The Coronavirus is taking the financial markets by storm. It began its attack on the public markets around February 12th. Since then, the markets have dropped 30% off their highs and have made wide swings from one day to the next. It has been one of the most volatile periods in history. While we have yet to see how everything will play out, it is encouraging to see that this volatility has seemingly not had the same impact on private funding online. The data shows that people are still investing in their local businesses via online platforms. And their numbers are growing year over year. This will play an important role as we emerge out of this pandemic. We wanted to understand what is happening, so we dug into the data, reached out to a few platforms, and this is what we learned.
Since February 12th, over $11.6 million has been invested into over 320 active companies, who are raising money on 13 online investment platforms. Over 21,000 investors have made individual investments into these companies. Comparing this to the same period last year, $9.8 million was invested into 227 active companies on 17 platforms by over 11,000 investors. There were 41% more active companies during the same period last year. The amount invested was up 16.3%, and the number of investors engaged was up 90%. All of these select private market indicators were up despite the public markets being in a free fall.
The image below shows period over period activity from February 12th to March 18th. What we see is that, despite the volatility in the public markets, this segment of the private capital markets appears to be withstanding the negative impacts … for now.
There have been several breakout companies during this period of public volatility. The list below shows the top 10, who they are, where they are based, where they are raising funds, and how much they’ve raised during this period.
Company | City | Listing URL | Amount Raised Between 2/12/20 and 3/18/20 |
Mightly Quinn’s | Passaic | https://www.seedinvest.com/mightyquinns/series.b | $1,075,619 |
Lost Spirits | Vernon | https://wefunder.com/lost.spirits | $1,070,000 |
Black Sands Entertainment | Brooklyn | https://wefunder.com/black.sands.entertainment | $480,000 |
Ample Foods | San Francisco | https://republic.co/ample-foods | $295,836 |
McSquares | Denver | https://wefunder.com/mcSquares_The_Art_Of_Whiteboarding | $282,207 |
Neurohacker | Carlsbad | https://wefunder.com/neurohacker | $277,529 |
Called Higher Studios | Franklin | https://www.startengine.com/called-higher-studios | $274,730 |
GenesisAI | Allston | https://wefunder.com/genesis.ai | $263,725 |
Copperworks Distilling | Seattle | https://wefunder.com/copperworks.distilling | $259,637 |
Fisher Wallace | New York | https://www.startengine.com/fisherwallace | $249,693 |
We asked some of the platforms for their thoughts on why the private capital markets might be operating differently from the public ones. Ryan Feit, CEO of SeedInvest, shared an interesting perspective. As he put it: “Sentiment is good. Venture will freeze up and entrepreneurs will need to utilize alternative sources of capital more than ever. On the investor front, the public markets will undoubtedly take a toll but given that the private markets have a low correlation to public and with interest rates at zero, hopefully people will continue to shift capital away from traditional assets.”
Chuck Pettid, CEO Republic Crowdfunding Portal, said “Investors may be starting to turn more to private markets because their numbers don’t move so rapidly as we’ve seen in the public markets.” Over the past week he’s heard that “Investors are looking for more long-term stability and when I see this being repeated it ends up being a theme.” Given the high volatility in the public markets this might be a reason to increase one’s diversification. “Sure some startups will fail but not in one day,” he says “it will take time.” When asked why he thinks people are investing, he shared “People are looking to diversify while some are investing strictly out of support. They want these businesses to be around and these investors can play an important part in America getting back on her feet.” When asked if he’s sees any correlation between the markets he remarked that the periods where the stock markets took deep dives, they saw very little investments happening on their platform but when it picked up, so did their volume. And while investors in this segment of the private markets can cancel their investments he acknowledged that they are seeing very little of that.
Jonny Price, Director of Fundraising at Wefunder felt “It is too early to tell. While he could certainly see how this crisis would lower investment volume March 2020 has been is our best month ever already.” He also agreed with Pettid and Feit above by stating, “You can make a case that when the stock market is crashing, investors will seek alternative investment opportunities. And when conventional sources of capital dry up (e.g. VC), more founders might turn to their fans and customers for capital.” His last thought was most poignant, “High level — if there was ever a historical moment for a democratic and people-powered financial system, this would seem to be it.”
