Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
In a care[...]
How Governments Should Use Crowdfunding to Battle the Economic Impact of #Socialdistancing
Crowdfund Insider | | March 31, 2020
The Crowdfunding industry is well aware of what economists call externalities – the fact that behavior of some people has an unintended impact on other people. Positive externalities can be observed on the Crowdfunding platforms every day due to the willingness of people to join their forces. These days, everyone becomes aware of the impact other people have directly on our lives, health, financial situation, liberties.
Crowdfunding platforms were very quick in meeting the challenge of channeling funds to those places where they are needed. Governments are now pumping billions and most likely trillions of dollars through the banking system into the economy. The alternative finance industry should not be ignored when creating the right response to the COVID-19 pandemic.
RESILIENT CAPITAL: How Regulation Crowdfunding Stood up to the First Weeks of Coronavirus
What could governments do?
They could support the donation-based platforms by reimbursing transaction fees, because essentially it will allow more donations to flow. They could also facilitate partnerships between municipalities, regions, and platforms that encourage local donations to local projects. For instance, the platform Helfen.Berlin which collects donations for companies in exchange for gift certificates is a private initiative from the start-up industry, but it charges around 3% in transaction fees. The city of Berlin could easily support this initiative by covering these costs. This form of civic crowdfunding will be an important pillar in creating regional demand and financial support.
Some, such as the City of Berlin, are enabling access to webinars, in this case with the Crowdfunding Campus. The support could go way beyond that.
A lot of SMEs may not apply to receive the wide range of support measures given by the government, because the application procedure is too tedious or too complicated, or simply because the SME does not fit into the support categories.
But the governments could easily match the contributions from the crowd, for instance, and pledge that for every Euro in pre-sales the government contributes 0.25 Euro up to an amount of 1000 Euro. Therefore, if an SME raised 4000 Euros from the crowd, it would receive an additional 1000 Euro.
Of course, these sums are small compared to what can be raised on equity- and lending-based Crowdfunding platforms. It is too early to see the impact that COVID-19 will have on those startups, real estate, and renewable energy investment financed on equity platforms.
Start-ups might have a difficult time in the next couple of weeks, although some business models in electronic retail or electronic services might scale much quicker. But other startups might have a hard time, so we would not be surprised to see the insolvency rate going up.
SEE: Canadian securities regulators propose new nationally harmonized crowdfunding rules for comment by May 27
In real estate equity-based crowdfunding, it depends on each location, at least in Germany and the Netherlands, it is not expected that housing prices and rents will decrease immediately, so the case for investing in real estate through crowdfunding platforms might still be there.
For renewable energy projects, the investment case continues to be strong because the climate crisis needs continued investments into solar and wind.
For all three types of equity-based crowdfunding, the investments have a long-term perspective, the payout is in the future, and at that time the markets and economies might have recovered. So investors who took a hit in the stock market might look for these platforms to diversify their portfolio, so at least in the medium-term, we should see increased investor appetite.
The equity-based Crowdfunding platforms in Germany, the Netherlands and in Europe, in general, have responded to the challenge by increasing their capacity to onboard SMEs. The Austrian-German platform Conda created the #condahilft-Landing page and promised to reduce the fees on all SME funding rounds on their platform.
In many countries, we can see that the investors don’t only want a financial return, but want the projects to succeed. In the Netherlands, all the large equity-based crowdfunding platforms announced that their investors will agree to a grace period between 3-6 months in which the project or company doesn’t need to pay the interest and does not need to repay their loans.
Aescuvest, an equity-based crowdfunding platform based in Germany with a focus on health startups created a fast-track for start-ups developing vaccinations against Covid19 and is currently in the process of partnering with other equity-based Crowdfunding platforms in Germany.
Fundedbyme, a Swedish equity-based Crowdfunding platform, has opened its platform to include donations as well, which is a sign of the shifting business models of platforms.
In the Netherlands, the banks have access to a guarantee fund if loans get into default. This week Dutch crowdfunding platforms will also get access to these funds, providing additional support for individual crowdfunding investors. This will create additional support for companies that are now in need of attracting additional funding.
MORE: Getting In Early: SEC Sees Growth In Equity Crowdfunding
Some of the lending platforms in Europe have announced a freeze on repayments, but there is not yet evidence that governments are supporting lending platforms to recoup these costs.
There is anecdotal evidence that investor appetite is decreasing on lending-platforms throughout Europe, with investor forums advising to shift peer-to-peer investment back towards cash and other more liquid assets and investors not willing to invest in new loans because of the uncertainty in the market. The numbers of people and companies seeking loans have increased on the platforms – the increased supply and decreased demand for investments into loans made it necessary that the owners of loans had to provide substantial rebates in order to sell off their portfolio. The interest rates on new loans have increased at many lending-based crowdfunding platforms. For the platforms, the next couple of weeks might be quite difficult, since often their fee structure is based on the repayment of the loans, not just on the intermediation.
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