This is Part 1 of a 6 part series on why Crowdfunding platforms are the new stock exchanges and why they will need to learn from exchanges like NASDQ, NYSE and LSE to self-regulate and provide a wide range of ancillary services that help campaigns succeed and at the same time, create revenues for the platforms.
The JOBS ACT of 2012 started the process of creating a whole new class of financial markets. Forget about accredited investors for a second. Let’s focus on the companies that seek funding. They could be startups looking for seed capital or existing businesses wanting to grow. Either way, many of the companies in that class are effectively shut out of the stock markets and crowdfunding opens up new opportunities for them to meet their financial goals.
Michael Libes is an entrepreneur and founder of Fledge, a startup accelerator that teaches and mentors business owners through the startup process. He says, “When a company needs only $200,000, they don’t need to be in something like NASDAQ.”
He’s got a good point, and I agree.
Crowdfunding, currently in its nascent stages, is growing into maturity. When it reaches full maturity, it will become more like stock exchanges for companies that can’t enter other markets because they don’t qualify.
Let’s take NASDAQ, for instance. Due to its stringent application requirements, a company must already have some financial clout before it can seek funding. Like the old adage with banks—the only people who can get a loan are the ones who don’t need it—the only companies that qualify are the companies that won’t die if they don’t get it. Essentially, it wouldn’t benefit NASDAQ to open its markets to fledgling companies that are still flailing their arms.
NASDAQ’s Qualifications for Capital Funding
If a company wants to be listed on the NASDAQ stock exchange, it will have to endure a four to six week application process. During that time it will have to show that it meets certain minimum financial requirements that include income, capitalization, cash flow, and other requirements.
At the lowest level, companies seeking capital funding will need to show that they’ve earned a pre-tax total of $11 million in revenue from the previous three years.and at least $2.2 million of revenue from the most recent two years. The minimum cash flow requirement is $27.5 million from the previous three years. For market cap, smaller companies must show a capitalization of $550 million from the prior 12 months.
Libes says, “Over half a million companies are started each year. Of those, about 1,000 are funded by venture capitalists. We don’t know how many are funded by angels, but only about 10% get the funding they need because there are more entrepreneurs looking for money than investors looking to invest.”
What it all boils down to is, many small to medium enterprises (SMEs) just don’t qualify or have other funding options. They’re shut out.
Crowdfunding to the Rescue: The Creation of the Small Cap Stock Markets
As with any field, increased competition will lead to better services and lower prices. Entrenched markets, however, seldom recognize the opportunities created by emerging markets. Equity crowdfunding is an emerging market with the potential to create new and powerful ways for small cap companies to get the funding they desire without having to jump through the hoops created by existing capital markets.
It’s already happening. Equity crowdfunding sites like Crowdcube are beginning to provide some of the same services offered by traditional stock exchanges. These include:
Intelligence & analytics
- Newswire & media services
- Governance & risk management
- Content creation
- Market data
NASDAQ provides all of these services, and more. Emerging equity crowdfunding platforms, in order to remain competitive, will have to start providing these services for smaller companies that can’t afford and can’t qualify for traditional capital funding strategies.