FinTech and The Rise of Alternative Investing

Financial Technology (FinTech) is revolutionizing the financial services industry, including the way investors participate in alternative investing. From Ally (online banking) to eTrade (online discount brokerage) to Prosper (peer-to-peer lending), to HealthiosXchange (equity crowdfunding), technology is redefining the way we bank, trade stocks, lend money, and invest in companies. Fueling the transition to online marketplaces are tech-savvy Millennials who find visiting banks and participating in offline investment groups an inefficient use of resources/time and more costly than online alternatives.

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Vital Signs #14: Crowdfunding Part II – Can It Fill the “Innovation Gap” in Biotechnology?

Crowdfunding is a term describing a method where syndicators use the Internet/social media to raise small amounts of money from a large numbers of investors.

The general rule is every offering of a security must be registered with the SEC, unless exempt. Most syndicators (~Biotech Companies) utilize exemptions available through Regulation D (Rules 504, 505 and 506) for private placements. Each of these rules prohibits the issuer from making an offer through advertising or solicitation, which covers making offers on the Internet.

As we profiled in Vital Signs #13, The House of Representatives passed H.R. 2930 which authorizes the Entrepreneur Access to Capital Act. If passed by the Senate and signed into law by the President, the Act would create a new exemption from the requirement to register the sale of a security with the SEC.

This Act does not place a limit on the number of investors, prohibit advertising and general solicitation and require extensive disclosure be made to investors. However, the issuer must:

  • Put a warning on their website that the investment is speculative and illiquid
  • Warn investors that there are restrictions on the resale of these securities;
  • Not provide investment advice to investors;
  • Have each investor complete an offering questionnaire that will show that the investor understands the level of risk involved in the security being offered;
  • State the amount of money to be raised and have a third party hold the funds until 60% of the stated amount has been raised; and
  • Outsource cash management to a qualified third party, like a registered broker or dealer.