This might be the year that puts the crowd in crowdfunding.
In 2021, global crowdfunding rose to $113.52 billion from $8.61 trillion in 2020, according to Pitchboook data. Matt Belcher, CEO and co-founder of Cal-Tier, an alternatives asset manager and fintech provider, thinks it could have much farther to rise in 2022.
“Technology, regulatory changes and a shift in the mindset of consumers drives this blossoming of crowdfunding,” said Belcher.
In the U.S. market alone, crowdfunding has doubled, according to Pitchbook, a growth Belcher believes is driven by more regulatory clarity, better technology, expanding opportunities and accelerating consumer interest.
Pitchbook—and Belcher—expecct crowdfunding to help push the private securities market beyond the $8 trillion mark in 2022.
On the compliance side, the shift that opened up the doors for private companies to engage in crowdfunding was enshrined in 2012’s JOBS Act, which for the first time permitted non-accredited investors to participate in startups.
There is, of course, concern that regulators in some future administration might take a more negative view on crowdfunding.
Such an outcome is possible, but not probable, said Belcher.
This has become such a giant market now, and everyone, including Fidelity and Goldman Sachs via their Marcus funds, is getting into it,” said Belcher. “If they reversed it, they would have giant lawsuits on their hands. The counterargument for advisors who are not ready to join the party is usually that this looks like a house of cards waiting to happen because many of the people taking part in these transactions are not financially literate,” said Belcher. “But we’re past the tipping point.”
Regulation CF, which governs annual crowdfunding raises of up to $5 million, offers some loose protections for the end investor. Issuers like CalTier are supposed to require investors to self-certify that they are placing an amount that does not exceed 10% of their annual income into the fund. So if an investor wants to invest $5,000, they have to self-certify that they earn more than $50,000 per year.
The idiosyncrasy in the rule, according to Belcher, is that there’s no way for different issuers to know what investors are doing. So theoretically, that investor who makes $50,000 per year could place $5,000 in 20 different Regulation CF opportunities and no one would be the wiser.
“It’s really no different from any other form of retail investing,” said Belcher. “Why can I just log into Fidelity and pick a bunch of traditional investments with no guidance and no checks? Either we can do all of this stuff, or Big Brother has to take control of all of it—with traditional investments there are no protections.”
Growing The Opportunity Set
“Today, there are private-label platforms and marketplaces that are springing up all over the place,” said Belcher. “These either allow issuers to offer opportunities directly, like what we’re doing, or are marketplaces that act as a way to open the doors to these non-accredited investors.”
In its current iteration, CalTier is a PropTech- or property technology—company offering technology-driven access to real estate opportunities it sources itself. Its flagship offering is a portfolio of multi-family properties with value-add opportunities.
Born out of the private real estate sphere, CalTier is now connecting its expertise at sourcing opportunities with the advantages of crowdfunding and investment technology.
“Fundrise is a direct issuer, but CrowdEngine, Start Engine and Republic are marketplaces,” said Belcher. “With marketplaces, an issuer wants to offer a deal, and they can put it on a platform, because they have the regulations figured out and have the technology that shows issuers how to do it.”
Platforms like Wefunder and Republic reported raising more than $171 million in Reg CF offerings, which are limited to $5 million. The platforms raised $8.6 billion in Reg A+ opportunities, which are capped at $75 million annually, according to Pitchbook.
Advisros should understand the difference between marketplaces and direct offerings, said Belcher, and the pros and cons of each.
“We’re not on marketplaces, and neither is FundRise,” said Belcher. “We have our own technology, and we do the compliance ourselves to offer our opportunities directly to our clients. If you’re on StartEngine and you’re the investor, and you put money into StartEngine, a cut of everything you put in, before it goes to the investment company, is paid as a high fee to StartEngine. With the marketplaces you’re creating an additional middleman.”
From an issuer’s perspective, the marketplaces can be unattractive not just for the fees, but also for the conflicts. Issuers pay fees for marketing that may benefit other opportunities at the cost of their own.
Consumer Appetite Roars
“Everybody sees shark tank,” said Belcher. “It’s not a refined concept, it’s a very blunt thing: people want to be the next shark tan person or Elon Musk who can stick $10,000 or $20,000 into a company and make a 100x return on their money—especially in this younger generation. The biggest piece of this is that there is a consumer desire, really fueled by platforms like Robinhood, to be masters of their own destiny. I think cryptocurrencies have fueled that desire as well.”
According to Pitchbook, November and December were the biggest month for Reg A+ and Reg CF capital raises, hinting that the category may carry some momentum into 2022.
That growth isn’t just coming from issuers flocking to marketplaces or to create their own direct offerings, but by a zeal for self-directed investing and opportunities in alternative asset classes.
“There’s a generational shift as well,” said Belcher. “If you’re in your 50s and 60s, you’ve had a financial advisor or someone else manage your money for you for most of your life. The people in their 20s, 30s and 40s for the most part don’t care for that model. They’re not as interested in professional advice, they want to be able to manage their assets on their phone. Fractional share investing and gamification has people sitting at home investing on their iPhones like it’s a competition. The culture has changed.”
There may be an economic reason as well—inflation is making it less desirable to keep money in cash or in low-risk fixed income investments, which is inspiring investors to look farther for investments and take more risk.
Also, for the past two years, retail investors have hunkered down, many working from home, with plenty of time to think about investing and investments.
“There’s both a supply and a demand in play,” said Belcher. “You couldn’t invest like this before, but now you can. It’s become like a new beginning for everybody.”
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