18 Mar Raising Venture Capital for Oil and Gas Investing
CROWDFUNDING PLATFORMS ARE STARTING TO GAIN A FOOTHOLD IN OIL AND GAS INVESTING
PHILIP RACUSIN, ENERGYFUNDERS, HOUSTON
Crowdfunding isn’t a new concept – investors have pooled their resources to back projects for hundreds of years. One of the most famous early records of crowdfunding dates all the way back to the 1700s, when Gulliver’s Travels author Jonathan Swift set up the Irish Loan Fund to provide loans to low-income families in rural parts of the country. However, having received its stamp of approval from the SEC just a few short years ago with the implementation of Title II of the JOBS Act on Sept. 23, 2013 and issuance of important advisory memos, crowdfunding as we know it today is a fairly recent means of raising venture capital.
Since the regulation changes, crowdfunding platforms haven’t wasted any time gaining a solid foothold in the investment marketplace. Crowdfunding has experienced epic growth in the few years it has been available to investors and project proposers-with total funding volume more than doubling year over year since Title II’s adoption and The World Bank estimating crowdfunding will reach $90 billion by 2020.
So, what is crowdfunding in the modern sense? How does it stack up against traditional means of financing and what does the emergence of this new method of raising capital mean for the future of the oil and gas industry? Let’s take a look.
HOW CROWDFUNDING FOR OIL AND GAS INVESTING WORKS
Crowdfunding is the practice of raising many small amounts of money from a large number of people to ultimately create a substantial source of capital for funding a project or venture. Nowadays, it’s typically accomplished through leveraging powerful fintech platforms capable of connecting investors and projects with a level of efficiency that would not have been remotely possible in Jonathan Swift’s time.
By its very nature, crowdfunding encourages community. The purpose of this fintech technology is to bypass middlemen and make it easy for investors to connect directly with projects they want to support. To that end, crowdfunding is an especially interesting concept in the oil and gas industry for two reasons:
Traditionally, energy has represented an investment class with an impossibly high price to participate that would leave all but the super-rich-or massive corporations with money to burn-balking with sticker shock. Crowdfunding allows for investors to play the game with much lower table stakes. For example, the fintech crowdfunding platform EnergyFunders allows investors to support various types of oil and gas drilling and re-working projects with a minimum of just $5,000. A lower cost of entry per project allows investors to spread risk across a wider number of projects to more effectively diversify their portfolio. This has proven popular with investors as its last eight projects have been fully funded.
Crowdfunding affords smaller oil and gas operators with a platform for generating capital that requires very few resources on their end. This is a crucial benefit for smaller oil operators who lack the massive fundraising arms the large oil and gas companies have at their disposal. Crowdfunding puts fundraising on autopilot for smaller operators so that they can focus on what’s most essential-driving growth in their business.
In essence, crowdfunding levels the playing field and makes room for more participants in the investment pool. With crowdfunding, it’s no longer a wading pool-it’s an Olympic-sized infinity pool complete with swim-up bar and volleyball net.
CROWDFUNDING VS TRADITIONAL FINANCING
With traditional financing, several steps are necessary before the project can secure the cash it takes to move forward. These include, but are not limited to, filing the appropriate regulatory documents, paying any fees required by the state and federal government, marketing the project, securing legal counsel to draft legally compliant contracts, meeting with individual investors and maintaining communication throughout the project, and calculating payout to each investor. Some of these steps can take several weeks to complete.
With crowdfunding platforms, most, if not all that extra legwork falls into the crowdfunding company’s court. This frees up operators to do what they do best: drill for oil and gas and sell it to the market for a profit. Investors benefit from this lack of extra overhead, too, because it means their investment dollars go into the revenue-generating work of successfully developing and running the project rather than the administrative tasks that pull the operator’s energy away from the task of, well, actually producing energy.
Crowdfunding also takes the pressure of intensive research off investors. The best platforms vet projects internally, often through a highly rigorous process involving industry experts, as it’s essential to the crowdfunding platform’s success to cultivate projects with the greatest probability of success. This allows investors to review opportunities with confidence they might not enjoy if required to delve deeply into each project’s intricate ins and outs themselves, as they would with traditional financing.
WHAT THE FUTURE OF CROWDFUNDING MEANS FOR THE FUTURE OF ENERGY INVESTING
In his book, The Prize: The Epic Quest for Oil, Money, and Power, Daniel Yergin put it quite eloquently:
“Whatever the twists and turns in global politics, whatever the ebb of imperial power and the flow of national pride, one trend in the decades following World War II progressed in a straight and rapidly ascending line-the consumption of oil. If it can be said, in the abstract, that the sun energized the planet, it was oil that now powered its human population, both in its familiar forms as fuel and in the proliferation of new petrochemical products. Oil emerged triumphant, the undisputed King, a monarch garbed in a dazzling array of plastics.”
As the demand for energy and oil and gas continues to rise, human innovation and technological advances have stepped up to meet the challenge of raising the capital required to supply it. It stands to reason that these same technological advances will become a crucial tool to financing advances in sustainable energy production methods to ensure supply can keep up with demand as we enter further into the new millennium. After all, extra capital also equates to additional resources toward exploring greener, more efficient means of meeting demand for energy and oil and gas.
ABOUT THE AUTHOR
Philip Racusin is the CEO of EnergyFunders, an online marketplace in which capital investment and energy projects come together. A seasoned litigation and outside general counsel attorney, he has represented clients from individuals to large companies in a variety of legal disputes for nearly a decade. At EnergyFunders, Racusin uses his legal and business background to navigate the oil and gas and securities industry’s regulatory waters and guide the business through its mission of offering pre-vetted projects and democratizing access to oil and gas investment.
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