An important trend is developing within
the corporate finance industry that involves
the offering and sale of exempt securities
over the Internet. This is commonly referred
to as Equity Crowdfunding. Crowdfunding
has been defined as the “practice of funding
a project or venture by raising monetary
contributions from a large number of
people, typically via the Internet”. Equity
Crowdfunding is a term that is broadly
used by industry stakeholders, media and
regulators, in reference to the online sale
of securities, under both existing and new
proposed securities regulations.
In a 2013 report, Massolution indicated
that the combined debt and equity segments
of the global Crowdfunding industry
exceeded USD $1.2 billion in 2012. In June,
2014, the largest debt-based Crowdfunding
portal in the USA (i.e., LendingClub),
announced that they had facilitated over $1
billion in new consumer and business loans,
during the most recent fiscal quarter. Clearly
something interesting is happening here.
Equity Crowdfunding is often portrayed
in the media as a novel activity that is
primarily applicable to entrepreneurs, startup
and early stage companies. However, its
essence (i.e., online private offerings) is a
transformative method of capital raising
which will inevitably become common
practice across the entire private capital
industry. As such, it is something that every
Exempt Market Dealer (EMD) should be
considering and developing plans to adopt.
In this article, we will explore the historical
context and resulting market disruption caused
by another Internet-based practice, online
stock trading, which emerged in the 1990s.
This background is useful, in considering
the potential impact of the evolving Equity
Crowdfunding regulatory frameworks in
Canada and the USA, as well as the emergence
of social media-based marketing practices,
within the financial services industry.
The rise of stock trading portals - a
precursor for disruption in private capital
Prior to the advent of the Internet,
information about issuers was largely
found via newspapers, other print media,
or TV. When investors decided to buy or
sell securities they called up their broker
(or responded to an unsolicited ‘cold call’),
and placed an order over the telephone.
The brokerage firm then entered the order
into their systems, which were linked to the
trading floor of the relevant stock exchange,
for trade execution.
In the mid-1990s, several innovative,
technology-enabled companies launched
Internet-based stock trading platforms,
successfully leveraging the convergence of
electronic communication networks (ECNs),
the growing prevalence of personal computers
(PCs), and the availability of Internet access to
businesses as the general public.
In 1991, William Porter’s new venture,
called E*Trade, challenged the established
full service, offline brokerage models, using
PCs, dial-up Internet connections (via
Compuserve and America Online), as well
as a deeply discounted, flat rate transaction
fee structure. Within three year E*Trade
was the fastest growing private company
in the United States. In August 1994, K.
Aufhauser & Company, Inc. (later acquired
by TD Ameritrade) became one of the first
brokerage firms to offer stock trading, via an
Internet portal (then called Wealth WEB).
Encouraged by these early pioneers,
Chief Executive Officer
Are You Ready for Private Offerings on the Internet?
By Calvin McElroy