(Illustration by Chris Gash)
On April 5, 2012, President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. At the signing ceremony in the White House’s Rose Garden, he declared it “a potential game changer.”
“Right now, you can only turn to a limited group of investors—including banks and wealthy individuals—to get funding,” he explained. “Because of this bill, start-ups and small businesses will now have access to a big new pool of potential investors—namely, the American people.”
The president was right: The law’s Titles III (Regulation Crowdfunding, aka “Reg CF”) and IV (Regulation A+, aka “Reg A+”) can transform the way the public invests and who gets to participate. The new regulations have opened up new sources of capital for small start-ups, democratized retail investment for the masses, and stimulated new market invention and experimentation.
But on their own, they’re not enough to reduce the racial wealth gap or repair the harm of privatized marketplaces on communities of color. Without strategic intervention today, the already privileged, predominantly white, wealthy classes with the know-how, connections, and capital will be the ones financially enriched by these developments. This once-in-a-lifetime emerging financial marketplace affords an opportunity for institutional foundations, impact investors, and financial industry experts seeking change to support the trailblazers of color who will make it possible for a greater diversity of people to become owners, operators, founders, investors, and investees.
A New Market
Title III enables retail investors—individuals with net worth of less than $1,000,000—to participate in equity investing in start-up or growth businesses and through public, online crowdsourcing platforms registered with the Financial Industry Regulatory Authority (FINRA) that spread risk among many. This change gives private businesses more access to capital. Before Title III, start-ups raised investment capital primarily from wealthy people and institutions, and generally on a nonpublic basis. Now, everyday people have the opportunity to make equity investments through publicly advertised crowdfunding: Today the 99 percent finally have the kinds of investment opportunities previously accessible only to the 1 percent.
Already, Title III is fundamentally reshaping how and to whom this new capital can flow. Ordinary people can invest to support a beloved local business—a bookstore, café, or theater company—or to fund an idea that could be the next Apple or Facebook. With equity crowdfunding, these retail investors can realize their desires to improve their neighborhoods, act charitably, and collect financial gains simultaneously. Retail investing by nonmillionaires is today’s big, untapped market, and some financial institutions are now paying attention.
Consider BlackRock, the world’s largest asset manager. It primarily served institutional investors but recently has shifted its focus to this growing individual-investor market. In 2019, more than 20 percent of its fundraising ($26 billion) came from retail investors—a market that did not exist five years prior. Or consider Wefunder, one of many new equity crowdfunding platforms born in the wake of Title III and currently establishing infrastructure to capture and channel this new money. Imagine, as Wefunder cofounder Greg Belote suggested in a 2014 blog post, that virtual-reality start-up Oculus had been funded through equity crowdfunding rather than through the rewards-based crowdfunding site Kickstarter. While investors may have missed out on receiving gear, they could have instead realized a 145X return (i.e., $1,000 would have turned into $145,000) when Facebook purchased the company.
Wefunder isn’t alone. A number of crowdfunding sites enable people and institutions to make investments in new or growing companies and appreciating assets. Some even allow the investment of retirement assets in crowdfunded securities deals, through self-directed individual retirement accounts (IRAs), such as Alto, for example. A cursory search yields dozens of new sites, built to streamline investment in everything from start-ups (SeedInvest, Republic, and Wefunder) to real estate (Arrived, DiversyFund, LEX, RealtyMogul) to community development financial institutions (CNote) to visual art and music (Yieldstreet Prism Fund, Masterworks, Royalty Exchange) to farmland (FarmTogether and LandFund Partners) and more.
We’re seeing market differentiation, experimentation, and invention as these platforms provide previously unimagined new types of products and services. StartEngine, for example, is one of the first to create a marketplace for people to trade holdings of private businesses acquired through Regulations CF and A+. Right now, the inability to trade debt and equity securities renders them illiquid, and thus a high financial risk. StartEngine’s new service illuminates what it may look like to have a robust marketplace of Reg CF and A+ trading.
The capital of regular people and their savings and retirement assets is now free to flow. This opportunity makes it vitally important for those marginalized by race, gender, or class—whose communities have historically been disempowered and excluded by conventional public support, private market, or philanthropic funding systems—to participate. The investors who pioneer this new market in retail-level private equity investing will shape its infrastructure, tools, and practices, as well as reap the financial rewards of getting in on the ground level of investing in businesses before they go public. These investors must represent the people in all their diversity to realize the democratizing promise of Title II and III.
