The nausea-inducing whipsaw that is the U.S. stock market (across all indices) has just about everyone scratching their heads over what sectors provide safe haven and which are doomed, at least for now, to capital purgatory.
Key growth areas, such as initial public offerings and security technology venture capital, may prove vulnerable to downturns and a shift in investor sentiment. So may equity crowdfunding, which has seemingly just gotten traction as an industry.
At first glance, crowdfunding itself, in which people chip in via online platforms to fund any number of charities or projects, might be a good candidate for immunity from stock market shocks. And that may be true when people chip in a small amount of what they view as disposable income to help a cause that catches their fancy. But a prolonged market rout may have a chilling effect as the “wealth effect” — a change in spending that ties into more confidence in individuals’ (perceived) current and future financial situation — may actually be reversed. In that case, plummeting stock prices lead to tighter purse strings.
That, of course, could spell trouble for companies like KickStarter, YouCaring and GoFundMe. But it’s unlikely that the model itself would be in serious trouble, as the idea of “democratization” of business/other niche funding is an idea that should have lasting appeal among people who want to help with $1, $25, or $50 at a time.
But there’s a business model of a different stripe that may – or may not — find it rougher sledding in this market environment: equity crowdfunding. In this type of business, investors grab ownership stakes in smaller private companies, in a fundraising process that is somewhat similar to what venture capital and private equity firms do on a larger scale. In effect, rather than get a tote bag or other giveaway that is typical of the crowdfunding arena.
Previously, equity crowdfunding has been the province of accredited investors, i.e., investors who meet a minimum threshold for net worth and/or income — typically those with income of $200,000 annually or $300,000 annually with a spouse. But a great leveling of the playing field has come only within the past several weeks, through the Securities and Exchange Commission changing regulations governing small public offerings.
Since June, smaller players have been able to buy shares in private companies without having to meet the (relatively) onerous requirements that mark the financial firepower of accredited investors. Now, mom and pop investors can invest in equity crowdfunding activity, up to a maximum of $2,700 per household (and for the companies themselves, a max of $50 million from accredited and non-accredited investors together).
So, perhaps a bit of fanfare for the common man (apologies to Aaron Copland) is in order. Investors may actually look to use alternative investments such as equity crowdfunding – as headlines engender interest, and presumably, education about this newly available asset class — as a hedge against the vagaries of public markets. But one caveat may be dissuasive: in equity crowdfunding, as in private equity, there’s less liquidity and there’s also a lockup period that ties up investors’ funds. Tie ups of capital may be the last thing an investor desires right now.
But at least for the moment, the chilling effect of the stock market, and China’s slowing GDP growth, and oil’s slide, and the Fed’s uncertain rate hike timeline – OK, just about everything, it seems – has been absent for equity crowdfunding. OneVest said in mid-August that it scored $2.1 million in a Series A funding round that came from its own platform. And in an interview with PYMNTS, in late July, Alejandro Cremades, co-founder of the company and executive chairman, said that he was expanding the team and was on track to have 30 deals in place in 2015, up from 13 last year. Likewise, across the pond, Crowdcube said earlier this month that its platform hit £100 million (about $158.6 million) in capital raised on its platform, and that might signal some resilience to the model even with the summer doldrums that have hit global equity bourses.
One equity crowdfunding niche that may pick up interest in a low yield environment that will continue to be historically low yield even post a Fed rate hike, or two, centers on real estate. New York City is about to see the opening of the AKA United Nations, which is an extended stay hotel condominium in midtown – a $95 million project that got $12 million of that investment through equity crowdfunding. In the end, headlines may spark interest to put money into real assets through a novel investing vehicle, even if markets continue to head lower.