We will continue to monitor this segment of the private capital markets to see how they are impacted. We will also share with you stories coming from both the platforms and There have been several breakout companies during this period of public volatility. The list below shows the top 10, who they are, where they are based, where they are raising funds, and how much they’ve raised during this period.
companies raising money on them that are focused on COVID-19. In the meantime, it is heartening to see that investments haven’t trailed off. At some point we will come out of this downturn, when we do these startups and small businesses will play an important role in helping to reinvigorate local economies and provide valuable jobs. Two of the things that seem most impacted by the coronavirus to date.
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We are excited to share with you today’s press release by the Securities and Exchange Commission with long awaited improvements to Regulation Crowdfunding as well as other exempt offerings. These changes should significantly increase the utilization of online finance in the United States over time.
In particular, we are thrilled that the years we have spent in Washington, DC advocating for changes and represented in letters and reports from the Treasury Department have resonated with the Commission. The changes outlined below will make the industry more appealing to issuers, allow the industry to scale and make online fundraising more efficient. Many thanks goes to the hard working people at the Commission.
Over the last 4 years, the data that CCA has collected on the industry has clearly shown that these offerings are conducted in a secure, efficient and nearly fraud-free market. This demonstrates the importance of a common data standard for the industry to enable transparency in the markets for regulators and investors. Other governments around the world should take note of these newly expanded rules as they contemplate their own opening of the private capital markets.
According to the press release, here are the highlights:
Offering and Investment Limits. The Commission proposed revisions to the current offering and investment limits for certain exemptions.
For Regulation Crowdfunding:
For Regulation A:
For Rule 504 of Regulation D:
“Test-the-Waters” and “Demo Day” Communications. The Commission proposed several amendments relating to offering communications, including:
Regulation A and Regulation Crowdfunding Eligibility. The proposal includes amendments to the eligibility restrictions in Regulation Crowdfunding and Regulation A. These proposed rules would permit the use of certain special purpose vehicles to facilitate investing in Regulation Crowdfunding issuers, and would limit the types of securities that may be offered and sold in reliance on Regulation Crowdfunding.
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It has been just over 3 years since Regulation Crowdfunding (Reg CF) went into effect and most recently the industry surpassed a quarter of a billion dollars in commitments. Since inception over 1,800 companies in cities all across the United States have filed to raise money under Regulation Crowdfunding. Over 271,000 investors, most of which are friends, followers or customers of these businesses have made commitments to start, scale or expand operations. The average raise stands around $237,000 which firmly addresses the Valley of Death[1] issue. Most of the successful companies are raising funds in less than 90 days which is far faster than other forms of financing like Venture Capital or Bank Loans. There’s been no fraud or Wild West as opponents had claimed. “Essentially we built a financing mechanism which is doing exactly what we said it would,” said Sherwood Neiss Principal at Crowdfund Capital Advisors (CCA) “We’re funding local businesses with a vested group of local investors that is creating local jobs and powering local economies.”
Regulation Crowdfunding began on May 16, 2016. It allows any startup or small business to raise up to $1,070,000 online from family, friends and followers (accredited or not) provided issuers use an online investment platform that is registered with the Securities and Exchange Commission (SEC) and disclose information about their company and financial wellbeing.
Since the industry began, Crowdfund Capital Advisors has been collecting information on every offering in its CCLEAR Database. CCLEAR is the leading Regulation Crowdfunding database that collects, cleans, aggregates and reports on all companies seeking funds via Regulation Crowdfunding as well as those doing parallel 506(c) offerings[2]. This information includes financial performance, security offering, valuation, industry, daily commitments and number of investors. The information is summarized and published on a daily basis on the CCLEAR Regulation Crowdfunding dashboard.
Here are some key data trends:
“No matter how you look at it, there’s been an impressive growth of at least 150% in 2 years,” says Neiss. “If we extrapolate out over the next 2 years, we estimate that over 3,400 companies across the United States will receive half a billion dollars by over half a million investors.”
CCLEAR captures a maximum of 56 different industries from Advertising and Marketing, to Healthcare and Utilities. During the first fiscal year there were 44 industries represented. That number increased to 47 last fiscal year. While application software, alcoholic beverages, business services, consumer packaged goods, entertainment, personal services and restaurants were the most common industries seeking funds, financial services, business services, employment services and retail saw the greatest increase in offerings between the first and third fiscal years. “The wide representation of so many industries speaks to the broad appeal of regulation crowdfunding to both companies seeking and investors looking to deploy capital,” says Neiss. “No matter what industry you are in, if you have an engaged group of customers that could be investors, Regulation Crowdfunding is something you should explore.” Companies in 48 of the 50 States have registered to raise funds via Reg CF.
