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The Brave New World of AltFi

Taking advantage of disruptors to the traditional finance market
Credit&Finance

The fundraising goal usually must be met within 30 to 60 days. Some crowdfunding sites, like Kickstarter, are “all or nothing” systems; that is, if the fundraising goal is not met, no money exchanges hands and there is no charge. Others, like Indiegogo, enable a business to collect the money even if the goal has not been met, but at a higher cost.

Equity crowdfunding
Equity crowdfunding is typically an option for a startup or growing business, where investors can buy shares of a company online. Companies that have successfully raised capital using this platform include Instacart, Dropbox, and Uber. Some platforms only deal with accredited investors, while others are open to those eligible under Title III. Wefunder is the largest equity crowdfunding platform, with more than $27 million raised.

Equity crowdfunding is regulated at both the state and federal level. Funding portals must register with the Securities and Exchange Commission (SEC) and be a member of the Financial Industry Regulatory Authority. Issuers are required to file certain financial documents and updates and all issuers must also abide by federal solicitation rules.

Financial statements of companies raising more than $500,000 must be audited, and crowdfunding is limited to $1,070,000 per year, though there is no limit under other SEC regulations (e.g., offerings under Regulation D which are available only to accredited investors). The minimum amount of an offering varies by the funding portal; on Wefunder, for example, the minimum is $20,000; at StartEngine it is $10,000.

As with rewards-based crowdfunding, companies create an online business profile, citing the reason for seeking funding. The creditworthiness of crowdfunding offerings is up to “the wisdom of the crowd.”

Online platforms only verify the com-pany’s legal standing and compliance with SEC rules. In-depth due diligence is performed, however, on companies seeking to issue securities under other investment regulations.

Costs can range up to 8 percent or more, depending on the portal. Numerous other fees may also be incurred, such as escrow cash management fees, credit card transaction fees, and fees related to amending an offering. These additional fees can total several thousand dollars.

Peer-to-peer lending
Peer-to-peer lending (P2P), also known as debt crowdfunding, enables an investor to lend money online to a business at a specified interest rate for a fixed repayment term. The online platform does not make the loan; lenders tend to be hedge funds and investment banks.

Lenders in the P2P category typically target mid- to near-prime borrowers (those with credit scores between 600 and 700). Debt instruments can be straight interest-yielding securities or offer conversion rights into common shares (equity); they can be secured against company assets or unsecured. Like equity crowdfunding, P2P is regulated under Title III.

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