Solar crowdfunding pushes way beyond the social network

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Kickstarter and the hype over crowdfunding platforms may give the impression that social media can replace the world of corporate finance, at least to some extent. But the Securities Exchange Commission is keeping startups on tenterhooks over its rulemaking for crowdfunding as part of the Jumpstart Our Business Startups Act signed into law by president Barack Obama last year.

Some argue that crowdfunding can only ever be a niche financial tool because of limitations of the JOBS Act, such a US $1 million a year cap every 12 months. A recent Forbes piece by Brian Korn, a securities lawyer, even claimed the “risks, burdens and limitations of crowdfunding render it almost completely useless”.

But sometimes a niche is all that is needed – just look at the rapid progress of crowdfunding in solar, particularly in the commercial segment of the market.

Mosaic, a clean energy finance company based in Oakland, California, has invested US$2.1 million and attracted 1,500 investors and celebrity fans to its crowdfunding cause such as Hollywood actors Mark Ruffalo and Edward Norton.

Billy Parish, co-founder and president, said that Mosaic wasn't waiting for crowdfunding rules handed down by the SEC.

“In hindsight, we made a smart choice not to build our business on a regulatory strategy around the JOBS Act,” he said. “There are a lot of crowdfunding companies on the sidelines waiting for the JOBS Act to [be implemented].

“The JOBS Act is designed for raising funds for startups and it's not very well suited to project finance – many projects are larger than the caps on the amount you can fund raise. We will continue to innovate through our own regulatory framework and we actually don't need the JOBS Act.”

During his Vote Solar presentation last month, Parish said that one major motivating factor behind the crowd was distrust in traditional finance.

“Our vision is abundant clean energy for and by the people,” he said. “We see ourselves as solving two key problems. The first is that people are losing trust in traditional financial markets… they feel like the investment game with Wall Street is rigged.

“On the one hand, we've got lots of people with a lot of money and unhappy with the options. On the other side, the deployment of clean energy is stifled by the lack of lenders in the space and the resulting high cost of capital to the industry. This is a huge pain point for most solar developers and the cost and availability of capital.”

In addition to its 1,500 investors, Mosaic has signed up a further 20,000 would-be investors, and has financed 12 projects with between US$26,000 and US$153,000. Investors receive high-quality debt and equity investments with ~4-10% yields, Parish said.

Mosaic's focus so far has been on the commercial segment of 30kW to 2MW project size where traditional banks fear to tread, such as schools, places of worship, community centres, and non-profit and municipal buildings.

“That sector of the market is particularly unbanked,” he said. “What banks are lending and investing in solar is focused on utility-scale or residential projects and it's very hard for commercial developers to get the funding they need.”

For example, non-profits, such as churches, often don't have tax equity to monetise to back an investment in solar.

Developers benefit from lower cost of capital, often 25-50 basis points below what the banks would offer and on more flexible terms, he said.

“Banks are not very interested in lending to non-profits, places of worship, schools… we're more open to looking at those types of institutions. Over time, we're also working to build the ability for developers to upload their loan applications for projects online so we can really reduce transaction costs.”

But criticism over the limitations of the crowd continues, however successful Mosaic has been so far.

Parish said that the most immediate limiting factor to scale was boosting its numbers of investors, rather than SEC regulations.

“We have a very robust project pipeline, and some amazing commercial-scale solar projects here in the US and are really focused on scaling the investor side of the marketplace – so getting from 1,500 investors now to 15,000 to 150,000,” he said.

Like Mosaic, SunFunder, founded by Ryan Levinson, also targets commercial projects, but in developing countries, rather than the US. SunFunder is also keen to describe itself as a solar finance company rather than simply a crowdfunding platform. But its barrier to scale is developing relationships with solar partners in those countries, he said.

“The biggest thing that would hold us back from scaling really quickly is our ability to develop enough strong relationships with solar companies and source great projects,” he said. “We view this an enormous opportunity; we think there's going to be the need for several hundred billion dollars in investment in off-grid solar over the next decade to alleviate energy poverty.”

In less than a year, SunFunder has launched nine projects and fully funded six projects, with one project repaid within nine months. But the off-grid market is still too nascent to deliver high-impact scale.

“But we also think it's a long-term opportunity,” said Levinson. “If someone wrote us a cheque for U$100 million today and said deploy this in the next six months to off-grid solar projects, I'd have to return that cheque because we wouldn't be able to [do it]. It's a new market, it's going to be huge, but it's also going to be a longer term opportunity.”

Another downside, albeit small, might be the fact that currently such investments are not liquid, although that should change soon, said Parish.

“Currently investments are not liquid but that's another thing we're working on where investors can sell their notes,” said Parish. “We also have shorter term investments that we'll be rolling out soon.”

Another distinguishing factor between the two companies is that Mosaic has SEC approval for accredited investors, which allows the company to return interest, but limits it to taking investments from people within the US, largely in California and New York (to a lesser extent). Without SEC approval, SunFunder has the freedom to take money from investors all over the world (33 countries so far) but cannot return interest.

While the solar crowd may think that it doesn't need the JOBS Act, it's almost certain that regulators are watching the crowdfunding leaders in this “niche” sector with great interest.

Read an interview with SunFunder's Ryan Levinson in the next issue of Solar Business Focus, out July 1

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