From an employment perspective, the data shows that Reg CF continues to sustain and support local jobs. In the first fiscal year over 1,482 jobs were supported. This grew by another 3,150 in the second fiscal year and another 4,448 in the third. “Collectively almost 10,000 jobs have been supported around the United States since the launch of Regulation Crowdfunding,” says Neiss. “We expect this number to grow by another 10,000 in the next 2 years. 20,000 jobs means 20,000 people employed by local businesses and reinvesting their income back into these communities through mortgage payments, groceries, dining out, education and more. This is how we support local economies. And we are doing it despite the current $1M cap on company raises. Imagine what we could do if we increased these caps from $1M to $5M, $10M or $20M? It is easy to see how we could increase this from 20,000 to 200,000 jobs.”
While not all Regulation Crowdfunding companies are revenue generating those that are had over $400M of Revenue in their most recent fiscal year. “Given that the majority of these firms are growing and reinvesting their earnings, you can only imagine the multiplier effect that this has on local economies,” says Neiss. “Businesses are reinvesting into their local economies by purchasing goods and services to support them and hiring employees. And employees are using their paychecks to support themselves. Together we estimate they are pouring close to a billion dollars into local economies.”
“You would think everyone would be thrilled about this and talking about it much more,” says Neiss. “If Washington really wants to help small businesses and our economy, they have this hidden gem whose potential has yet to be discovered and promoted.” Major industry players sent a letter to the Securities and Exchange Commission during the summer of 2018 seeking to raise the cap from $1M to $20M, as of yet there’s been no response.
[1] The Valley of Death commonly refers to funding that is needed for businesses that is above that which can be personally supplied by the founders and is less that that which is commonly provided by Venture Capital. It is typically from $30,000 to $250,000.
[2] A 506(c) offering is an online accredited investor offering. A parallel offering allows an issuer to run two offerings side-by-side and group the accredited investors in one pool and the Reg CF investors in another. This type of offering is popular for issuers that seek to raise in excess of the $1.07M cap in Regulation Crowdfunding.
[3] We consider the first fiscal year of Regulation Crowdfunding from May, 2016 – April, 2017.
2018 was a solid third year for Regulation Crowdfunding with triple digit growth all around. There were 680 unique offerings, up from just 178 in 2016. Since inception, approximately $194 million in total proceeds was raised. The average amount raised across all firms is approximately $270,000. California leads the way in terms of deals and funded capital. Firms reported creating 2.9 jobs, and saw revenues increase 137%.
But that just scratches the surface on what is poised to become a billion-dollar industry in the next 5 years. In this full report we dig into the who, what, when, where and why of Regulation Crowdfunding. We answer questions like how does location affect raise? What industries are the most successful with Reg CF? What does the average Reg CF company look like? And how do Reg CF valuations compare to early venture finance?
Special Sections – Get these industry reports for FREE. They break down the industry by capital commitments, investors, valuation, top raises and more! More importantly we provide a link to every successful campaign within that industry so you can dig into their disclosures on your own.
Want to see the complete report? Here’s your chance to pre-order the full report with charts, images, and complete analysis.
The full report is estimated to be out the end of February 2019.
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Over 100 pages of charts, graphs and analysis. Including:
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The full report will be out the end of February, 2019. You must pre-order it in order to receive a copy. The discount price is only available for pre-orders and is only available on a limited basis.
People often group crowdfunding under one umbrella. In reality there are 5 very different types of crowdfunding. If you want to use it for your business or startup it is important to know which one is right for you. This decision tree will help point you in the right direction. [zingtree id=”186220336″ style=”panels” hide_title=”yes” persist_names=”Restart” persist_node_ids=”1|5″]
The following is a reprint of a story Sherwood Neiss wrote for Venture Beat. The original can be found here. The full report is available for paid download:
I wrote this article because I was irritated by reporters calling me and saying, “I’ve heard that a Regulation Crowdfunding campaign is very expensive.” “Really,” I’d say? “Can you tell me who said that and how much is ‘very expensive’?” This was usually followed by an awkward silence and then an “Um, I don’t know. It’s just what I’ve heard.” So, I decided to answer the question myself since I have access to all the successful regulation crowdfunding campaigns.
I created a survey, emailed 485 campaigns owners (also known as issuers), and received 81 responses; a 16.7 percent response rate. So, we will consider these preliminary findings. I asked two main questions up front:
I then broke the campaign down into the following tasks: creating the copy and graphics that appear on the campaign page, creating company disclosures (like the pitch deck, business plan, product or service overview, financials, and cap table), creating the campaign video, marketing and PR, and finally hiring legal and accounting help to create the offering memorandum, investor agreements, file Form C with the SEC, and review financials/provide opinion letters.
