Will crowdfunders stick to local investments?

As the Securities and Exchange Commission nears its deadline for handing down crowdfunding regulations — in which large groups of small investors buy stakes in start-ups — some platforms poised to enter the space are taking bets on what crowdfunding will look like.

Two such sites — SoMoLend and crowdfunder — are predicting that crowdfunding will take an increasingly local turn, and they have tailored their platforms to cater to community-based investments.

Sites like Kickstarter and Indiegogo, which currently only allow users to contribute to projects, not invest, are well-known for connecting artists and entrepreneurs with backers all over the world. But Los Angeles-based crowdfunder’s chief executive Chance Barnett thinks once equity-based crowdfunding is viable, investors will want to invest the same way they do now — in people they know, not in businesses they stumble upon online.

“If you look at how early stage investment works now, angels invest in people they’ve been referred to in their community,” Barnett said. “They like to know they can reach out and have some kind of relation.”

Crowdfunder’s platform allows contributors and accredited investors to search for potential business opportunities in their geographic location. It recently rolled out a “Social Enterprise Hub” page connecting for-profit social entrepreneurs to relevant investors in the community.

Once equity-based crowdfunding is viable, Barnett hopes the social networks for investment on crowdfunder will be in place, because entrepreneurs can already reached out to potential investors. (The first deal involving an accredited investor on the platform could come early next quarter, Barnett said.)

“We’re not making investing on crowdfunder a new disruptive thing, we’re looking to take what works in the real world,” he said.

Candace Klein agrees. As chief executive of SoMoLend, she founded a Cincinnati, Ohio-based site that allows friends, family and accredited investors to lend to small businesses.

SoMoLend (a name abridged from “Social Mobile Lend”) mostly features small, local businesses like salons and restaurants, Klein said. Lenders can search for businesses using a GPS-tracking location system — the site’s “most popular feature,” Klein said — and anonymously connect with businesses to whom they’d like to lend.

Klein said SoMoLend doesn’t plan to participate in equity-based crowdfunding, but that the SEC’s crowdfunding regulations could open her platform up to the general public, beyond just the friends and families of business owners and accredited investors who can currently lend.

Community-based crowdfunding may be compelling, Klein said, because there’s an “there’s an unspoken social pressure to repay the loan” if the lender is local. This could help keep interest rates down on the loan, she added.

Cincinnati residents Cheryl and Carlin Stamm have invested approximately $20,000 on SoMoLend — partly in a Cincinnati-based camping equipment manufacturer and also in a Louisville, Ky.-based milliner. (Cheryl is also a board member of Klein’s Cincinnati-based micro-lending organization Bad Girl Ventures.)

Though Cheryl plans to buy one hat from the milliner once the business takes off, neither invested because of any real connection to the products the businesses create, and neither are avid campers.

But the two consider loans to small businesses to be financial investments, Carlin said, and he predicts that investing locally would provide a greater return because of the long-term economic benefits to his place of residence.

Carlin said he wouldn’t rule out investing in a potentially high-growth company he found online on some crowdfunding platform, even if he didn’t have any social or local connection to them, but he would consider the investment higher risk.

“If given the choice in investing in a business that was local or in Colorado, I’d naturally choose [Cincinnati],” he said.

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Mohana Ravindranath covers IT and small business for the Washington Post and its weekly Capital Business publication.
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