Traditional investment banking required a great deal of hands-on discussion with both institutional and accredited investors. It was very much a “boots-on-the-ground” exercise of getting on the phone with debt and equity investors in a particular deal. But thanks to today’s burgeoning financial technology, crowdfunding is changing the way traditional investment banks operate. The trends not only allow for investing from the masses, but the efficiency in raising capital has been significantly improved with some of the new crowdfunding laws and technologies.
Then vs. Now
Before the JOBS Act of 2012, American companies could only solicit to and collect investment dollars from wealthy individuals with whom they had an existing relationship. The law did not allow for things like general solicitation and general advertising for debt and equity securities offerings. With the new crowdfunding laws, issuers are able to pitch their business ideas to a more general audience, making it that much easier to find potential investors in their deal.
As the law currently stands company issuers can generally advertise, but they can only take funds from accredited investors (those that have at least $1,000,000 outside the value of their personal real estate). When the full impact of the law goes into effect in a few months, the true “retail” investor will then be able to put his or her money into promising startups or even later-stage companies that are seeking money to grow and expand. The growth of the crowdfunding market is still widely unknown, but is likely to be very large as the industry continues to expand.
How Investment Banking Fits
Investment bankers typically make their money by selling securities to larger institutional investors. In this case, smaller companies that are in the middle to lower middle-market are not likely to be able to get as favorable of terms from larger institutional investment banks, lenders and equity investors as someone might be able to get if they were larger and fit in the institutional “bucket” a bit better.
While crowdfunding is likely to have a huge impact on how investment banks raise their money, most are better that investment banking and crowdfunding will not be mutually exclusive. That is, they will likely be able to play together in some capacity. For instance, some accredited investors are likely going to want to dip down into the middle market investments they see on many of the direct investing portals while at the same time, individual retail investors may be investing in the same offerings. Further still are the opportunities for larger institutional investors to jump in once the company reaches specific growth milestones down the road. That is, investment crowdfunding may be efficient for seed and early stage deals, but the opportunity for investment banks may lie later down the road when the business owner is looking to eventually sell the company.