When it comes to financing for entrepreneurs, this week marked a major event in the financial industry of the United States with immense potential ramifications for the developing world. This week, the US Securities and Exchange Commission’s unanimously approved rules for equity crowdfunding.
For context, equity crowdfunding allows entrepreneurs to sell equity shares of their company to a group of investors through an internet platform, and is a distinct category of crowdfunding apart from micro-finance (Kiva), perks-based (Indiegogo), and debt (Lending Club). The most notable crowdfunding website is Kickstarter which since 2009 has raised more than $840 million, from more than 5 million people, funding 50,000 creative projects. This platform operates on a pre-sale, perks or donation model where funders contribute funds for a future product, reward, or in-kind. Shares or equity were, until the SEC ruling, not part of the deal.
If we hold true that this SEC measure represents a seismic shift in the way entrepreneurs can raise funds in the United States, the question remains, can emerging markets leap frog the developed world to democratize access to finance for entrepreneurs in their countries?
The answer, we believe, is yes.
This week, the Financial Times reported that Jacob Rothschild bought into a peer-to-peer lending (P2P) company, Zopa, which allows people to lend to each other directly over the Internet. The Lending Club, a US-based P2P company, has processed more than $1 billion in loans and is preparing for an initial public offering.
Why has this sort of lending taken off? According to Rothschild, “Savers are looking for a way to get enhanced yield and at the same time, borrowers are looking for options where banks aren’t lending.” A recent post on Bloomberg noted that “Lending online became popular in China after a tightening of bank credit in 2010 following two years of stimulus spending to fight the global financial crisis.” Furthermore, the total amount that circulates as loans among friends, families and companies is $1.3 trillion – an amount equal to last year’s US budget deficit.