Backstage Capital is a venture capital fund of Black, Indigenous, and people of color (BIPOC); LGBTQ+; and women owners that focuses on investing in underrepresented founders. The fund recently took advantage of the JOBS Act to crowdfund capital for the costs of running their company. Their campaign was a hit due to a large, diverse fan base: Backstage raised their first tranche of $1,070,000—the maximum allowed at that time under Reg CF—within 24 hours from 2,790 small investors by offering membership shares of their VC company on Republic—another minority-founded equity crowdfunding platform that shares Backstage’s goals of building wealth for BIPOC, women, LGBTQ+, and immigrant founders who have been excluded from conventional financial systems. (Backstage eventually succeeded in raising the rest of their $5 million within just eight days.) In other words, a crowdfunding platform that exists because of Title III made it possible for fans of Backstage—nonaccredited, primarily people of color—to collectively have an ownership stake in Backstage’s future.
Second, under Reg A+, private entities are also no longer limited to the use of third-party platforms: They can raise funds directly by appealing to their communities through a Direct Public Offering (DPO). For example, TechSoup, a nonprofit network of NGOs that provide tech products and services to nonprofits, is currently running a DPO campaign to raise $11.5 million by issuing loans to nonaccredited investors for as little as $50; investors will be paid simple interest annually, plus their principal, at the end of five years.
DPOs have great potential to help nonprofits, social impact companies, and community-serving enterprises seeking to raise significant Reg A+ capital from the people they serve and who value them. East Bay Permanent Real Estate Cooperative, based in Oakland, California, recently launched a DPO campaign—the first DPO to receive SEC approval for a real estate cooperative fighting the displacement of Black people because of gentrification. EB PREC’s DPO highlights a solution to a problem that plagues the nonprofit sector: Charities typically raise money from wealthy donors and institutions who do not represent the communities that the nonprofits are trying to serve. Now, with crowdsourced funding, the source of funding and the community that EB PREC serves (and should be accountable to) are one and the same.
Finally, the growth of socially responsible investing, divestment screens, and impact investing already shows that there is strong market demand for investment opportunities in nonprofits, locally and globally beneficial enterprises, and businesses that improve a community. But we see underdevelopment on the supply side of this demand: Private foundations, impact investors, and nonaccredited community-supportive investors need more opportunities to move their investments into this new marketplace. They need more BIPOC-owned enterprises to invest in, more investable products issued by community-owned and cooperatively governed funds, and greater guidance to redirect their capital.
Roadmapping Inclusion
Democratizing access to equity investments does not mean that everyone in the 99 percent will benefit without intervention. Infrastructure and practices are still being shaped in ways that will, once again, exclude people of color, with an overwhelming majority of crowdfunding platform founders and staffs run and financed by those who are white and male.
The lack of diversity is why foundations, nonprofits, and government are needed to shape fair and inclusive alternative investment markets. Philanthropic capital can act as concessionary grant capital (i.e., no expectation of financial return) to afford start-ups with operational runway and reserves, take subordinated investment positions to financially lower the participation risk for individuals without inherited wealth, and provide no- or low-interest recoverable grants or loans to encourage BIPOC participation. Accredited private investors of high net worth can provide early seed or growth capital at nonextractive terms. And local and state governments can update guidelines to make their programs and resources accessible to BIPOC founders whose participation in this new market will channel this new capital into their local marginalized communities.
We cannot pretend that this new form of private market capitalism will make these new economic structures helpful and healthy for people and the planet. We must act now, at this early stage, to ensure that these new markets become more inclusive and equitable. The AmbitioUS funding initiative of the Center for Cultural Innovation, where I am president and CEO, deploys grants, loans, and investments focused on building an alternative network of community-based, BIPOC-driven economic systems. We recognize that it takes intentionality to help those who have been marginalized to shape and benefit from these new spaces. A greater diversity of people need to invest and participate in this wealth building, to be the technical assistance providers accessible to all, to found the intermediaries and platforms to channel funds, and to establish new models and deal terms.
Read more stories by Angie Kim.