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Crowdfunding Makes Rapid Gains With Accredited Investors

March 30, 2015 at 10:22 AM
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Crowdfunding is democratizing the investment process, making it easier for more people to participate in private investments and lending activities offered online, according to a new report by The Pensco Marketplace.

These opportunities are bolstered by technology, a favorable regulatory environment and lower minimum investment.

The Pensco Marketplace is a platform designed to display a network of providers, products and services for alternative asset investors, including self-directed IRA investors, to make it easier for them to identify and invest in private placement opportunities.

According to the paper, many IRA holders do not realize that besides traditional exchange-traded assets, they can also invest in assets that traditional financial institutions do not offer, such as limited partnerships, private equity and real estate.

"When we consider that $146 billion is currently held in self-directed IRAs, it is easy to see that this new course of investing is only just getting started," the authors write.

"At Pensco, we are watching emerging trends in the technology and investing landscapes closely, which allowed us to recognize the potential opportunity to use retirement dollars to invest in crowdfunding platforms," Kelly Rodriques, Pensco's chief executive, said in a statement.

Crowdfunding Trends

Pensco prepared its report based on perspectives of participants on its platform as well as insights from Silver Portal Capital, a registered broker-dealer that runs a crowdfunding platform.

Following are several trends the paper identified:

One, investment in and access to private equity are accelerating, thanks to new rules for accredited investors issued by the SEC under the JOBS Act that opened the door for equity crowdfunding and led to new funding models for startup companies, angel investors and local businesses.

Even unaccredited investors can invest in private equity under certain conditions, and peer-to-peer lending is accessible for all investors. In future, the SEC may drop all barriers between unaccredited investors and private placements.

Two, online platforms are giving accredited investors access to a multitude of assets and sectors:

  • Sports and entertainment — These sectors benefit from familiarity, with some 95% of consumers having ties to them
  • Health care — In 2014, healthcare startups reached $4 billion, a 125% increase over 2013, and indications suggest this growth may continue
  • Film financing — Opportunities are finally opening for individual investors in this traditionally "members-only" sector, where the market for online streaming services is the fastest-growing segment
  • Real estate — Crowdfunding is giving accredited real estate investors a chance to make direct investments in the kind of deals that were historically closed to them

Three, issuers are under growing pressure to provide a level of transparency and communication more akin to that of a public company than a traditional private placement.

Four, individual investors are benefiting from the combination of transparency and access. Online platforms are starting to provide them with institutional-grade information and deals, which allows those investors to use private equity and debt to diversify their portfolios.

Regulatory and technology changes are also influencing lending, according to the paper.

Lending activities are shifting from traditional banks to nonbank entities, such as peer-to-peer lenders, which match investors with individual borrowers.

The two biggest peer-to-peer lenders — Prosper and Lending Club — grew from $26 million in 2009 to $1.7 billion in 2014.

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