Crowdlending for Businesses: A Great Development

CrowdlendingBusinesses borrowing money from “the crowd” via the Internet is one of the fascinating new ways for businesses to raise capital.

What is “Crowdlending?”

Crowdlending is a form of capital raising that permits high net worth individuals (as well as corporations, trusts and other institutions) to invest in businesses through debt.

Generally lenders find these opportunities to invest through general solicitation over the Internet or through a public forum.

What Is So Great About Crowdlending? 

Crowdlending is a great new development for a number of reasons.

First, Crowdlending is a new source of capital for businesses.  Businesses need new sources of capital.  Bank lending levels are still in absolute terms lower than they were in 2008.  This is particularly important for start-ups (of all kinds, not just tech companies), because start-ups create the most jobs out of any segment of business maturity.

Second, Crowdlending may create a source of capital for communities that have been underserved by traditional lending institutions.

Third, Crowdlending can reduce the costs of borrowing.  Interest rates can be lower and so can fees.  Businesses can then use these savings to increase wages, improving sustainability and energy efficiency programs, provide better healthcare.

What About the Risks? 

For lenders, Crowdlending is risky, just like all other investment activities. However, there is reason to believe that the activity can be less risky than other forms of investment activity. The reason? The community aspect that typically accompanies Crowdlending.

There have been numerous studies looking at the relationship between community lending and default rates compared non-community bank lending.  A recent study by the Federal Reserve concluded that there risk of default appears lower in community-based lending institutions.

Crowdlending typically means investing in a business in your community.

Moreover, the same due diligence tools banks use to determine credit-worthiness are available to individuals either through the platforms or through secondary services like Experian and Dun and Bradstreet.  In addition, servicing models used by financial institutions (things like UCC Filings, collection activities, distressed asset sales) are also all available now to individual consumer lenders.

So while there is risk with any investment, one might argue that compared to the stock markets, the ability to at least use a collections agency to get some of your money back is better than what happened with the last financial meltdown.

Crowdlending Is the New Crowdfunding

Crowdlending is in the literal sense, people in a community coming together to lend money to a business to get it started, or to help bridge it through tough times.  People have been doing this for year.

What has changed is the Internet and the JOBS Act has just rendered this traditional way of raising community capital much more efficient.

How Big Will Crowdlending Become? 

It’s hard to say how big Crowdlending will become.  The industry is only months old, and additional regulations at the state and federal level may make it easier or harder for the industry to grow, depending on how things shake out.  So let your representatives know you want Crowdlending!

About the author: Tabitha Creighton is CEO and Co-founder of InvestNextDoor, a new Crowdlending marketplace that enables Main Street businesses to issue promissory notes to community-based investors, and provides back-office services to support businesses and investors throughout the borrowing and repayment lifecycle.  You can find her on Twitter @tabcreighton, on LinkedIn at www.linkedin.com/in/tabithacreighton, on email at tabithacreighton@investnextdoor.com, or at her marketplace at www.investnextdoor.com. 

Model Documents for Startup Financings

You might be looking for model documents for startup company financings. If so, the below list might be helpful. If you become aware of resources I have left out, please email me at joe.wallin@gmail.com so that I can add them to the list.

Model Documents: Convertible Note Financings

500 Startups, KISS

Alliance of Angels, Model Financing Documents

TechStars, Open Sourced Model Seed Financing Documents

Model Documents: Convertible Equity

The Founder Institute, Convertible Equity

Y Combinator, SAFE

500 Startups, KISS

Model Documents: Series Seed, Series AA, and Series A

National Venture Capital Association, Series A

Series Seed

Y Combinator, Series AA

Model Documents: Other

Foundry Group, Standard Forms of Documents

The Founder Institute, The Founder Advisor Standard Template

Fun Books, Including The Leftovers

If you are looking for fun books, I have some suggestions. First, check out Tom Perrotta’s book The Leftovers.

