I’ll admit, when I started covering all these aspects of the peer-to-peer revolution, I was pretty much winging it. I am delightfully surprised find myself churning out 2,000 words a week.  I’ve been told your average reader has an attention span of 300 words per web page…. Yikes.  It seems like every week someone tells me a smaller number, 700… 500… now 300.  Yet my posts keep getting longer.  Something is wrong here.  But I march forward!  And as I write these posts and plan out the weeks to come, I am seeing more and more changes in our society moving toward peer-to-peer transactions. And it’s awesomely exciting.


The peer-to-peer revolution charges on into week 4 where I’m going to discuss peer-to-peer finance.


My goal in this article is to talk about how finance is changing when it comes to investing in businesses or raising capital (like funding a startup company).  These are two sides of the same transaction, so both are effected by the peer-to-peer movement.


My first startup was a biotech company which raised money from two investors in exchange for equity.  This was a pretty straightforward, “Shark Tank”-style deal, where we gave X percent of the company away for X dollars.  There are of course some legal documents that need to be put in place to form a company and move the money.  I expected this.  What I didn’t expect was some of the rules I discovered that govern who is allowed to invest in startup companies.


Not just anybody can hand over money to launch your startup company.  In order to (legally) be an investor in a startup, a person has to be an “accredited investor.”   In the United States, this means they must have either $1,000,000 in equity (not including their home) or have an income of over $200,000 for the last two years.  Simply put – you’ve gotta be rich to be an investor and you’ve gotta raise money from rich people if you are funding your startup company.  This regulation was put into place in order to “protect” those who aren’t rich from being taken advantage of by swindlers.  The government wanted to prevent someone from knocking on your door saying “Hey, I’ve got a great business deal, give me some money and I’ll make you rich!” and then running away with your money.  Sounds nice… but by “protecting” you, they’re also excluding you from an opportunity: you aren’t allowed to participate in these deals.


There are exceptions to this rule.


The first exception happens if the person investing money in your business is going to actively work in it.  If you and Bob get together to open a restaurant and Bob is unemployed and broke, you can still accept his last $100 as an investment as long as he also plans on working in the business.  He cannot participate if he is going to only act as an investor.


The second exception is if the person raising capital puts together what is called a Private Placement Memorandum, or PPM.  A PPM is a very expensive legal document which details exactly how much money you are raising, what the shares are worth, what your business plan is, and each and every risk that goes along with your business. It is detailed and expensive.  And riddled with bullshit. It would seem to me that if you have enough time and money to put together your PPM then you have alternative sources of financing than non-accredited investors…  not really for the bootstrapping startup entrepreneur.


You are therefore left with these two options: find someone rich to invest in you, or, pay a bunch of money to get a legal document made that allows your “average Joe” to invest in you. Wouldn’t it be nice if this barrier was reduced?  Not just to make it easier for you to raise money for your venture, but also to allow other people to participate in the investment.


If I expect to get less than a 1% return from my bank and a maximum of 10% in the stock market… maybe I’d rather gamble my money up investing in a startup company, that, while risky, may make me a huge return.  Our laws protecting you from taking this gamble – BUT – you can dump 100% of your bank account into the state lotto or go to an Indian casino as you please. Thanks for the protection Uncle Sam.


Recently, a new form of venture financing has emerged, called crowdfunding.  Crowdfunding is the process of raising money for a business venture (or project or non-profit organization) from large numbers of people, usually using the internet.  This is different from traditional investing which involves just a few parties.  You could almost think of it like launching your own publicly traded company… except nobody is allowed to actually own a piece of your company.  What the fuck?


Yes – let’s be very clear about one thing: you cannot simply begin taking money from people and giving them equity in your business unless they are accredited investors.  This is illegal.  But, there are ways people are still achieving their crowdfunding goals.  Just like Airbnb is to housing and Uber is to transportation, the change-maker in the world of peer-to-peer finance is Kickstarter. Kickstarter is an online platform that allows people to put money into creative projects (which can be companies).  You set a funding goal and offer rewards to your donors, promote your fundraiser, and if you meet your funding goal, you get to keep the money.  Rewards can be anything from an early release of the product, a chance to meet the founders of the company, or any other “thing” or “experience” that the people launching the project wish.  Really, they can give away anything… except for equity in the company.


Kickstarter is massively successful with over $2 billion in pledges from 9 million people who have successfully funded 94,000 projects.  Some projects have raised over $1 million, but the average (statistical median) raises around $6,000.  Keep in mind that many of these projects are the first products made by new companies, which is effectively raising a seed round of financing for a startup. Right now there are 6,000 active projects raising money on Kickstarter and about 33% of projects meet their fundraising goal. Much like Uber and Airbnb, Kickstarter doesn’t provide any tangible good or service, they are a platform, and they take a percentage (5%) of the transaction in exchange for using their platform.


What are they getting paid for?  Good question.  If your project is big enough, they do help promote it.  That is everybody’s goal: post a project on Kickstarter and magically have it take off virally and launch them into stardom and riches.  It’s not that easy.  Running a crowdfunding campaign takes a lot of planning in advance, and many would say, if you are doing your job right, you won’t be relying on Kickstarter to promote your venture at all.  I did a crowdfunding campaign last fall using IndieGoGo (similar to Kickstarter) which did not go great. I, like many others, expected the platform to help promote the project which didn’t really happen.  I relied almost exclusively on my own fundraising promotion. As the South Park episode titled “Go Fund Yourself” points out – you might as well just raise the money yourself – promote your own crowdfunding campaign.  But Kickstarter has become so well-known that people use the term “kickstarting” interchangeably with “crowdfunding.”


