The Growing Danger of Crowdfunding Monopolies

V.2, N.48

The announcement by Mainvest, one of the most community-friendly federally registered investment crowdfunding portals, that it is shutting down in a few weeks is awful news. Sure, there are plenty of other portals operating, but nearly all of them have fledgling business models. Only a few portals are really succeeding. Three months ago, we noted with concern that of the 92 federally registered portals, the top two (Wefunder and StartEngine) accounted for 59% of last year’s business, and the top four accounted for 75%.

This kind of monopolization is bad news for all of us. Less competition means fewer choices, higher costs, and sluggish innovation.

I want to be clear: I don’t believe companies like Wefunder engage in predatory behavior. In fact, I love Wefunder—and have written several stories about their initiatives to become more community-friendly.

As Mainvest says on its website, “It’s been a challenging environment from the start, with the pandemic hitting early in our lifecycle and ongoing volatility in the VC and Fintech spaces that have made fundraising difficult.” By which, they mean Mainvest’s fundraising, necessitated by ongoing losses.

One reason it’s hard for a portal to make money in this space is overregulation. The relevant federal agencies (the SEC and FINRA) have made it too damn expensive for all but the biggest portals to comply with the myriad rules.

Before the JOBS Act legalizing investment crowdfunding passed in 2012, I argued that the SEC should simply create an exemption for all small-business investments under $100. No one is going to go bankrupt with a $100 investment, and it’s no more risky than a dinner for two at a new neighborhood restaurant. Nearly a thousand petitioners wrote to the SEC in support of this idea.

Instead of embracing this simple proposal, the SEC decided to create a Rube Goldberg machine of new regulations.

“Let’s require portals to facilitate all the transactions. Let’s put the portals through the ringer with annual filings. Let’s create a long checklist of requirements for every small business offering.” I’m not saying that these rules are pointless, but in the context of the problem being solved—moving capital into local businesses and projects—they were overkill. And now we have the predictable result: an unviable, uncompetitive, and increasingly monopolized marketplace. 

Honestly, I expect most other portals will fail as well. It’s a tragedy—and a completely unnecessary one. Congress could and should course-correct by simplifying the rules for local investment. Here are my starting ideas:

• Every investment under $100 should be exempt from SEC and state securities rules.

• Any investment fund with under $1 million serving local businesses (that is, operating only intrastate) should be similarly exempt.

• Any fraud committed can be punished, post hoc, through federal and state anti-fraud statutes.

• Any conversation about selling these securities with anyone at any time is permissible.

My proposed title for this bill is the “Securities Attorneys Retirement Act of 2024.”  What do you think?

In other news (find links below):

• The Nonprofit Quarterly has a provocative article on the growing problem of bank monopolies and how the Community Reinvestment Act basically provided a permission slip for two generations of destructive mergers.

• To some, the contribution of big banks to community investment funds makes their megamergers worthwhile. The MacArthur Foundation recently recruited several big banks to help the Invest Appalachia Fund reach its $35.5 million target.

• The New York Times has a great piece on how many cities are meeting their high housing needs through community-owned cooperative real estate. The article begins with a great profile of the $20 million Commongrounds project in Traverse City, Michigan. The first $1.3 million was raised through investment crowdfunding.

• Ellen Brown has a terrific essay on how California can erase its record $73 billion deficit with a well-designed state public bank like North Dakota’s.

• Marjorie Kelly, our featured interview in last week’s MSJ Extra, provides a good summary of her latest book, Wealth Supremacy, in Yes! Magazine.

If you want more news, please subscribe to the MSJ Extra! through this handy link.

~ Michael Shuman, Publisher

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NEWS

• Mainvest Shutting Down on June 14, Mainvest (May 14)

• Will New Federal Bank Merger Rules Have Teeth? Nonprofit Quarterly (May 8)

• Invest Appalachia Closes $35.5 Million for Place-Based Impact, ImpactAlpha (May 6)

• Priced Out of Housing, Communities Turn to Cooperative Development, New York Times (May 13)

• Raise Taxes, Cut Programs, or Form a Bank? Public Banking Institute (May 9)

• Breaking Up With Capitalism, Yes! Magazine (May 7)

WHAT YOU MISSED IN LAST WEEK’S MSJ EXTRA!

I’m pleased to chat with one of the pioneers of the responsible business movement, Marjorie Kelly. She is a distinguished senior fellow at the Democracy Collaborative and the author of a series of outstanding books, including The Divine Right of Capital, Owning Our Future, and The Making of a Democratic Economy (with Ted Howard). Her most recent book, which I now assign to my business students, is Wealth Supremacy: How the Extractive Economy and Biased Rules of Capitalism Drive Today’s Crises.