Here is the set up in The Leftovers: 2% of the population vanishes. No one understands why or what happened. Of course, theories abound. Was this biblical, or something else?

But the book is not about the vanishings. It is about the folks who are left behind who must go on. People go crazy, of course. And other supernatural, or semi-supernatural things start happening. I am only about half way through the book, and I really have no idea where the story is going. That makes it fun. I can’t and won’t give any spoilers away, but I am really enjoying it so far and recommend it.

The book reminded me a little bit of Children of Men. There the set up is people quit having children. World wide. And governments start planning for the end.

In both books, the authors have a lot of fun creating worlds where they can explore how people might live in the event a true calamity befell them and everyone else.

 

If you are looking for other potentially fun books, here are some suggestions:

Children of Men by P.D. James

You Deserve Nothing by Alexander Maksik

A Marker to Measure Drift by Alexander Maksik

Shantaram by Gregory David Roberts

Talent is Overrated by Geoffrey Colvin

The Goldfinch by Donna Tartt

My Interview of Dan Levitan

Last week I had the good fortune (thanks to Buzz Bruggeman (@buzzmodo) to interview Dan Levitan (@levitan) in front of a large group of people (meetup.com says more than 200!).

Rachel Lerman (@rachelerman) of the Puget Sound Business Journal wrote a nice story about it.

We captured audio of the interview.

I truly hope you enjoy this program as much as I did!

How Would You Change the Definition of Accredited Investor?

The SEC is considering changing the definition of accredited investor.

I am curious how readers of this blog would change it.

My Recommendations

Here are my recommendations:

  • First, don’t increase the financial thresholds. Increasing the financial thresholds would hurt the startup and early stage company ecosystem. Perhaps devastatingly. Plus, apparently there have been no studies of the potential economic impact of increasing the financial thresholds. We should not act without knowing the likely economic consequences of our actions.
  • Second, allow persons who do not meet the financial thresholds but who meet a sophistication test to qualify. For example, Certified Financial Planners, securities professionals, and other similar persons.
  • Third, add proportionality.

Proportionality

By proportionality, this is what I mean:

  • Allow people who do not otherwise meet the current income or net worth tests to invest up to 5% of their income or net worth in startups annually. So, for example, if you have a $500,000 net worth, you could invest $25,000 in startups per year.

Proportionality would improve the definition of accredited investor. Right now, if you are worth $999,999 and don’t meet the income test, you can’t invest anything in an all accredited investor offering. That doesn’t make sense.

Proportionality would also broaden the pool of investors. This would be a good thing.

Accredited Investor Definition: What Not To Do

Some groups seem intent on upping the financial thresholds no matter what. Apparently the idea is–since they haven’t changed since 1982 they must be “broken” and need to be “fixed.” This is simply not true.

In this regard, I loved what Georgia Quinn had to say:

What struck me the most in listening to the committee discuss the definition and its purpose, was that while it must have been said at least fifteen times that the definition “was broken” or “didn’t work,” no one provided an example of how it had failed or the harm being caused.

Other groups are concerned about senior citizens. If this is a concern, we can pass a special for persons about a certain age. Or ratchet up the thresholds as you get older. But don’t ratchet up the thresholds for everyone over concern about senior citizens.

Tell the SEC What You Think

What do you think?

Share your ideas!

You make your voice heard to the SEC by hitting the button below and telling the SEC your thoughts.

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Books Recommended by Dan Levitan

Thanks to Buzz Bruggeman, I had the good fortune to interview Dan Levitan of Maveron yesterday.

Again, thanks to Buzz, we filled the room.

Dan is a great public speaker, with really great things to say. If you ever get the chance to hear him talk, don’t miss it.

There were a number of things that Dan said that were really profound to me. I plan to blog about those later. But I wanted to share Dan’s book recommendations.

When I asked Dan what books he liked recently, he gave these three.

I have read Mindset, and that is a great book.

I haven’t read the other two, but I am going to put them on my list.

Thanks to everyone who came yesterday, and thank you Dan and Buzz!