05 Crowd Finance and Social Trading Flashcards
Why is traditional IPO (raising capital) so difficult?
- requires a lot of effort for complying regulation (disclosure of financials/business information=
- involves one/several large investment banks
- entails a roadshow to institutional investors
- excludes retail investors
- is often underpriced
–>Banks may hesitate to make loans to start-ups
–>Angel funding or venture capitsal might not be accessible or not enough
What is Crowdfunding?
Crowdfunding is the process of funding a project/business or an individual by raising relatelvy small amount from a large number of investors
Charcteristics of Crowdfunding (what are the investors and how is funding coordinated
- Investors are typically retail or high net worth individuals
- funding is coordinated on online platforms that bring togehter investors and entrepreneurs
Two types of Crowdfunding?
- distinguish between profit-oriented investing and non-profit-oriented investing and donations ont the other
- ICO are a type of (more decentralized) crowdfunding
What are the JOBS?
the Jumpstart our Business Startups Act was signed in 2012, to ease the funding process of small businessess
–>Included 7 tiltes where title 3 is the most relevant
What does Title 1-2 say? (JOBS)
Title 1: makes it easier for companies to go public
* pre-ipo process with the SEC can be done confidentially
* Less stringent audit requirements
Title 2: allows firms to stay private
- companies may stay private even when advertising for outside investments
- Investors need to be “accredited”: High net Work or high income
What does title 3-4 say? (JOBS)
Title 3: Regulates crowdfunding
- limits on individual investemnts (seize, and min. holding period)
- Limits on total amount raised
- Certain disclosure requriements
Title 4: Introduced “mini IPOs”
- Shares can also be sold directly to retail investors
Motives for investing in Crowdfunding?
- Profitable for investors??
- don´t forget opportunity costs of due dilligence
- the price was simply set by the company
- was the company unsuccessful in raising funds any other wa?
- Impact investing: Investors want to have a postivie impact on society, the environmnet, and thus investing in projects they believe make a difference
- Donations: giving money to charities, artistis, provides a “warm glow” of giving
- early adopters: Reward-based campaigns often give priority access to the funded products or services
Motives for Obaining Crowdfunding? Why should is use crowdfunding ?
- Funding costs may be lower than traditional financing
- Successful campaings serve as proof of concept
- Crowdfunding process already build a network and client or fan base for the company
- company might learn from the crowd (get some idea of company valuation based on demand by investors)
- -
Risks Crowdfunding
- The project might simply fail or fall short of expectations
- Delay, the project might take longer than expected to deliver the promised reward
- Illiquidity, seeling shares during equity crowdfunding may be impossible
- Fraud, some projects were never meant to be actually realized
- Security of crowdfunding platform
What do P2P Lending, Crowdlending and Marketplace lending ?
They all describe platforms that match borrowers with lenders
- just brings them together, do not make the loans itself
- loan agreement is between the lenders/borrowers
What is Marketplace Lending?
Is a platform where Borrowers fill out a profile and the platform evaluates their credit risk and sets interest rate.
- Then borrowers can accept or reject the offer
–>THe platform make the credit decision on behalf of the investors
–>some even securitize the loans, they bundle them in special vehicles and directly sell them to institutional investors
Why do borrowers go to marketplace lending platforms?
- to pay down debt, in particular credit card debt
- other types of credit may not be available
–>Typically provide some information
- Financials and income
- Planned use of funds
Why do lenders invest on marketplace lending platforms?
- yields in other assets may be low
- better credit risk evaluation might uncover “good risks” and profitable investments
What is a Microcredit?
= Microcredit is the lending of small amount of money to typically impoverished borrowers with no access to other types of creidt
