On Main Street


Don’t overlook the new opportunities from crowdfunding platforms

By Alexandra Borzo Fay

Community bankers had everything but crowdfunding on their minds in 2009. With dozens of bank closures and unbridled regulatory whiplash amid the depths of the Wall Street financial crisis, the launch of donations-based crowdfunding websites was of trivial significance in the banking world. The artists campaigning for funds from everyday people on these sites were demonstrating creativity even in the way they financed their projects, but this hardly affected banks.

Then in 2012, the JOBS Act was signed into law, allowing startup companies to sell stock or debt via online platforms to unaccredited investors. But bankers were still otherwise distracted. And though the Securities and Exchange Commission has yet to finalize the rules for this new chapter of equity crowdfunding, the excitement has lead more than a dozen states to write and ratify their own crowdfunding laws in anticipation of the federal rules.

In this dawn of change, community banks are uniquely positioned to explore crowdfunding as a capital-building tool to make more loans happen.

Attitudes toward crowdfunding remain inconsistent, particularly among bankers. The media noise around crowdfunding in the last decade has rendered many bankers deaf to the rumble of the coming storm. Donations-based crowdfunding was followed by equity and debt crowdfunding, which remains available only to SEC-accredited buyers. The JOBS Act legalized the participation of an unlimited number of unaccredited investors (pending SEC rules), theoretically opening the floodgates for small-business financing in a way that could humble even community banks. Savvy online campaigning could amplify a business’ capacity for growth, not to mention demonstrate an entrepreneur’s market reach in hard numbers flashing across a digital backdrop.

This social capital is an asset worth noting. Where an application for a bank loan might lag under the weight of underwriting and compliance, a business can lobby for funds instead on a chic platform designed to raise capital and advertise simultaneously.

No matter its appeal, crowdfunding is not a singular means for financing a business. Selling securities to users through online campaigns should ultimately be one of many forms used to raise capital. Foolish though it is to defame crowdfunding as trivial, it would be equally foolish to see it as a threat to traditional bank lending.

As community bankers, we proclaim our support for small businesses fanning the flame of our economy, yet they remain underserved. Despite our conviction, under the pressure of regulatory compliance some deals just can’t be made. To remain in constant review of available resources is to remain in touch with our convictions. If this pending expansion of crowdfunding could serve community banks or our customers, it would be in our best interest to explore the possibilities.

A decade of buzz around crowdfunding has produced such disparate views that it is necessary for banks to take a fresh, industry-specific look at the potential for this new capital source. As leaders in our local communities, the simplest application might be to introduce crowdfunding to bank clients seeking counsel when raising capital. A way to monetize this consultation would be a potential referral fee brokered between a bank and a crowdfunding platform in the event a banker refers the customer. A more aggressive application could be a conditional bank loan, offering a matched dollar amount for crowdfunded capital, or agreeing to book a loan once certain capital requirements have been met.

The most ambitious banks may even seek to build their own crowdfunding portals to supplement their product base. Every bank would consider its own balance of risk appetite, its own Goldilocks standard.

A bouquet of recent media hype has been devoted to changes in the digital landscape, particularly among young consumers. Economic strain has served as a catalyst spurring these innovations. A generation of entrepreneurs has arrived to the market, crafting business plans around technologies that did not exist 10 years ago. As community bankers, we remain committed to the small-business engine of our economy. Our optimum move is a full realization of the tools available.

Alexandra Borzo Fay (afay@drake-bank.com) is a retail banking officer for Drake Bank in St. Paul, Minn.