Academic journal article ABA Banking Journal

Crowdfinance: Banks' Friend or Foe? as Crowdfunding Expands under JOBS Act, Banks Must Assess Position of This Upstart for Startups

Academic journal article ABA Banking Journal

Crowdfinance: Banks' Friend or Foe? as Crowdfunding Expands under JOBS Act, Banks Must Assess Position of This Upstart for Startups

Article excerpt

DARA ALBRIGHT SAYS SHE LAUGHS EVERY time she thinks of a recent New Yorker cartoon showing two panhandlers. One whispers to the other: "Remember, we're not begging. We're crowdfunding."

Albright, chief strategy officer of consultancy Crowdnetic, thinks bankers should be looking seriously into crowdfunding, or, "crowdfinance," as she and some other players are coming to prefer.

You may have heard about Kickstarter, the crowdfunding website where artists, inventors, and others seek capital from the public in the form of donations or in exchange for various rewards. Since launching in 2009, the service has enabled 4.9 million people to back projects to the tune of $805 million in pledges from, as the site states, "friends, fans, and inspired strangers."

But chances are you've never heard of Sparkmarket, and, if your bank is based in Georgia, co-founder Jeff Bekiares very much wishes you had. You may have heard of Fundrise, which has already had some interest from bankers.

More about them in a moment. In the U.S., most crowdfunding activity has been in the donation and reward phase, but that is on the verge of changing. Under the JOBS Act--the same legislation that achieved banks' long-sought changes to shareholder counts that trigger public reporting status--two significant milestones were set up. In late September, companies were permitted to make general public solicitations--from a TV commercial to a billboard--to raise capital for a business from accredited investors, under Title II of the act. Later, after securities regulators issue rules, Title III's provisions will go into effect, which will enable companies to raise equity or to offer debt through crowdfunding.

Georgia on his mind

Jeff Bekiares, a Georgia banking attorney, says his platform will be able to offer such services to businesses sooner. That's because Georgia, using a longstanding federal securities provision available to states, has implemented its Invest Georgia Exemption. The law permits states to allow intrastate capital raising through mechanisms like crowdfunding.

Bekiares has tapped his banking connections to raise awareness of Sparkmarket and crowdfinance's potential, "but getting commercial banks to pay attention to that has been very challenging."

The attorney isn't looking for their cash, but for their referrals. "I see this as a partnership," explains Bekiares. "I see no measure of competition. It's really a complementary business."

Banks don't generally finance startups. "There's a lot of risk, and you are only getting your interest rate," says Art Johnson, chairman and CEO, United Bank of Michigan, Grand Rapids, $467.1 million-assets.

But Bekiares sees banks in the position to say, "We can't lend you money out of the gate. But if you raise capital through something like crowdfunding, that can collateralize a loan."

"Everybody wins with this scenario," says Bekiares. "But nobody wants to be the first to brand themselves with a crowdfunding platform."

Only Georgia and Kansas have such exemptions at present. But as the JOBS Act provisions kick in, more startup companies will be able to make their case to the public for debt and equity funding.

Local hopes rise, one brick at a time

Sparkmarket isn't the only operation doing business under an exemption. A different provision in securities law, under Regulation A, enables a real estate investment crowdfinance platform called Fundrise to raise money for urban construction and commercial real estate projects. These projects are called "direct public offerings" or "local public offerings," according to Fundrise co-founder Ben Miller. With the clearance of local regulators, Miller explains, firms like his can offer what are essentially syndicated real estate deals--except they can be done in units of $100.

"We're not offering developers the whole capital stack," explains Miller, but the opportunity to tap a fresh source as part of the finance mix through a tech platform. …

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