Extraordinary popular solution: funding from crowds?

Executive Summary

“Crowdfunding” allows early-stage companies, projects, and artistic ventures in the US to attract financing from the masses over the Internet and provides developing world microfinance initiatives a new avenue to secure capital. To date, crowdfunding has provided more than $500m for enterprises or ideas normally unable to raise money even from venture investors by aggregating funds from thousands of motivated and unaccredited individual investors. With the recent passage in the US of the JOBS Act, this novel method of financing stands to grow rapidly. Given the often small, distributed nature of clean energy development, a small, distributed financing model holds real potential though there are potential pitfalls as well.

● Crowdfunding is an investment vehicle that works in reverse – retail investors can determine which projects are brought to market and what information they require on a continuing basis. Crowdfunded clean energy projects could substantially upend today’s relationships between non-accredited investors and project developers, term lenders, institutional funds, and venture capital.

● Crowdfunding could take a substantial venture investment role similar to existing angel and seed-round players – but with virtually no protections for early investors.

● Asset investments sourced through crowdfunding can be used in place of construction debt and term debt. However, there are potential limitations. Even if crowdfunded asset finance is senior debt, it will require both insurance products and a secondary market in order to be a large, robust, and transparent investment mechanism.

● Energy asset crowdfunding resembles energy cooperatives and third-party finance, but it creates two fundamental breaks in those existing structures: it allows cooperative investment without direct participation in energy use, and it allows non-accredited investors to be active third-party financiers.

● This unique financial mechanism relies not just on investor interest, but investor engagement and even emotion. Crowdfunding aggregators and arrangers will need a relationship with their investor-clients, rather than just a transaction with them.

● The most visible player operating in the nascent space of clean energy crowdfunding is Solar Mosaic, which has just raised $2.5m in venture capital. Others include Abundance Generation in the UK, and SunFunder in the US.

● In the past decade, retail investments have been both risky and low yield. Even very small fractions of the trillions of dollars in retail investment capital would provide ample dollars for crowdfunding clean energy. 1% of current retail investment in savings accounts, money markets, and US Treasuries would provide more than $90bn in clean energy crowdfunding.

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