ESG Investing

Impact Investors Fan Crowdfund Wave

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On May 16, 2016, the US Securities and Exchange Commission (SEC) ripped a hole in long-standing regulations concerning equity investments in nonpublicly traded companies. Introduced as part of the Jumpstart Our Business Startups Act (JOBS) of 2012, the move exempted companies that use web-based crowdfund methods to sell equity stakes in their business from costly and labor-intensive registration processes. It also lowered investor requirements.

The SEC pushed back the restrictions even more in a 2021 follow-up, raising companies’ annual fundraising limit nearly five-fold to $5 million per year and removing the previous cap on investments for accredited investors.

“Those two changes have really poured fuel on the fire of the crowdfunded securities market,” said Franz Hochstrasser, CEO and cofounder of online local impact investing platform Raise Green. He added that as a result, the crowdfunding equity market is on pace to raise at least $1 billion in 2021. That marks more than four times the $239 million raised in 2020—its previous all-time high.

“That’s important, because this democratized form of investing—in which nonaccredited investors are allowed to come in on private deals—really does flip the table on traditional financial firms,” he said.

The ripple effects stand to expand opportunities for smaller investors as well as boost access to capital for many enterprises, including those that emphasize impact as much as returns.

Expanding Access Beyond the Wealthy

For decades, private equity was only offered to accredited investors, as defined in the Securities Act of 1933. The regulation was based on the thought that wealthier indivuals were more investment savvy. It was also meant to help protect individual investors who own modest levels of assets—either a net worth of at least $1 million or an annual income of at least $200,000 for two years, according to the current threshholds.

Such distinctions began eroding in 2005–06 with the debut of Kiva, which allowed individuals to collectively lend money to entrepreneurs and students in developing nations. It was joined by peer-to-peer financing firm Lending Club, which was designed for individuals to extend loans of varying sizes to US-based businesses that may otherwise struggle to secure capital. Their success fueled interest in similar outlets offering equity in start-ups and early stage companies struggling to secure financing.

The JOBS Act answered that call. As a result, any investor may currently participate in equity crowdfunding offerings for as little as $100, although nonaccredited investors are subject to investment limits of around $2,200 per offering. The limits act as a measure to minimize individuals’ exposure to highly speculative investments.

“The ability to raise money from the general public is really a customer-building exercise as well, as it’s more of a two-way dialogue to the capital formation process rather than the strict traditional morality of, ‘This is the way it has to happen,'” Hochstrasser said. “And that’s particularly valuable for small businesses and project financing at the community level.”

Resonating in the Impact Investing Space

An expanding subset within the crowdfunding realm is impact investing, where the previously high barriers to entry limited opportunities for individual investors seeking capital to large projects. When allowed to crowdfund, investment firms and portals may coordinate financing for smaller initiatives with a broader range of investment levels while also targeting varied ESG goals.

For example, rabble focuses on urban impacts, fostering access to nutritious food, creative spaces, and responsible real estate. Raise Green centers its efforts on clean energy solutions. In addition, aggregator sites such as investibule pull together community-focused investment opportunities from the more than 60 registered crowdfunding portals.

Offerings range across equity shares in an enterprise, loans for specific projects, prepaid support for locally owned retail outlets, and beyond. Hochstrasser said the flexibility of options has proven valuable to most of the business owners and project developers he’s met.

“Issuers appreciate being able to set their own terms for financing as opposed to taking the terms dictated by a commercial banker or private equity firm,” he said.

An expanding subset within the crowdfunding realm is impact investing, where the previously high barriers to entry limited opportunities for individual investors seeking capital to large projects.

Advancing Beyond First-Movers

In light of the traction the still-nascent crowdfunding finance space has gained over the past few years, Hochstrasser has noticed interest evolve—from the earliest-stage investors with an eye toward innovative takes on long-standing practices to those driven by passion for impact and ESG goals.

Perhaps just as important for the field as it approaches mainstream awareness, a number of complementary administrative, insurance, and accounting service providers have surfaced. This has been especially true over the past 6–12 months.

“More and more innovation is happening every day,” Hochstrasser said. “Plus, there’s a growing interest among some of the bigger financial institutions, which previously ignored the crowdfunding space.”

New momentum around crowdfunded finance keeps growing at both extremes of the investment community, from the largest money managers to the smallest individual investors. In turn, the outlooks for cash-strapped grassroots impact organizations stand to brighten considerably.

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