I asked about how many people worked on each task, time spent, cost, and any comments they had. I summed up the data and analyzed the results.
Here are the key findings.
So if you are raising the current average amount of $225,000, you can expect to spend $11,902.50. An amount that actually seems quite realistic for that amount of money (and for the effort required to raise that money). It is also an amount that is NOT very expensive when considering the alternative options in the private capital markets.
Chart One: Average Resources (Individuals) Required Per Activity
Chart Two: Average Time (hours) Allocated Per Activity
Chart Three: Average Breakdown Costs (US$) Per Activity
Based on this preliminary research, I’ve put together the following chart outlining the amount a company should budget for its fundraising campaign based on how much it hopes to raise.
Keep in mind that, just because there is a correlation between the more time/money spent and the amount raised, you shouldn’t just spend the maximum amount in an attempt to hit the maximum funding target – it doesn’t work that way. Crowdfunding comes down to marketing and who you know, so work on managing your expenses and focus your efforts on pulling in as many supporters to your campaign as possible.
We have shared below what we believe are a few of the most compelling arguments for expanding Regulation Crowdfunding. If you agree with our findings, we ask that you show your support by signing the petition to increase the Regulation Crowdfunding cap.
Since the passage of The JOBS Act, access to capital for early-stage startups and small business has actually become more challenging. Over the past six years, seed-stage venture capital managers have moved up-market to launch larger funds and invest in later-stage deals. This trend has resulted in a vacuum at the traditional Seed stage, as well as a corresponding, sharp decline in investment activity. After a couple boom years (2013-2015), the number of traditional Seed stage deals declined 41% and the number of dollars invested has also declined dramatically1.
Meanwhile, as early-stage venture funds decline, the number of companies looking to raise early-stage capital has actually increased, leading to a supply-demand imbalance. As a result, there is large demand from companies looking to raise $1-$20 million through non-traditional channels, but regrettably, the current regulatory framework is untenable. Unfortunately, Regulation Crowdfunding is capped at $1 million and Regulation A+ requires substantial upfront costs and disclosures as well as onerous ongoing reporting and audit requirements. As a result, Regulation A+ is not a great fit for companies which are not looking to raise a more significant amount of capital.
Studies have shown that these high growth startups which need to raise $1-$20 million are the very same companies which create jobs in America. Recent SBA research suggests that these companies, which typically have 20+ employees and have been in operation for one to five years, play a significant role in net job creation. We frequently encounter these types of companies that have already raised an initial round of $500k to $1 million and are now looking to raise $5-$20 million in order to accelerate their growth and hire rapidly.
Proof From Abroad
In the United Kingdom, equity crowdfunding has been around for five years longer than the US and has a higher, $10 million maximum-resulting in a much more robust dataset than exists in the US. What we see in the UK is that equity crowdfunding has now become the preferred way for startups and small business to raise capital. In fact, the Cambridge Centre for Alternative Finance recently found that in just a few years, equity crowdfunding has grown to account for a whopping 17% of all seed and venture stage equity investment in the UK. Furthermore, equity crowdfunding has clearly helped to bolster the innovation and job boom in the UK over the past seven years, with the Centre for Economic Performance at the London School of Economics reporting that two thirds of the new jobs in the UK since 2008 have come from small and medium businesses.
In the US, although we have less data, we have also seen healthy results over the last two years. So far, 715 companies that support 4,172 jobs have raised capital through Regulation Crowdfunding. In addition, early findings suggest that women and minorities have had much greater access to capital, as well as higher success rates, through equity crowdfunding than through traditional channels.
Furthermore, despite meaningful fundraising activity through Regulation Crowdfunding, there have been zero reports of fraud thus far. Back in 2011 and 2012, during our discussions on Capitol Hill, it was suggested that the $1 million Regulation Crowdfunding cap was merely a starting point. At this point, there is sufficient data to show that equity crowdfunding has been effective at providing greater access to capital for startups and small business without materially increasing the risk of fraud. But the true potential of equity crowdfunding is still critically constrained by the arbitrarily low fundraising cap of $1 million per year. In The U.S Department of The Treasury’s October 2017 report, A Financial System That Creates Economic Opportunities, Treasury recommended increasing the Regulation Crowdfunding cap and pointed out that the SEC has the requisite authority to do so. Like The Treasury, we ask that the SEC consider revisiting and raising the current cap.
