Regulation Crowdfunding, the law that ushered in mainstream crowdinvesting, turns three today. And while it might not be growing by audacious leaps and bounds, it’s not a slacker, by any means.
Regulation Crowdfunding, a centerpiece of the 2012 JOBS Act also known as Title III, allows small businesses and startups to raise up to $1.07 million from everyday investors. Before the JOBS Act, such investment was generally limited to wealthy “angel” investors, with a few exceptions. Since the law went into effect on May 16, 2016, 1,688 separate investment crowdfunding campaigns have been launched—with 778 of those taking place in the last 12 months.
More than 243,000 individual investors have been moved to invest close to $230 million into these ventures, according to Crowdfund Capital Advisors (CCA). By comparison, there are roughly 300,000 active angel investors in the U.S. The actual amount invested is less, as only campaigns that successfully reach their minimum funding target receive the funds. Roughly 60% of investment crowdfunding campaigns are successful.
The average amount raised by a business via Regulation Crowdfunding to date is $221,000, slightly down from last year’s average of $246,000. California leads in activity, both in number of deals and amount raised, followed by New York, Texas, Florida and Colorado. All but three states—North Dakota, Kansas and Nebraska—had Reg CF offerings.
CCA estimates the Reg CF has supported more than 9,000 jobs to date.
Fulfilling its Potential
Still, some lament that Reg CF, as its called for short, hasn’t lived up to the expectations many had in 2012, when the nation was still recovering from the financial crisis and there was pent up demand to move money from Wall Street to Main Street.
Collectively, Americans have $22 trillion in corporate stocks and bonds, according to a recent Fed report, and another $26 trillion in retirement accounts. If just 1% of that was shifted to Main Street businesses, that would be $480 billion—with a B—for the small businesses and startups that energize the economy and might otherwise not get funding from traditional sources.
“The Reg CF market should continue to grow each year,” predicted Ryan Feit, the founder and CEO of New York-based SeedInvest, one of the more prominent investment crowdfunding sites. However, startups and funding portals are currently constrained by the $1.07 million limit on capital raises, he said. “In order for it to truly scale, we need to increase the cap.” Thousands of people have signed a petition started by SeedInvest to raise the limit.
Other provisions of the JOBS Act, such as Regulation A (Title IV) and Regulation D 506c (Title II) allow for larger amounts to be raised, but at more cost for issuers, in the case of Reg A, or restricted to wealthy investors in the case of Reg D. Others say the problem lies with stringent caps on individual investments, including by accredited investors, under Regulation Crowdfunding.
Advocates have also lobbied for more flexibility for funding portals to “curate” companies that list on their sites (right now only broker-dealers can do that) and to group crowd investors into a single entity. Bills to address these perceived flaws have been kicking around Congress, but have not been a top priority.
Women and Mom & Pops
Still, there continue to be new entrants attracted to the investment crowdfunding space. There are now 43 funding portals currently regulated by FINRA and the SEC, up from 41 last year. Notably, some of the newest entrants are run by women, including Crowdfund MainStreet and Buy the Block (along with SmallChange, a real estate crowdfunding site founded in 2016). Buy the Block has the added distinction of being the first African American-owned funding portal. EnrichHER, a new site, is also owned by an African American woman, but is not yet active.
Some of the newcomers have chosen to focus on Main Street-type businesses, often with a preference for loans and revenue share deals (rather than equity or SAFES). These include Pittsburgh-based Honeycomb Credit, Salem, Mass.-based Mainvest and Oakland, CA-based Crowdfund MainStreet. “We want to give people an opportunity to invest in their backyard,” said Ben Blieden, Mainvest cofounder and CFO.
In a sign of the market’s maturity, there has been some inevitable consolidation. Indiegogo, the popular rewards-based crowdfunding site, ended its experiment with Reg CF crowdfundung last year, quietly exiting from First Democracy VC, a partnership between Indiegogo and Microventures. Startwise, a women-owned funding portal that focused on small businesses, also shut down.
In what may be a sign of things to come, SeedInvest, a broker-dealer platform that handles Reg CF as well as Reg D offerings, was acquired by Circle, a crypto and digital finance company with $250 million in venture backing. “We believe that tokenizing startups can take things to another level and turbocharge equity crowdfunding,” said Feit.
And Houston-based NextSeed continued its evolution, from intrastate crowdfunding to Reg CF to, most recently, Reg A and Reg D offerings via a new broker-dealer entity, NextSeed Securities LLC. That will allow it to help businesses raise more money and to offer Reg CF campaigns alongside a private offering for accredited investors.
One of the obstacles to wider adoption of crowdinvesting has been the lack of liquidity—you can’t just trade shares of a private company like you can when you buy a share of, say, Apple, stock. In April, SeedInvest became the first Reg CF portal to receive a regulatory greenlight to conduct secondary trading through an ATS, or alternative trading system. Feit hopes to begin offering trading by the end of the year.
Other portals, including StartEngine, are experimenting with secondary trading of crowdfunded shares as well.
Speaking of tokens, the initial coin offering (ICO) bubble, like the Bitcoin bubble, has deflated, and coin and token offerings have been brought under the regulatory umbrella. This has taken many forms, with everything from stock-plus-token offerings to SAFTs, a twist on the SAFE (Simple Agreement for Future Equity). But as blockchain-based tokenization evolves, the watchword for now remains caveat emptor.