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With SEC poised to expand crowdfunding rules, it's time for advisers to get up to speed

Challenges and opportunities lie ahead as access to private equity investments goes retail

Oct 29, 2015 @ 2:02 pm

By Jeff Benjamin

Investment crowdfunding is coming to the retail-investor marketplace and financial advisers who are not up to speed could be missing an opportunity to provide valuable guidance to their clients.

“I think it's a really big thing,” said Doug Ellenoff, a securities lawyer at Ellenoff Grossman and Schole. “I have every belief that in five years if we do this responsibly, we'll be looking back at this like we looked back at the start of online trading.”

The Securities and Exchange Commission's vote on a lingering piece of the 2012 JOBS Act, scheduled for Friday morning, is expected to give retail investors first-time access to private equity investing through a fast-growing network of crowdfunding platforms.

Even though the JOBS Act — and thus crowdfunding — has been around for three years, advisers remain largely on the sidelines, focused instead on what to do with client portfolios when interest rates start to rise.

And although, as with any new investment strategy or platform, some wrinkles, blind turns and bumps in the road should be expected, advisers shouldn't think they can avoid crowdfunding, that it will to go away or fade into the background.

“It's sensitive stuff because it involves non-accredited investors, but I call it the publicification of the private investment market,” Mr. Ellenoff said.


Still, even if the SEC votes to approve Title III of the JOBS Act, as expected, the platforms will not be able to start taking money from non-accredited investors until early next year. But for financial advisers, the time to get up to speed is now because the crowdfunding platforms are gearing up for an aggressive push into the retail space.

“We will be launching several [investment options] on the day that the rules allow us to go live,” said Ron Miller, chief executive of StartEngine, a four-month-old crowdfunding platform that has already attracted 30,000 investors under a different provision of the JOBS Act that involves more reporting and disclosure requirements than will be required under Title III.

What Mr. Miller and the hundreds of similar platforms are tapping into is the mood among millennial investors to invest locally or in familiar and socially acceptable ventures.

“We know that baby boomers invest 80% for the financial return and 20% because it's helping the world, but for millennials it's the opposite way around,” he said.

Mr. Miller said, however, that there is no shame in getting in on the ground floor and making a killing.

“The kinds of investments we're likely to see under Title III are going to be more on the wealth accumulation side for purpose of getting a big hit,” he said. “This is the first time that 92% of the population has had a chance to get in on the ground floor, to get in on the next big thing.”

New rules that allow crowdfunding platforms to offer private equity access to non-accredited investors will not quite be luring investors into the Wild West of alternative investing.


For starters, any deal offered will be limited to a $1 million capital raise within a 12-month period. And even though it caters to retail-class investors, the individual investments will be capped at between 5% and 10% of the investor's gross annual income.

It would be a mistake to shun the crowdfunding trend as a touchy-feely millennial fad, according to Marshall Saunders, co-founder and managing partner of SaundersDailey, a real estate crowdfunding platform that launched in June and currently has four investment offerings.

“We started this so we could reach un-accredited investors, because we think that ratio of appeal based on good will and performance is going to become about 50-50 in a few years,” he said. “We're just waiting to hear what the new rules will be, and we'll be compliant with those.”

Advisers will need to be on their toes because retail-level private equity is still a very new and evolving space. Some platforms will be operating similar to brokerage platforms, while others might be structured as investment funds.

Casey Minshew, director of investor relations as the two-year-old EnergyFunders, said his platform will likely offer separate access points for accredited and non-accredited investors. Some of the complications there include prohibitions on offering investment advice to retail investors.

EnergyFunders' current accredited investor platform has a $5,000 minimum investment and 10% take of any profits, which is a structure that would not likely be allowed for retail investors.

“The two platforms will be different, but it's still not clear how we will roll out retail access,” Mr. Minshew said.


What do you know about crowdfunding?

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