If you agree with these points, I encourage you to read our letter to the SEC and to add your support to our Change.org petition. Please also help us spread the word to fellow entrepreneurs and investors. In a few weeks we plan to share the list of supporters with Chairman Clayton which will hopefully prompt additional dialogue with the SEC.
The following is a reprint of a story regarding the letter CCA coordinated to increase the Regulation Crowdfunding cap to US$20M. The original can be found here.
In a letter forwarded to Securities and Exchange Commission (SEC) Chairman Jay Clayton, a group of Fintech leaders demanded the Commission to increase Regulation Crowdfunding (Reg CF) from the current $1.07 million max amount to $20 million – a substantial increase to current rules. The demand to increase Reg CF, an iteration of securities crowdfunding that was created by the JOBS Act of 2012, comes at a time when there is pressure for the US to maintain is position as a leader in investment crowdfunding the space. As pointed out by the signatories, both Germany and the UK have increased their crowdfunding threshold to €8 million (USD $9.4 million). The European Commission may move to make this a pan-European threshold with some EU insiders pushing for a higher amount.
The letter was sent under the letterhead of Crowdfund Capital Advisors (CCA), co-founded by Sherwood “Woodie” Neiss and Jason Best. The two founders were vital to the passage of the JOBS Act when President Obama signed the bill into law.
Neiss told Crowdfund Insider;
“Each of the parts of the JOBS Act served a niche well except for those companies that liked the idea of crowdfunding from Main Street investors without the costs of a Title IV (Regulation A+ offering). By increasing the maximum an issuer can raise to $20 million under Regulation Crowdfunding, we can now fill this void and allow a broader spectrum of small issuers into the marketplace. With 2 years of history and data under our belt, we can see that the system is working, capital is flowing, jobs are being created and money is being pumped into our economy. Rather than ask for another de minimus increase in the cap, let’s raise it to an amount that will really allow the industry to take off but in the same systematic and transparent way that benefits issuers, investors, and regulators.”
Neiss, in an email to Chair Clayton, said “the United States should not be left behind, but should make the bold move to increase the cap to $20 million.”
The SEC has the ability to act and such a move would most likely have the support of much of Congress and most likely the Executive branch. The question is whether, or not, Chair Clayton will be willing to take such a bold move that will clearly support small business and capital formation – a policy area Clayton has consistently said is one of his top leadership priorities.
The letter to Chair Clayton was signed by the following crowdfunding industry leaders:
The letter is available for download here and is re-published below.
July 19, 2018
The Honorable Jay Clayton
Chairman
U.S. Securities and Exchange Commission 100 F Street, NE
Washington, DC 20549
Dear Chairman Clayton:
We compromise the largest online crowdfunding platforms and industry influencers in the United States. Given the positive early results since 2016 for both entrepreneurs and investors, we believe the time has come to raise the maximum amount an issuer can raise via Regulation Crowdfunding (Reg CF) from US$1M to US$20M. Please keep in mind that during the 2 years of this new exemption there has been no fraud and very limited regulatory issues.
Since the launch of Regulation Crowdfunding:
The cap should be adjusted because:
In a FINRA live chat with Robert Cook you said, “I continue to worry that retail investors do not have access to as broad a slice of our capital markets as I would like them to have. Said another way, you have private capital and public capital. Retail investors can really only participate in the public capital, and to the extent private capital has become so robust, you’ve shrunk opportunities. That bothers me a bit. If that trend continues, a much more select group is participating in the growth of the economy.”
We believe increasing the caps on Regulation Crowdfunding will address your concerns and invite more retail investors into a systematic, transparent part of the private capital markets that is creating jobs and providing valuable economic stimulus.
We kindly urge you to adjust the maximum amount an issuer may raise to $20M. Sincerely,
Sherwood Neiss, Crowdfund Capital Advisors
Doug Ellenoff, Ellenoff Grossman & Schole
Youngro Lee, CEO NextSeed
Tyler Gray, COO Microventures
James Dowd, Managing Director North Capital
Kendrick Nguyen, CEO Republic
Ryan Feit, CEO SeedInvest
Karen Kerrigan, Small Business and Entrepreneurship Council Ron Miller, CEO StartEngine
Nick Tommarello, CEO Wefunder
Using data published by Crowdfund Capital Advisors, Zachary J. Robins wrote the following article for the Mitchell Hamline Law Review.