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I think we are looking at things from the same vantage point.

I think the implications of Reg D changes — unlimited accredited investors, direct solicitation of accredited investors — are more important than the Emerging Growth Company deals.

The EGC deals are going to be deals that could not get VC funding. Granted VCs are only funding 2% of deals leaving the other 98% available.

Local could be huge.

JLM
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I like your analogy to the SBA! I think a company that creates standardized loan docs, underwriting and security, then funds with peer to peer loans (including syndication to limit individual investor losses on any one loan) would really do well for itself, borrowers and investors. I’m sure Prosper, Lending Club, et. al. have their eyes on this market. The only issue is their investor bases are used to re-funding consumer loan debt where the borrower is cutting interest from 18% to 11%. Investors will have to get used to 5-8% to get good quality borrowers to be interested, IMO. I like your angle on “funding their own neighborhood”. The affinity angle could work in lots of ways, whether geographic (as you point out), industry, type of product, etc. You have elements of Kickstarter at work there.

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I agree more with you than you do with yourself.

I think there two pieces of low hanging fruit that would be game changers:

1. Fully funding the SBA; and,
2. Making the banks lend money up to 85% of assets.

The crowdfunding will surely replace the SBA — who runs out of money (guaranties really) at the end of Q1; and, will do exactly what you have so keenly observed — take the place of commercial banks who funded solid businesses which were not growing wildly but were providing jobs and a good living for numerous folks.

People forget that crowdfunding can also be used for straight debt deals. Why should an investor in debt accept a deal brokered or otherwise channeled through a commercial bank when they could make that loan directly and get a substantially better rate. And take pride in funding their own neighborhood.
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I agree with your analysis, and wanted to add that one possibly very big positive change to the current funding landscape is “non-scalable” businesses may finally be able to have a new funding source. I think this fits under you heading of “existing stable companies” that may not have the 100X business models that VC’s require and may also include startups with a viable idea and some early traction that are not going to be $100M/year businesses but are going to be solid small businesses that can repay their crowdfunding investors on terms that are good for the investors. I also agree that this is in many cases finally going to replace the bank debt/funding that has evaporated over the last 5 years.

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Charles, you may well be right.

At the end of the day, you have to make money and getting a lot of money is not always an indicator that you CAN make a lot of money.

I really want it to succeed.
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They are doing very well.

I think the best combination is a broker dealer license and a crowdfunding mentality.
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I’ve had mix feelings on crowdfuning, at first I was incredibly excited by the prospect of community funded businesses, then after thinking it over these business models are already happening with revenue driven growth. I guess the big differentiator is the spark of initial capital. Where will it come from, who will lose it all, and who will win BIG?

Here are the ramblings of a 3 years younger and more foolish version of me.

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Yes and no.

If a business is sound, stable and generating cash, then the issue becomes simply what do they intend to do with their excess cash? Distribute it or plow it back into the business?

If they decide to plow it back into the business — thereby avoiding double taxation of dividends — then they can leverage that cash flow to underpin appropriately priced debt.

If they intend to grow by adding an operating unit and have sufficient cash flow to handle the debt without any contribution from the new unit, then all they have done is leverage their own cash flow.

Then the issue really just becomes a “cost of capital” issue.

With CD rates where they are today, I suspect a reasonably well run business with a 1.75 DCR (debt coverage ratio) — which used to be a AA credit once upon a time — would be able to borrow money very, very cheaply.

Anything is cheap when you cannot borrow money from a commercial bank. Commercial banks used to fund growth for existing small businesses once upon a time — DOA now.

JLM
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I get it. It fills that segment’s need. But the caveat is that it puts the business at risk at the same time. The minute you borrow and make a promise to grow to pay it back, you’ve already mortgaged your future to the borrower whether they are cheerful crowd-funders or badass bankers. I’m with you that it should work out at the end, as we see more successes than failures. But the difference between that and a startup’s funding is that a startup gets funded to allow them to search for their true north business model, whereas an existing stable company already has (supposedly) a repeatable business.