On Monday, the popular commission-free trading app, Robinhood (Nasdaq:HOOD), took a beating…
In an interview published in Barron’s, SEC Chairman Gary Gensler said that a full ban of the controversial payment for order flow (PFOF) is “on the table.”
A practice that is already banned in the U.K., Australia, and Canada.
Why? Because according to Gensler, it has “an inherent conflict of interest.”
And this conflict of interest starts – and ends – with the most important problem in FinTech…
Who is the real customer of the business?
As the saying goes, “if you’re not paying, you’re the product, not the customer.”
If a business generates most of its revenue from selling your data to advertisers – like Facebook, Google, and most media outlets – they are the customers… not you.
And hey, maybe you’re okay with BigTech creating a highly addictive product designed to harvest your personal data so they can sell the ability to influence you to the highest bidder…
But what happens when that same model of thinking is applied to the financial services you use?
What happens when a company – like Robinhood – makes almost 80% of its revenue from selling your data to high-frequency trading firms who can front run your trades?
Or put another way, a company that has a business model that fundamentally benefits by incentivizing you – the little guy – to risk financial harm?
At least when you go to a casino, you know exactly what you’re walking into…
But for the millions of Americans who are looking for a way to build wealth, the price of “free” trades could wind up costing them everything.
Sadly, we’re seeing this same fundamental business model flaw infect the entire crowdfunding ecosystem…
And if we – the Equifund community – don’t do something, it could mean the eventual death of the one of most important innovations in Capital Markets in the past 50 years.
It all has to do with…
The biggest problem in FinTech
If we take a look at the premise of Challenger Banks, it’s pretty simple: people hate banks because they hate the fees.
With this in mind, companies like Chime decided to offer “banking with no hidden fees and fee-free overdraft.”
How do they do this?
They rely solely on something called the Interbank Exchange (a conversation for a different time), and a LOT of outside investment capital.
But here’s the inevitable problem with this strategy…
Eventually, those shareholders want to see a return of some kind…
And eventually, the fees they can harvest from the Interbank Exchange could collapse (called “margin compression”).
This means the FinTech in question needs to figure out a monetization model that is defensible from being attacked (for example, Robinhood forcing the retail brokerage market into commission free trades)…
And ideally, do it in a way that isn’t just the old way (i.e. bank fees people hate paying), but new again.
Put another way…
We need more transparency into how deals work… how people get paid… and how that can potentially create misaligned incentives!
For example…
If your financial advisor offers “free advice” (i.e. free sales pitch) but only earns a commission on the investment products she/he sells you…
Who does that person really represent? You? Or the product that pays the commission?
And even though it’s entirely possible for someone to work on straight commission and resist the temptation to oversell…
The incentives are set up for them to do the opposite – because the more they sell, the more they get paid.
But if you hire them on a “fee only” basis – and the advisor doesn’t accept any commissions or referral fees – it means you can have more confidence that you are their true customer!
And more importantly, it’s a sustainable business model that keeps the business fully aligned with the customer’s best interest.
This, in a nutshell, is the problem we’re currently facing in Crowdfunding
If you look at the way most crowdfunding portals make money (including the Equifund Crowdfunding Portal), it’s from a combination of…
- Listing fees – companies pay money to have their deal listed on the platform.
- Transaction fees – companies pay a percentage of funds raised to the platform
- Success fees – companies award a percentage of shares sold to the platform
This means that fundamentally, the companies raising money are the customers… not the investors on the platform!
Because the revenue model is based on funds raised on the platform… not the financial returns to the investor!
And if we look at the core problems plaguing the entire crowdfunding space – a lack of due diligence, overinflated valuations, non-investor-friendly deal terms…
In our opinion, it all comes back to the monetization model.
Here’s why…
From the issuers perspective, the primary concern is (usually) “how much can you raise, at how high of a valuation, and how fast?”
With investors, the primary concern is (usually) “how much money can I make, and how fast can I make it?”
Somewhere in the middle, someone is selling both of those promises to both sides of the market…
And spoiler alert: it doesn’t always work out for the Investor.
As it stands right now, the Equifund Crowdfunding Portal charges a listing fee to cover initial due diligence. And depending on the deal, it typically earns 7% of the funds raised on Reg-CF offerings and is awarded 7% of the shares sold (i.e. 7% of 1m shares sold @ $1 = $70k + 70,000 shares).
If you compare that to most other portals in the Crowdfunding ecosystem, Equifund takes by far the most in the way of equity compensation… and does so on purpose.
It means, in our opinion, Equifund has the highest alignment with investors because it’s the most incentivized for a company to succeed (as it ends up being a larger shareholder alongside you).
In addition, to the best of my knowledge, Equifund is also the only one providing ultra in-depth due diligence on all of its offering pages…
And the only one educating investors on the “piping and plumbing” of Capital Markets (i.e. problems with depositing and clearing shares)…
(Not to mention, probably the only ones willing to talk about the problems holding the Crowdfunding ecosystem back…)
And we do it all – for essentially zero up front cost to you, the Investor – because the long-term upside potential.
If you’ve ever felt anxious or nervous about investing in private market opportunities…
We totally get it.
We’re in these deals with you.
Don’t get me wrong. It’s not fun waiting years for these things to pay off…
And it’s not always easy having the patience and discipline to stop chasing shiny objects and focus on a long-term wealth creation plan…
But life is a long-term game.
And we want to play it with long term people so we can build a business that’s built to last.
Sincerely,
Jake Hoffberg – Publisher
Equifund