And rightfully so – the most lucrative crowdfunding campaigns have been through the Kickstarter platform.  Not without some controversy, though. Speaking of controversy, let’s talk about Oculus Rift. Oculus Rift is a virtual reality gaming console that was launched off of a $2.4 million fundraising campaign on Kickstarter.  Most gamers pledged money to the Oculus Rift Kickstarter in exchange for an early release of the console.  Without the investment, the system would not be built.  So they were effectively pre-ordering the product, ensuring that this virtual reality system would become a reality.  This is what Kickstarter has turned into in many cases, a system for pre-ordering a product.


Oculus Rift took in $2.4 million worth of pre-orders for a console that didn’t exist yet. Pretty impressive, and sure as hell beats having to go raise $2.4 million from an investor.  Though, once you have $2.4 million in pre-orders, you get a lot of people’s attention.  And you have a lot of capital to work with.  And you have already proven there is a market for your technology.  All of these things make it pretty easy to find an investor.


And, guess what: a year and a half later Facebook bought Oculus Rift for $2 billion.  And who got rich?  Not the people who pledged to the Kickstarter.  In fact, none of them made any money in the deal.  Imagine putting money into a stock that offers a 1000x return in 1.5 years… that would be pretty cool.  But that didn’t happen.  Instead, all the pledges got was an early release of a their virtual reality headset.


Some felt they got screwed.  I don’t think so.  They put money into a project and were offered a headset… and they got their headset.  Nobody promised them a piece of the big pie.  And it would have been illegal to do so.


Wouldn’t it be nice if sites like Kickstarter existed where you could actually get equity in a company?  Well they do – if you are rich.  Yep – internet Kickstarter-style platforms exist (Angel List, Crowdfunder, and Fund Rise, among others) where you can put money into businesses in exchange for equity, but they require your investors to be accredited.  What about the average guy?  Wouldn’t it make it nice for a startup to be able to offer something really valuable in crowdfunding campaigns, like equity?  And wouldn’t it be nice for your average person to be able to invest in a startup company?  Sure would be….


I’d like to mention one more facet of peer-to-peer financing which I’m very excited about which involves equity financing of projects (not companies). This is something I dreamt of back in 2013 when I launched a commercial LED retrofitting company, American Relight.  Our business model was to pay for your LED lighting retrofit and you’d pay us back out of your energy savings, which can often be huge.  Some LED products can reduce your energy consumption as much as 80%!


Effectively we take a loan out on the LEDs as if they are a piece of farm equipment that is going to generate money for you.  Then, your energy savings is treated as if its new revenue… saving money becomes the same as making new money.  It’s financial engineering I suppose.


To operate a model like this requires a huge bank account to run around paying the upfront cost of LED retrofits and the people loaning the money want a return… often as much as 10% interest!  That’s a lot of interest to pay on a loan, but if you’re getting 30% return from your LED retrofit it works.  Unfortunately, not every retrofit gets you a 30% return.  So you end up going to the niche markets where this return exists: for example, properties with halogen lamps that are burning for 12-24 hours a day (restaurants, hotels, casinos, furniture stores, retail stores). You can’t go around retrofitting the billions of those fluorescent lights for free because the return isn’t big enough to pay for the financing cost. And there are billions of inefficient fluorescent tubes that also have detrimental health effects sitting in ceilings waiting to be replaced.


Even now… I look at the money in my bank account as a waste. My money has a 5% loss every year from inflation.  Investing in a bank I get less than a 1% return.  Investing in the stock market could maybe get me 10% if I really paid attention and gave a shit.  Wouldn’t it be nice if your average person could invest in an LED retrofit project?  We’re stuck receiving <1 % interest at a bank when we could be getting a 5% return from an LED retrofit project.  Instead of going to a bank or private lender and paying 10% interest on the money, why not offer the public the opportunity to participate in these deals?  Or why not give a community the opportunity to invest in the properties within their communities and earn a 5% return on their money?  That would be pretty dope.  Of course we can’t do things like this because we need to “protect” people.  Can’t invest for equity.


And soon all of this equity crowdfunding will happen – very soon.  The JOBS Act was passed in April 2012 which changes some securities regulations to allow people to invest in new businesses.  The Act has seven parts to it, of importance to us is Title III: Crowdfunding.  This month (October 2015), Title III is slated to be activated, which enabled equity crowdfunding. This is huge!!!!!


And guess what… it’s October 23, 2015 and still nothing has happened.  Why?  No idea.  I read that the House Appropriations Committee wrote to the SEC bitching them out for not getting their shit together in time.  But nothing has happened… yet.  The government moves slow… but it is moving.  But you better believe that we’ll have equity crowdfunding in the very near future – a gigantic step forward for the peer-to-peer revolution.


PS:  I don’t feel writing about another aspect of peer-to-peer finance that is really exciting, which is the implementation of  what I would call a “peer-to-peer currency,” known as BitCoin.  This is a universal currency which is not associated with any particular government.  From what I can tell, it is a peer-to-peer currency, but I don’t know enough about it to write an article about it, so I will leave you to your own devices to Google it and learn. I apologize for leaving it out, I hadn’t even thought of it when I started this series.  Like I said, there are a shitload of these peer-to-peer systems being built!