MS: Welcome, Marjorie! Your new book, Wealth Supremacy, is a pretty searing indictment of the way we practice capitalism. One dysfunctional feature of the system you call out is its “capital bias.” Can you describe what you mean by that term?

MK: We think of wealth as a pile of money, but in today’s economy, wealth is invested. When we invest that money, it’s called “capital.” Capital, we’re told, must limitlessly grow. The fundamental myth at the heart of the operating system of capitalism is that no amount of wealth is ever enough. This is operationalized through the various ways the system favors capital over labor, community, and environment. Capital bias is not unlike gender bias or racial bias. Until the civil rights and women’s movements named these forms of bias, they were invisible. Now we understand how societal norms and structures work against historically disadvantaged people of color and women. Similarly, our economic system has norms and structures designed to grow wealth for the wealthy but do not provide widespread prosperity. 

MS: Can you give some examples?

MK: The providers of capital alone vote on corporate boards, while workers are dispossessed and disenfranchised. The income statement defines income to capital as “profit,” which is to be driven up, while income to labor is called an “expense,” which is to be driven down. Hence, we have an ongoing war on labor. Investment and accounting norms say corporations and financial advisers have a fiduciary duty to maximize gains to capital, while impacts on workers, the environment, and the community are defined as “not material” unless capital is impacted. These are all forms of capital bias.

SPONSOR CORNER

The National Coalition for Community Capital (NC3) is dedicated to educating, advocating, and activating community capital—and serves as MSJ's fiscal sponsor. Thank you for being a part of a growing movement! Be sure to reach out to us for support integrating local investing in your work: info@nc3now.org.

NC3 UPDATES AND ANNOUNCEMENTS

• NC3 in the New York Times: A project that NC3 has been involved with for years - Commongrounds in Traverse City, MI—was highlighted in this recent New York Times article alongside several other community-driven business and housing solutions.

• NC3's ERC Fellow, Sydney Davis, is in Washington D.C. at the Federal Resources Training this week, learning how we can best secure funding to further our work.

• The SuperCrowd Inc. continues to bring people together. NC3's Board Chair was recently on SuperPowers for Good and SuperCrowdChicago is coming up on June 12—we hope to see you there! Discount code NC3MEMBER will get you 30% off your ticket today!

PARTNER NEWS & VOICES

• New CEO Starts June 1, Candide Group (May 14)

• Why I Support the SEC's Tentative Plan to Raise a Key Crowdfunding Threshold, Superpowers for Good (May 8)

• Local Economies Love Legacy Businesses, Project Equity/Forbes (May 7)

• Celebrating 20 Years, Rising Tide Capital (May 7)

NEW INVESTMENT OPPORTUNITIES

Our complete list of recently posted investment opportunities has moved to MSJ Extra! As a teaser, here is an offering from our list. (Please note that our listing of these opportunities is not an endorsement, and remember that all investments are risky, so click on the hyperlinks and read all the details carefully before investing.)

• Carbon Collective (Berkeley, CA) Wefunder: Helping individuals and companies have a fundamentally better and greener 401(k) experience.

NOTABLE NEW RESOURCES

• Inclusive Shopping Guide: Rising Tide Capital Entrepreneurs, Rising Tide Capital (May 9)

• Should Companies Be Owned by Their Workers? Freakonomics (May 8)

• Investing in Regenerative Ag with Dirt Capital Partners, Down To Earth (April 29)

FEATURED EVENT

• Transformative Strategies for Moving Capital to Communities of Color - Virtual Event. May 29 at 1 pm ET.

MORE EVENTS

• Book Discussion: Wealth Supremacy - Virtual Event. May 29 at 6 pm ET.

• Community Capital Live: Poder Emma Community Ownership with Andrea Golden - Virtual Event. June 5 at 2 pm ET.

• SuperCrowdChicago - Chicago, IL. June 12.

• Artisans Cooperative: Crafting a Member-Owned Online Marketplace - Virtual Event. June 13 at 1 pm ET.

ICYMI

• The Rise of Ethical Finance in the UK, Stir to Action (April 25)

JOBS BOARD

• ImpactPHL: Chief Executive Officer

• Mission Driven Finance: CARE Finance Senior Director and Senior Data and Analytics Engineer

• Project Equity: Head of Finance and Administration and Manager of the Project Management Office

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The Main Street Journal aims to catalyze the movement of $50 trillion from Wall Street to Main Street to facilitate economic development and economic justice. It’s sponsored by the National Coalition for Community Capital, with grants from the Heron Foundation, Wallace Global Foundation, and the Bondi Foundation. We welcome feedback about everything, from our design to content. Also, we welcome suggestions of other groups to involve as partners and additional information to include. Please send ideas to Jen Risley at jen@main-street-journal.com. 

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