"Crowdfunding” may be a new buzzword, but it’s really not all that complicated. “All crowdfunding is just the Internet coming to the capital formation industry,” says Markley S. Roderick, a business lawyer who is an expert in the emerging field of crowdfunding. “If you look at what the Internet did to the bookselling industry, taxicabs with Uber, and hotels with Airbnb, this is just the same thing.”
Considering that the Internet completely transformed those industries in just a few years, Roderick says anyone involved in investing, or in raising capital, should take note of the changes coming their way.
Roderick will speak Tuesday, March 31, from 6 to 9 p.m. at the Association for Corporate Growth at the Hyatt Regency New Brunswick. Tickets are $75 for first time attendees, $85 for members, and $110 for nonmembers. For more information, visit www.acg.org/newjersey.
What has Roderick and other finance industry insiders excited is a law called the JOBS (Jumpstart Our Business Startups) Act of 2012. That law removed Depression-era restrictions on advertising for investing and paved the way for the Securities and Exchange Commission to make even more sweeping reforms. Although the regulatory agency has yet to issue those regulations, Roderick says that when it does, this year or later, it will pave the way for individual small investors to put their money into all kinds of business ventures that they never could support before.
The JOBS Act has already allowed for some limited crowdfunding from accredited investors. The SEC defines an accredited investor as someone who has a net worth of $1 million or an income of more than $200,000 a year. The idea of the law, which sprang from the 1930s era of investing con men, is to use wealth as a proxy for sophistication. A savvy investor is less likely to be duped by an investment scam. Because of this restriction, crowdfunding is still tiny despite the removal of the advertising restrictions. “I think all of the crowdfunding sites put together will do maybe $500 million during 2015,” Roderick says.
By removing the accreditation requirement, or changing the definition of accredited investor, small businesses will be able to raise money directly from the general public.
Crowdfunding in America already exists in the form of Kickstarter, IndieGoGo, and other sites that allow artists or companies to raise money from donors who contribute to a project in exchange for a copy of the final product, or just the satisfaction of making something happen. The sites have raised more than $1 billion so far for projects despite there being no financial reward for anyone who contributes. To Roderick, this is a sign that equity crowdfunding will be a big deal when it finally arrives.
“When Kickstarter was launched that’s what all of us old securities lawyers said. There’s no way. No one is going to donate money. It’s hard enough to raise money when you’re actually issuing stock; it’s impossible that people are going to donate money for nothing in return. A billion dollars-plus later, we were obviously wrong,” he says.
“Whenever I talk about equity crowdfunding, I always suggest the audience think about why people are giving money in Kickstarter campaigns,” he says. “It’s obviously not true that the donors aren’t getting anything in return. Clearly they are getting something; it’s just not a financial something. They are getting, as far as I can tell, a sense of community because you are participating with other people, and a sense of having done good, and a sense of having been generous. These are nonfinancial returns that people value very highly, and I always tell people in equity crowdfunding that those somethings should be brought to bear because clearly, people do attach value to them.”
However, discussing Kickstarter raises the issue of all those pesky regulations — the restrictions on advertising and the requirement for investors to be accredited all were designed to prevent con artists from raising “investments” in sham companies and then leaving town. Crowdfunding websites are rife with projects for impossible inventions and movies, games, and gadgets that are never completed.
So what’s to stop the coming wave of crowdfunding websites from being full of fraud and theft?
“There are two answers,” Roderick says. “The first answer is, nothing. The second answer is more complicated.” The United States can benefit from the experience of other countries in this regard. Australia in particular is way ahead of America in crowdfunding and has managed to keep a lid on fraud. Secondly, he says, reputation is key. The existing equity crowdfunding websites are extremely selective about which companies they allow to raise capital with them, so investors know they are dealing honestly when they do business with them, unlike with the fly-by-night schemes that permeate Kickstarter. “If they have a single deal that turns out to be fraudulent, it would probably mean the end of their business,” Roderick says. “So they are extremely diligent.”
Roderick was born in Germany to an Army family. His father, an artillery officer, died when he was young, and his mother married his best friend. “My father had keys to the nuclear weapons facility where we were stationed, in Dormstadt, West Germany,” Roderick recalled. He later went to Dickinson College where he got a master’s degree in engineering, then got a master’s in mathematics from the University of London. He earned a law degree at the University of Virginia and began a career as a tax lawyer with Drinker Biddle. He soon changed his specialization to business and moved to the Cherry Hill-based firm Flaster Greenberg, where he has been representing entrepreneurs for the last 25 years.
Roderick is spearheading the company’s nascent crowdfunding practice.
He says crowdfunding is an enormous paradigm shift. “This is the biggest legal change of my career and the biggest change to the capital formation in 80 years,” he says. “Crowdfunding is just the Internet. Think about what the industry has done to other industries: it has pushed the middleman away, reduced costs, and created efficiency. Everything else is details.”