Tis the season to reflect, predict and, for some, to even gloat a little.
And by some, I mean “me”. I am proud to announce that every single one of my 2014 crowdfinance prognostications rang true. Just as I projected at the start of this year:
- Institutional as well as retail capital poured into P2P
- Equities-crowdfunding began to germinate through sell-side channels
- Non-Title III crowdfinancing structures are proving to be more viable solutions
- Venture capital was deployed into crowdfinance infrastructure plays
According to arithmeticians, four out of four would equate to 100% accurateness – or some other percentage as per Paul Krugman’s math.
Alas, if only I was as proficient at foreseeing con jobs as I am at prophesying crowdfinance trends. But that’s a story for another time and place. In the meantime, I am not the only one who discovered this year that they had been “grubered”. Sadly, I share that distinction with half of America.
But things could have been a lot worse. At least I wasn’t “ubered”, i.e. awakened to find that, in a drunken stupor, I paid $367 for a $40 cab ride. You see, I always find the bright side. And, thankfully, 2014 was bursting with them.
REVISITING MY 2014 PREDICTIONS:
- Institutional as well as retail capital poured into P2P
I predicted that Institutional as well as retail capital would pour into P2P (Peer-to-Peer), and wow, did it ever!
Both institutional as well as retail investors came out in droves to invest, not only in P2P loans, but in the platforms that house those loans. While more than $8.6 billion in capital flowed into P2P debt this past year, online lending platforms raised money in record sums.
Leading the charge was Lending Club. The world’s largest P2P platform raised over $1 billion (including green shoe) in its public offering – making it the second-biggest U.S. IPO of the year. It was exceeded only by Alibaba’s $25 billion offering.
In 2014, Prosper, the world’s second largest P2P platform, raised an additional $70 million from Francisco Partners, Institutional Venture Partners and Phenomen Ventures. This funding came just a few months after its $25 million infusion by Sequoia Capital, BlackRock and others.
The speed at which P2P, online or marketplace lending is proliferating is astonishing. In just six months Prosper originated $1 billion worth of loans – surpassing the $2 billion mark. To put this accomplishment into perspective, it took Prosper 8 years to reach its first $1 billion in originations.
The P2B (Peer-to-Business) market mushroomed as well. Further validating the online lending model, OnDeck Capital, an online lending service for small businesses, raised $200 million in its IPO. Just like Lending Club, OnDeck’s shares soared in the aftermarket – substantiating retail’s appetite for marketplace lending.
Funding Circle, a leading online peer-to-business lender, raised $65 million in a Series D funding round led by Index Ventures with participation from Accel Partners, Union Square Ventures and Ribbit Capital.
Kabbage Inc., an Atlanta-based online provider of working capital for small businesses, closed a $50 million Series D equity round led by SoftBank Capital.
And the industry is just getting started. 2014 was online lending’s 1995. Despite what some espouse, this is not a fintech bubble, it is a financial revolution.
- Equities-crowdunding began to germinate through sell-side channels
I stated earlier this year that unlike the debt side of crowdfinance which grew out of widespread buy-side demand, the equity side will require the assistance of intermediaries who are adept at selling “story stocks”.
We saw the initial stages of sell-side penetration in 2014 as online angel marketplaces facilitated a growing number of Reg D offerings, and as established broker dealers began embracing new platform technologies.
Roth Capital used its OpenRound platform (launched in December 2013) to raise more than $68 million for companies in 2014. Merriman’s Digital Capital Network (also launched in December 2013) not only raised $26 million for 33 issuers, it is now bringing white label platform solutions to independent broker dealers nationwide.
Chris Tyrell, CEO of OfferBoard, a technology-based private placement platform for emerging growth companies, stated at my recent Reg A event that he is seeing a growing number of Broker Dealers interested in finding ways to facilitate deals online.
Going forward, I envision many platform intermediaries and traditional underwriters coalescing to form modern-day sell-side syndicates.
- Non-Title III Crowdfinancing structures are proving to be more viable solutions
When the SEC released its proposed rules for Title III crowdfunding back in October 2013, I expressed concern that Title III Crowdfunding would prove too expensive and burdensome for practical use. As such, I predicted that alternative crowdfinance structures would prove more feasible. And I was spot on.
As accredited crowdfunding via 506(c) gained momentum in 2014, the nation saw the proliferation of states adopting their own crowdfunding laws.
Although a mere 1 year old, 506(c) accounted for nearly 10% of all Reg D offerings. Furthermore, what began, rather inconspicuously in 2011, with just two states passing crowdfunding legislation, exploded in 2014 with more than half of the nation’s states having either implemented or proposed their own crowdfunding laws.
But, according to industry experts, including recognized JOBS Act attorney Sam Guzik and Congressman Patrick McHenry, it is Reg A+ that is likely to become the most pragmatic solution for unaccredited crowdfunding (see:http://daraalbright.com/2014/11/17/reg-a-its-more-than-just-tropical-vacation-music-it-may-just-be-the-catalyst-for-the-next-small-cap-ipo-boom/).
Traditional brokerage firm, Moloney Securities, has been out on the forefront testing the Reg A waters. Moloney raised $5 million under Reg A for Allegiancy, a commercial real estate asset manager, in a structure that positioned the company for an eventual Reg A+ follow-on offering. Additionally, Moloney provided an aftermarket for Allegiancy shares.
