The rise of Fintech in equity crowdfunding, how technology is disrupting traditional investing
Fintech continues to alter traditional conventions of investing, most notably in the emergence of equity crowdfunding.
Equity crowdfunding has signified a departure from typical capital-raising methods, rebuffing the long-standing exclusivity of conventional investing while empowering individuals to contribute to a business’ potential growth and share in its success opportunity.
Historically, the investing landscape was largely accessible only to institutional investors and high-net-worth individuals. Barriers to entry, from stringent regulatory frameworks to substantial minimum investment requirements, restricted many potential investors, limiting the investor pool and preventing fundraising opportunities for burgeoning enterprises.
Fintech and changes in legislation, however, have dramatically changed the landscape.
The US JOBS Act of 2012 marked a significant turning point. This legislation, specifically Title III (the Crowdfund Act), allowed private small businesses to offer and sell securities through equity crowdfunding.
The Act aimed to facilitate capital raising by reducing regulatory hurdles for small businesses, thereby encouraging job growth and national economic development.
In 2020, further modifications were made to the rules, increasing the limits for the amount that could be raised via crowdfunding from $1.07 million to $5 million, providing more opportunities for businesses to secure the necessary capital.
By harnessing secure platforms and the latest technology to allow trading in private companies to take place, it has opened up the market and enhanced investor confidence.
Traditional investing often involves substantial capital, extensive knowledge of financial markets, and a network of contacts in the financial world. Meanwhile, equity crowdfunding is open to a broader range of investors regardless of wealth or expertise.
The increased transparency afforded by equity crowdfunding platforms means they can provide investors with more information about these businesses seeking funding, including their business model, financial health, and future plans, empowering investors to make informed decisions. This feature has been lacking in traditional investing, where information might be filtered through intermediaries.
Equity crowdfunding also offers a unique sense of engagement Investors are not only financial contributors but also form part of a company’s community. They can interact with company founders, share insights and witness their impact on the company’s potential growth trajectory.
It has also been greatly enhanced through blockchain technology, providing platforms with a means to offer additional transparency and control to investors. With its decentralised nature, blockchain allows for a more secure and transparent recording of transactions, supplying each user with a clear and unalterable history of investment activities.
As such, investors can track their investments, from the initial contribution to any subsequent trades or changes in value, in real-time. Within traditional investing, smaller investors often depend on periodic reports or statements to track their investments.
While traditional investing continues to hold its place, the advent of equity crowdfunding has undoubtedly created new potential opportunities for individual investors, offering a wider range of investments, enhanced transparency, direct engagement, and innovative tools for investment management alongside a compelling alternative to the traditional investing model. And all underpinned by fintech services.
Crowdfunded securities are generally offered by early stage companies and investors should be prepared to lose some or all of the investment. Investors should real all the risks and disclosures prior to making any investment decisions.
Investors should recognize and accept the risks associated with investing.
Certain investments may require you to keep your holding for periods of many years with limited or no ability to resell unless there is a strongly regulated secondary market.
You may also have limited access to periodic reporting, see your holdings decrease and increase in value, or even lose your entire investment.
Investors should decide for themselves whether to make any investment, basing this on their own independent evaluation after consulting with financial, tax and investment advisors.
Never rely solely on marketing materials, as they could potentially be exaggerated and place a disproportionate emphasis on ESG criteria. A more comprehensive picture of the investment can usually be found in the company’s SEC EDGAR filings.
Reading the fine print can help avoid situations where the marketing or promotional materials for an investment might not tell the whole story.
ESG funds my take more work for fund managers to construct and manage and, consequently, can cost more than a passive fund that tracks a broad-based market index. Research how much any investment you’re considering will cost you over time, paying attention to the annual expense ratio for an ESG fund.
If you are using an investment professional, ask about any fees associated with an investment, such as sales charges, ongoing fund expenses, how much it costs to buy or sell the security, or assets-under-management fees.