Klein: By 2015, the Wall Street Journal, Bloomberg and Forrester research indicate that this will be a 100 billion market. Fred Wilson has also been quoted on his blog as stating that this could be as large as a 300 billion market by 2015.
Drake: How will broker dealers and angels be affected by this law and how can they best leverage it?
Klein: Broker dealers will benefit greatly because they essentially will be able to facilitate crowdfunding more quickly than non-broker dealer portals. Also, angel investors will not likely be held to the same investment caps, but will have significantly greater deal flow and greater access to investment opportunities.
Drake: Thank you, Candace. We are excited to see how crowdfunding for equity evolves to help the 20-25 million Small & Medium-Sized Enterprises existing in the US. We had gone to Rome last summer as a delegate for the US Commerce Department to discuss these policies for their 28 million SMEs. They are facing a larger challenge as they are deep in a recession with little to contracting growth in 2012. The hard work you have done in the space and the fact that you remind us that this is the largest financial change in the US and SEC in our lifetime makes this one of the most exciting journeys. Thank you, Candace, for paving the path with the SEC and the hard working CFIRA members towards a new future with easier access to capital.
David Drake is the founder and Chairman of LDJ Capital in New York City and of The Soho Loft Capital Creation Event Series (“TSL”) covering the Private Company Marketplace and Capital Formation. Mr. Drake is an expert and a thought leader on the USA JOBS Act (Jumpstart Our Business Start-Ups Act) including Reg A+, Reg D 506, Crowdfunding Capital and Onramp IPO. He is a founder and former executive board member of the Crowdfund Intermediary Regulatory Advocates (CFIRA) and of the leading global trade association Crowdfunding Professional Association (CfPA). He was part of the U.S. Commerce department delegation as the JOBS Act expert at the US and European Transatlantic Economic Council (TEC) forum last July 2012 in Rome and Brussels where he met with European Ministers and national legislators. He writes extensively on these topics and his articles and editorials are published by leading industry websites such as forbes.com, pehub.com, equities.com, cfira.org, crowdsourcing.org, sme-world.comand loftfi.com to name a few.
This interview also appeared on Editorial.Equities.com