A new study finds entrepreneurs looking for capital are increasingly turning to equity crowdfunding platforms in the process threatening revenue for brokers and advisors focused on accredited investors.
A UK study released last week that examines the equity crowdfunding scene suggests entrepreneurs are avoiding banks and traditional private equity firms and opting for the quicker route of alternative financing.
As the trend continues to spread here in Canada, advisors focused on presenting accredited investors with those kinds of equity and IPO opportunities may find themselves shut out.
“Banks are just too expensive and VCs want too high an amount of money. Also, they require you to have revenue, so when you don’t have revenue it’s a pretty hard thing to crack,” the report from University of St. Andrews professors Ross Brown, Suzanne Mawson, Alexander Rowe and Colin Mason states. “And it’s not like Silicon Valley where people will invest in pre-revenue companies based on valuations of individuals like engineers or MBA candidates.”
Almost three quarters of the entrepreneurs surveyed for this report said that they turned to equity crowdfunding as a result of other financing sources, such as banks and private equity firms, being difficult to tap. More troubling, perhaps, was many of these entrepreneurs admitted that they hadn’t even attempted to seek bank financing.
The end result is clear and one Canadian advisors working with accredited investors may have to deal with in the coming years as equity crowdfunding steps into the spotlight.
Ironically, that development is already on the radar screens of industry veterans as provincial securities commissions introduce new rules to allow unaccredited investors to invest small sums into private investments.
“While the commissions have taken a few steps to reduce such costs for issuers, the commissions’ efforts are predominantly investor protection,” said Former IIAC Managing Director Barb Amsden. “In this, crowdfunding rules seem to constitute burning the registrant candle at both ends: continuing to heat up the regulation of IIROC and MFDA dealers and advisors generally, while incinerating traditional capital-raising and support opportunities for these same registrants.”