April 19th, 2014 20:45 EST
Crowdfunding, the Banks and Wall Street
The new crowdfunding rules are taking everyone by storm, and they`re bound to have impact in ways that can only be guessed at so far. And only in the imagination of the most crazy of us, can we look down the road even a couple years.
We don`t know exactly what`s going to happen with crowdfunding and its implementation, but one thing is for sure: there are a lot of parties who are nervous about it - and well they should be.
For example, the banks. Banks are not friends to consumers. Granted, we all need a place to park our money, but is it really likely that most consumers are going to get loans from these institutions? They barely help businesses. They rarely help homeowners get financing to make purchases or refinances. To be fair, this is partly because of government regulation but it also reflects their own risk tolerance. These giant institutions, which were declared too big to fail, are too big to be in business and they are about to get a haircut.
It`s only The People that can take them down.
The new crowdfunding rules are attacking the banks head-on. Since banks won`t make loans, new organizations have sprung up that are making loans to consumers in record numbers and in record time - like never before. Companies like LendingClub and Prosper are taking in small increments of dollars from regular people (investors), pooling them together and making loans after implementing a fair underwriting process for the borrowers. This is providing consumers and small business owners with access to limited the amounts of capital to meet their needs.
I was speaking with the CEO of Prosper recently who told me that he believes young people will probably never have a need to walk into a bank. I believe that he`s right. My kids, for example, take pictures of their checks; they use ATMs to get cash and they use the internet to move their money around. They have a pretty good sense that a bank will never loan them any money, so they might as well go to one of these peer-to-peer, "P2P", lending services if they need capital for a business, car purchase or other item.
It`s the way of the new world. What`s ironic is that banks are more profitable than ever but the post-bail-out profits are not coming from loan interest. Much of it is coming from fees they unscrupulously charge on overdrafts, bounced checks and other account-related services.
The other who is desperately concerned about the implementation of the crowdfunding rules are the Broker/Dealers (BDs). Broker/Dealers are organizations mandated by the Securities and Exchange Commission (SEC) to oversee and employ stock brokers. The concept of a Broker/Dealer means these companies both broker other people`s securities as well as dealing in product that they own (do you sense the conflict of interest?). Stock brokers and Broker/Dealers are paid a lot of money, but unfortunately, only a few add much value. Most of the rest are just a drain on your accounts.
I want to repeat: just a few are really good.
The amount of regulation they have to deal with from the government is tremendous, and consequently, the amount of value and service they can deliver to consumers is low. Worried about crowdfunding, the Broker/Dealers have been pushing the SEC to create very strict guidelines around the new processes. They want to make sure that the fence " they have around financial transactions stays intact.
As brokers and intermediaries, they want to be in the middle of every transaction but if the Internet has taught us anything, it`s that nobody gets to be in the middle. The Internet is the great enabler that makes it possible for people to manage their own affairs. But at the present time, the Broker/Dealers want to make sure that all the money being raised in these crowdfunding arrangements runs through them. Some of it will, some of it won`t, but clearly they`re worried that their monopoly on capital raising and money management is at risk.
By the way, most Broker/Dealers have never heard of crowdfunding and most of those who have are laughing at it " at least for now.
Crowdfunding is clearly the democratization of access to capital. There are still many rules that need to be revisited and revised. But at least for now, a lot of the old rules are being assaulted - and this is going to work out well for consumers.
Maybe the Banks and Wall Street have finally met their match. The government can`t control them but my bet is that the citizens of our country can. Go People.
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Joel G. Block is a successful entrepreneur, speaker, advisor and is an astute investor. Joel is also CEO and founder of the Bullseye Capital Real Property Opportunity Fund, LLC which acquires distressed real estate nationwide. The Fund partners with accredited investors to accomplish its goals.
We also offer standard-setting seminars to show others how to raise or syndicate capital to acquire properties. Knowing how to pool funds to purchase real estate investment, whether single family, multi-family, commercial, or industrial is the key to wealth creation. For more information and complete details, please go to http://www.syndicatefast.com/.