Regulation Crowdfunding

Crowdfunding

For Regulation Crowdfunding, a Glass Half Full

Amy Cortese | May 16, 2018

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Two years ago today, Regulation Crowdfunding went into effect with a promise to transform the investment landscape for entrepreneurs and investors. So how’s it working out?

In the first two years, 910 businesses have used the Regulation Crowdfunding exemption (aka Title III of the JOBS Act) which allows them to raise up to $1.07 million from the general public. Before the JOBS Act, such investment was generally limited to wealthy investors, with a few exceptions.

Tens of thousands of individuals have answered the call, investing more than $120 million to date. That pales compared to angel and venture capital funding, not to mention the $5.6 billion raised through Initial Coin Offerings (ICOs) in 2017 before regulators cracked down on those deals.

For comparison sake, in the UK, where investment crowdfunding has flourished for more than five years now, 17% of all seed stage funding in 2017 came from investment crowdfunding.

Still, we see the glass as half full. More than 100,000 individuals have become crowdfunding investors, not far behind the 300,000 active angel investors in the U.S. Angel investors—wealthy individuals who professionally invest in early stage ventures—can put up bigger sums than regular investors can typically afford or are allowed under the Regulation Crowdfunding rules. But the small investments from everyday Americans can add up.

Related: JOBS Act at Six: A Progress Report

From Doughnuts to Bionic Organs, Entrepreneurs Start Raising Under Regulation Crowdfunding

Collectively, Americans have $50 trillion in stocks, bonds and other investments that was mostly unavailable to entrepreneurs until the JOBS Act went into effect. Even if just a tiny sliver of that were to be invested in crowdfunding campaigns, it would represent a vast new pool of capital.

Here are some of the more notable observations after two years of “Reg CF”:

The Portals Keep Coming

New crowdfunding portals continue to be attracted to the opportunity. To date, 41 crowdfunding portals have been approved by the SEC and FINRA, including the first African American-owned portal, Buy the Block. The Reg CF market is dominated by a handful of early entrants, namely WeFunder, SeedInvest and StartEngine, followed by Microventures/Indiegogo, NextSeed and Republic.  Some portals are specialists, such as Small Change (real estate), GridShare (renewable energy) and Honeycomb (Main Street businesses). One portal, UFP, was shut down by regulators in the fall of 2016.

Will there be consolidation? Possibly. But there may be room for many funding sites—after all, the U.S. once had more than 30 local and regional stock exchanges that raised capital for growing businesses.

Repeat Issuers

Some businesses that ran successful crowdfunding campaigns had such a good experience, they’re coming back for more. There have been a number of repeat issuers, including Meow Wolf, PlantSnap, Peli Peli, and the founders of Hawaian Ola. Legion M, a fan-owned entertainment company that conducted one of the earliest and most popular crowdfunding campaigns to date, is launching a new campaign today on WeFunder at an almost $20 million valuation. It also raised close to $2 million via Regulation A in 2017.

Geographic Mix

Entrepreneurs from all over the country are making use of Reg CF. They hail from red states and blue, rural and urban. All told, entrepreneurs in 44 states as well as Puerto Rico have launched Reg CF campaigns. Measured on volume, California leads with 287 offerings to date, followed by New York (82 offerings), Florida (65), Texas (54) and Illinois (34). But Minnesota had 7 offerings, Missouri 6, and Alabama 5. There were 6 deals in Hawaii, 1 in Alaska and 1 in Puerto Rico.

The most active cities of all time? Los Angeles and Austin, according to StartEngine.

Diverse entrepreneurs speaking at a recent Republic event

Diverse Founders

Crowdfunding is also encouraging broader participation by underrepresented entrepreneurs, including women and people of color. And portals are stepping up their efforts to court these founders.

Portals such as WeFunder and NextSeed, where 75% of issuers have been women or minority-led, have held events to engage women and diverse founders. And from the start, New York-based Republic has made a concerted effort to attract diverse founders to the platform.

Its efforts have paid off. Forty-four percent of investments on Republic have gone to female founders, and a quarter of investments have gone to companies with black and LatinX founders, according to a recent diversity report published by the portal. That compares to 13% and 1%, respectively, of venture capital dollars.

One reason for the greater support may be that 30% of Republic investors are women, according to the portal. And investors tend to support those they have an affinity with.

One example is MadeBOS, an AI-driven platform that helps entry level workers plot their careers. Founder & CEO Martha Hernández raised close to $40,000 on Republic. The majority of her 93 investors were Latino and, within that group, predominantly female. Crowdfunding, said Hernández, “provided a platform to activate my Latino community in Oakland who believed in me and wanted to do something actionable to support my business.”

For The Cut, a mobile platform “modernizing the barber shop experience” run by Obi Omile, half of the investors were black or Latinx.

“Traditional VC is overlooking trillions of purchasing power of other communities,” Caroline Hofman, COO of Republic, told Locavesting. “Maybe these companies don’t have the return profile for a VC fund, but they can still be a good return profile for us.”

Fun fact: All 3 campaigns in West Virginia were run by female founders. And in Pennsylvania and Nevada, a third of all offerings had female founders. source: StartEngine

Women, in particular, have found success via crowdfunding, especially compared to the dismal record of VC, angel and even bank financing. One broad analysis of crowdfunding found that businesses at least 50% owned by women successfully raised capital 76% of the time. According to StartEngine’s March Index, male founders raise only slightly more (3%) than female founders via Regulation Crowdfunding. While there is improvement to be made, the gap is significantly smaller than in venture capital, where men outraise female founders by an average of 58% 

Hello, Cannabis

Food, beverage, software and tech continue to be dominant categories. But the types of businesses making use of Reg CF reflect American creativity and cultural shifts. Among the popular categories: Electric vehicles, biotech, blockchain, pet care, and cannabis.

Economic Impact

The economic impact of Reg CF is hard to assess. But in calendar year 2017, issuers that filed annual reports reported creating 14 jobs on average, according to a recent study by Crowdfund Capital Advisors.  They also reported an average 131% increase in revenues from the prior year.

What about the economic health of crowdfunding portals? It’s still early, and crowdfunding portals are very much in market-building mode. But there’s no doubt that platform economics are challenging, especially for non-broker dealers handling smaller deals.

Some portals are adding side-by-side offerings, concurrent Reg CF and Reg D offerings that allow for larger deals—and fees. (Under Reg D rule 506c, offerings may be publicly advertised but can only be sold to accredited investors. There are no limits on how much can be raised or invested.)

One glimpse into the financial health of platforms comes from Los Angeles-based StartEngine, which is in the midst of a Reg A offering on its own site.  StartEngine, which handles Reg A and ICO deals in addition to Reg CF, generated just over $2 million in revenue in 2017, according to its latest financials, although it had a net loss of slightly more than that.

For more stats, see our infographic:

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Comments

  1. Great read thanks for the data. Regulation Crowdfunding has not come out of the gate like the thoroughbred I had envisioned, but it is moving along in a steady manner. My hope is to see it grow inner-city community businesses, jobs, and real estate development that promotes wealth building in undeserved communities. There are many applications and this is the one that I hope will demonstrate immense economic impact.

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