There are a lot of buzzwords associated with equity crowdfunding. We’ve all heard that Equity Crowdfunding will democratize the financial system. But there’s little discussion on the tangible outcomes that capital markets can bring to local economies. 

Access to risk capital is one of the biggest challenges facing the economies of small to mid-size cities. CityLab spotlights the concentration of venture capital. Others highlight the economic divergence between wall street and main street. It is helpful to explore how a lack of capital impedes growth outside of the major metros.

Below are some examples:

A local tech entrepreneur might look to scale up a new product. Without risk capital at the early stages, they cannot compete with counterparts in larger metros. This creates, in a sense, a monopoly that larger cities hold on the new economy. Entrepreneurs with a more grounded vision and approach to their space are left out. They can’t compete. If two entrepreneurs start as competitors, the company that can raise 2x or 3x the amount of capital hasan almost insurmountable advantage.

In small to mid-size cities many of the markets underperform or are broken due to years of disinvestment. This includes commercial, residential, and industrial real estate, but also other markets vital to a revitalized new economy such as arts, tech, and the creative industries. Art markets are likely not formed in small to mid-size cities, but also media. For every investment bank in New York City, there is a production studio equally concentrated in Hollywood. Arts, culture, and heritage are essential to demographics seeking to re-urbanize.  

Open, local markets can also improve capital access in small business and home ownership. If capital is sourced locally, wealth stays within the region. There are additional sectors that fall outside scalable tech startups and real estate. Succession and healthy consolidation in manufacturing is an overlooked space. Local economic developers in the Northeast often lament that lack of ownership transition that occurs because the next generation does not have the capital to buy the firm.

Transparency and Resiliency for Capital Markets

Since the financial crisis, Wall Street and corporate America are not well respected on Main Street. However, the nature of reporting in public markets injects transparency into the ongoing governance of these companies. Finance is one incentive for companies to go public. In return, corporations must open up their books.

We need more transparency in how small to medium sized businesses operate, and equity crowdfunding provides an incentive for more transparency in how local companies operate. Companies that are held accountable by shareholders or who disseminate financial or performance data to investors are likely better run. They can weather shocks.

There is also an important consideration from the investor’s perspective. Right now, all of the country’s wealth funnels itself right toWall Street. The fragility of the crisis as evidenced in the financial crisis of 2008 and 2009 is because assets are so concentrated within the financial system. A small group of banks makes investment decisions for the savings of the entire country.  

Adding the 500,000 plus small businesses to asset markets diversifies the asset base. This diversification is at the very least geographical in nature, an important consideration for a world confronting climate change, rising sea levels, and an increase in severe weather events.