Crowdfunding's Power To Close The Racial Wealth Gap

Crowdfunding's Power To Close The Racial Wealth Gap
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Today, Monday, May 16th, 2016 marks the beginning of a new era in American capital formation. Title III of the historic JOBS Act signed by President Barack Obama on April 5th, 2012 is now a reality. Regulation crowdfunding, known as Reg CF, allows startups and small businesses to raise up to $1 million annually from small-dollar investors through web-based funding portals.

Also effective upon enactment, Title VII of the JOBS Act requires the Securities and Exchange Commission to conduct outreach to inform small and medium sized businesses, as well as businesses owned by women, veterans and minorities, of the changes made by the JOBS Act.

To this end, I personally believe that equity crowdfunding is the most significant piece of financial based legislation for African Americans since the Emancipation Proclamation's 1863 emancipation of the Southern slaves.

It's the emancipation of capital. Hear me out:

Wealth inequality has widened along racial lines since the end of the Great Recession. According to 2013 federal data, the median wealth of a Black American family was about $11,000. In comparison, the median wealth of a white American family was around $141,900. This is a difference - or chasm - of about $130,900.

This wealth gap in our society has a huge impact on every facet of American life, such as early exposure to future career paths and opportunities; viable elementary, secondary and post-secondary education; affordable healthcare; economic development; high growth job creation and community re-development. Without wealth, it's nearly impossible for a community's stakeholders to invest in the upward mobility of their own communities and, ultimately, contribute to the growth of America as a whole.

In my estimation, there are four ways to close the wealth gap.

1. Obtain a "good job" and save your money, perhaps utilizing financial technology tools like Digit. Yet, this can take a lifetime or two.

2. Receive an inheritance by a family member who made enough money in their lifetime to save, get life insurance and/or invest.

3. Start a high growth business that scales, pays dividends and/or is acquired.

4. Invest in a high growth business that scales, pays dividends and/or is acquired.

At Opportunity Hub and TechSquare Labs, we focus on the last two. Why? A study from the Center for Global Policy Solutions, "The Color of Entrepreneurship: Why the Racial Gap Among Firms Costs the U.S. Billions," suggests that past and present discrimination inhibits the true growth of minority businesses. Without discrimination, 1.1 million new businesses could be established and funded. These additional companies could produce an estimated 9 million more jobs - increasing the nation's economy by $300 billion.

Access to capital is key to starting and growing a business from the ground up, and the black-white wealth gap affects the success of family and friends rounds. A lack of funds often prevents black cofounders from even surviving long enough to build their minimum viable product, which would give them something concrete to present when applying to accelerators and incubators.

Access to the innovation, entrepreneurship and investment ecosystems that are often curated at coworking spaces and entrepreneurial centers across the country requires capital. For instance, according to research published by New York workspace Cowork/rs, the average cost of a dedicated desk is $526 per month - an unobtainable luxury for many minorities. Let's use equity crowdfunding to launch more entrepreneurial ecosystems across America that offer affordable membership, programming and capital to its stakeholders.

Equity crowdfunding can serve as family and friends, seed and Series A (via Title IV) funding for startups, particularly those from under-represented communities. Active angels and venture capitalists may not like the idea of thousands of non-accredited investors being on a startup's cap table. But what do they expect from black and brown entrepreneurs, who know that each year less than 1% of the $50 billion in angel and venture funding goes to black and brown firms?

Let's use equity crowdfunding to fund the stages of investment that early stage entrepreneurs must navigate to gain traction with their businesses.

Equity crowdfunding can also serve as a catalyst of hyper-local community and economic development and job creation. Imagine the purchase, renovation and rental of blighted real estate properties via crowdfunding. Platforms like the Atlanta-based Groundfloor are already doing this.

Imagine using Title III and Title IV of the JOBS Act to launch companies that will lend to and refinance the 70,000+ Black churches that have high interest mortgages with financial institutions who don't reinvest proportionately into their communities. Platforms like Semble in Seattle are working with non-profit institutions such as churches and schools to refinance their outstanding mortgages via equity crowdfunding, thereby allowing these institutions to reduce their interest rates by significant amounts and use the savings to fund local economic development.

Whether we realize it or not, equity crowdfunding is tied to the creation of wealth in underrepresented communities.

Even though I've been an unapologetic, active advocate for equity crowdfunding - ongoing innovation in capital formation and access to capital for minorities in particular - there's still so much work to do. Crowdfunding platforms must see the value in marketing to and attracting black and brown entrepreneurs and educating black and brown retail investors. Minority business associations such as the National Minority Supplier Developer Council, United States Hispanic Chamber of Commerce and The Indus Entrepreneurs must be intentional about educating their member firms on getting involved in equity crowdfunding as investors and issuers as a definitive plan for scaling their small businesses.

Civil rights groups, faith based organizations and social- and service-based fraternities and sororities must be intentional about creating affinity-based networks of new investors that are willing to own and produce what they consume. Historically Black Colleges and Universities must be intentional about educating their students and alumni on the power of equity crowdfunding to refinance university debt, commercialize research and fund end-to-end startup ecosystems in their city.

Allies of the black community must also use equity crowdfunding to invest early and provide follow on capital to further accelerate growth and scale of minority lead companies.

Let's embrace equity crowdfunding. Let's invest in black and brown owned firms. Let's create unprecedented opportunity. Let's create new jobs. Let's reduce illiteracy, crime and disease. Let's reduce the wealth gap. Let's make America great.

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