- Venture capital was deployed into crowdfinance infrastructure plays
This was most evidenced by the completion of Orchard Platform’s $12 million Series A from some of the most prominent venture capitalists in the online lending sector. Orchard is a leading P2P analytics platform that provides order execution, reporting, and the hosting of investment strategies for institutional investors. Orchard also has plans to build a much anticipated secondary marketplace for P2P debt.
AND NOW FOR MY 2015 FORECAST:
- There will be a strong focus on liquidity and Venture Exchanges
I have stated many times that while the JOBS Act increases a smaller company’s ability to access funds, it fails to tackle their most pressing need – a respectable marketplace where they can thrive. Without a manageable aftermarket where a young company’s equity and debt can trade both equitably and effortlessly, raising capital will always be hindered. I predict that in 2015 a lot more attention will be given to venture exchanges and secondary markets. I expect legislation will be introduced to establish a new framework for small cap liquidity. I also anticipate many more businesses will be focused on building the infrastructure to support venture exchanges and secondary transactions for private equity as well as peer-backed whole loans.
- Data will transform securities marketing
I believe we are entering new epoch of securities marketing – one that will be dominated by “algorithmic deal matchmaking”. Essentially, data will transform investor marketing in the same way that it revolutionized consumer marketing. (see: http://daraalbright.com/2014/10/09/the-evolution-of-securities-marketing-and-its-impact-on-issuers-intermediaries-and-investors/)
- Financial Planners and retail investors will flock to P2P funds
Now that Lending Club’s high profile IPO brought mainstream awareness to promising world of P2P investing, I expect many more retail investors and financial planners will begin embracing this asset class as a viable fixed-income diversifier – particularly as P2P continues to outperform conventional fixed-income asset classes.
I believe that most of these later adopters will be more at ease investing through P2P funds as opposed to investing directly via the platforms for a variety of reasons.
First of all, most P2P fund managers likely possess years of P2P investing experience, the technological infrastructure to rapidly purchase the desired loans, and most importantly, the proven algorithms that enable them to more accurately predict defaults and post solid returns. In many instances, these veteran P2P fund managers outperform even the average platform returns.
Furthermore, because of their fiduciary responsibilities, financial planners will be hard-pressed to unleash their retail clients on the platforms without “supervision”. They are much more likely to recommend the P2P funds or managed accounts that they, themselves, have researched and performed proper due diligence on.
In the coming years, expect a growing number of conventional banks and brokerage firms to begin offering their retail clients an opportunity to invest with P2P fund managers, especially through self-directed IRA accounts.
- Accredited Investors will be redefined
I’m going to go out on a limb and predict that the “accredited investor” rule is amended – if not abolished altogether. Although this may not occur in 2015, I believe it will happen eventually. Why? Because the accredited investor rule is unconstitutional. There, I said it. This nation has made great strides to eradicate discrimination based on gender, skin color and religion, yet we continue to discriminate based on income and net worth. Isn’t it about time that America stops suppressing its citizens of lesser means?
If the accredited investor definition remains unchanged, or worse, made even more restrictive per Dodd Frank, I will make it my personal mission to rile the crowds and lead a crusade to end “investing injustice” once and for all. Mark my words.
- Reg A+ will begin to change the Small Cap IPO Landscape
I feel confident that in 2015 the SEC will implement its final rules for Title IV. I am also hopeful that new regulatory framework will include a preemption of state blue sky laws – despite NASAA’s threats.
I believe that the promulgation of these rules will inspire a new breed of financing structures known as Reg A Crowdfinance Offerings (“RACO”s) that will bring later stage PE opportunities to the masses.
Furthermore, this favorable action by the SEC can lead to a renaissance of desperately needed small cap underwriters, market makers, analysts and salespeople who will provide aftermarket support. This renewed ecosystem, combined with modern technological infrastructure, has the potential to democratize small cap investing and reduce a harrowing wealth gap.
- More crowdfinance companies will head toward public pasture
I predict 2015 will be another banner year for fintech IPOs with Prosper leading the next-generation of online lending companies into the public arena. Additionally, with Reg A as a viable financing option, we may even see a number of smaller revenue-generating crowdfinance companies going public via RACOs.
In addition to Prosper, I think the following crowd-centric companies have the potential for being public in 2015: CircleUp, Indiegogo, Kabbage and Funding Circle.
Time will soon tell if this year’s predictions are as precise as my last. But of this I am absolutely sure:
The only certainty in life is change, and the only guarantee in the markets is fluctuation.
Watching “It’s A Wonderful Life” for the umpteenth time coupled with my Christmas Eve birthday renders me overly reflective this time of year. As such, I am going to end on a sentimental note by thanking my industry colleagues for their outpouring of support during the past few months. I remain deeply touched by the encouragement of many, the generosity of some and the utter brilliance and altruism of one. You know who you are. To quote from my favorite Tom Cruise movie, “You are my ambassador of Quan”, and I will be forever grateful for all you have done.
I enter 2015 heartened by the goodness in people and assured of the integrity that lives within the crowdfinance industry. I look forward to spending the last few days of a very eventful year counting my blessings and finishing my crowdfinance book which I believe will help pave the way for a fairer financial system.
As we prepare for another momentous year in crowdfinance, I wish you all a joyous holiday season. And may the “grubers” of this world find their stockings filled with karma.