Crowdfunding Update – 2019 State of Regulation Crowdfunding

Regulation Crowdfunding Surpasses $250,000,000 in Commitments The Model is Working but its Potential is Much Greater

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:

• Capital commitments – From FY17[3] to FY18 capital commitments increased 78% from $45.7M to $81.1M. The second full FY of Reg CF saw capital commitments increase 39% to $113M. Total capital commitments to date is over $250M.
• Issuers – During the same period the number of companies seeking to raise funds increased 87% from 317 to 592 and 37% to 810 in FY19. Total issuers to date is over 1,800.
• Investors – The number of individual investors grew from 44.5k in FY17 to 92.6K in FY18 to 117.8K in FY19. Total investors to date is over 270,000.

“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.

The 2018 State of Regulation Crowdfunding COMPLETE REPORT

The 2018 State of Regulation Crowdfunding

COMPLETE REPORT

Over 100 pages of Charts, Graphs and Analysis

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.

• Blockchain in Reg CF Report
• Alcoholic Beverages in Reg CF Report
• Restaurants in Reg CF Report
• Application Software in Reg CF Report
• Entertainment in Reg CF Report
• Personal services in Reg CF Report
• Consumer packaged goods in Reg CF Report

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.

[maxbutton id=”1″ ]

Over 100 pages of charts, graphs and analysis. Including:

• Analysis of all offerings since the launch of Regulation Crowdfunding
  • Capital commitments by year
  • Investors by year
  • Successful campaigns by year
  • Average raise by year
• Breakdown of successful offerings by:
  • Geography
  • Industry
  • Type of security offered
  • Funding target
  • Maximum amount sought
  • Company revenues
  • Company earnings
  • Company assets
  • Company debts
  • Employees
  • Amount raised
    • Special Section: The $1 million club – Who are they?
  • Valuation
  • Length of campaign
  • Investors
  • Fees
    • Special Section: How much does a Reg CF campaign actually cost?
  • Analysis of proceeds by:
    • Geography
    • Industry
    • Type of security offered
    • Funding target
    • Maximum amount sought
    • Company revenues
    • Company earnings
    • Company assets
    • Company debts
    • Employees
    • Amount raised
    • Valuation
    • Length of campaign
    • Investors

[maxbutton id=”1″ ]

• Analysis of what the median Reg CF issuer looks like
  • Assets
  • Cash
  • Debt
  • Revenues
  • Income
  • Employees
• Analysis of repeat offerings:
  • Performance
  • Average raise
  • Total capital raised over time
  • Total investors over time
  • Change in company valuation
  • Change in company employees
  • Change in company financials
  • Complete list of repeat offerings including
    • Company name
    • Listing url
    • Capital raised in each offering
    • Valuation during each offering
    • Financial report from each offering
  • Annual report analysis
    • Impact on revenues
    • Impact on earnings
    • Change in employees
    • Regions with most growth
    • Complete list of annual reports including
      • Company name
      • Listing url
      • Capital raised in each offering
      • Valuation during each offering
      • Financial report from each offering
    • Portal performance
      • Geography
      • Industry
      • Funding target
      • Maximum amount sought
      • Amount raised
      • Valuation
      • Length of campaign
      • Investors
      • List of active vs withdrawn portals
        • Max offerings at time of withdraw
        • Max capital commitments at time of withdraw
        • Max investors at time of withdraw
      • Valuation analysis
        • Valuation by industry
        • Valuation by Region
        • Valuation by type of security offered
        • Valuation by number of investors
        • Valuation by revenue
        • Valuation by earnings
      • State Analysis
        • Rank
        • Capital commitments
        • Investors
        • # of successful campaigns
        • Success rate for the state
        • Average raise by state
        • Average days campaign
        • Map of company location
        • Image of commitments over time
        • Most popular industries
        • List of companies by state
          • City
          • Company name
          • Portal
          • Industry
          • Campaign summary
          • Link to campaign
          • Capital raised
          • Employees
          • Valuation
        • Recommendations for improvement
        • Special Sections – Get these industry reports for FREE
          • Blockchain in Reg CF Report
          • Alcoholic Beverages in Reg CF Report
          • Restaurants in Reg CF Report
          • Application Software in Reg CF Report
          • Entertainment in Reg CF Report
          • Personal services in Reg CF Report
          • Consumer packaged goods in Reg CF Report

[maxbutton id=”1″ ]

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.

Here’s a decision tree to help you figure out what type of crowdfunding is right for your business

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″]

How Much Does a Regulation Crowdfunding Campaign Actually Cost?

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:

1. How many total people (including yourself) worked on your campaign?
2. What would you estimate to be the total cost of putting your campaign together?

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.

1. Startups spent an average of $16,878 (median $10,600) and raised on average $319,040 ($164,375 median). Since the average raise among the survey responders ($319,040) was greater than the current industry average of $225,000, our results are biased towards issuers who raised more money.
2. The average startup had three people focused on launching their campaign. They spent on average a collective 241 hours from campaign preparation to launch and funding. This indicates there is a lot of effort required by more than one person to run a successful campaign.
3. You can estimate the costs to put your campaign page together, create your company disclosures, film the video, hire a marketing firm, lawyer and accountant at around 5.29 percent of your raise. This is much less than a typical Reg D offering would cost in legal and accounting fees alone.
4. There is a direct correlation between how much time and money is spent and how much money is raised (the more spent, the more raised).
5. No two issuers spent the same amount of time, effort, or funds on all tasks. However, the majority of time and effort went into creating the company disclosures, followed by creating the campaign page, marketing outreach, and video production.
6. The majority of issuers outsourced the legal and accounting tasks associated with putting together a regulation crowdfunding offering. Given that selling securities is a regulated process and that CPA review of financials over $100k is necessary, this makes sense.

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.

Support Innovation & Stimulate The Economy – Help us raise the Regulation Crowdfunding cap

On July 19th we submitted a letter to the Securities and Exchange Commission (SEC) providing data and analysis for why the Regulation Crowdfunding cap should be increased from US$1.07M to US$20M. The letter was signed by the largest Regulation Crowdfunding platforms in the industry as well as leading industry influencers. Since then a petition was created on Change.org by SeedInvest and it is starting to gain traction. Washington does pay attention to numbers, so we encourage you to take 2 seconds to sign the petition and share your voice as to why you support increasing the cap. Below is a letter SeedInvest’s CEO, Ryan Feit sent to all their supporters that provides further rationale.

  

---

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.

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.

Prominent Group of Fintech Leaders Send Letter to SEC Chair Jay Clayton Seeking an Increase in Regulation Crowdfunding to $20 Million

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:

• Sherwood Neiss – CCA
• Doug Ellenoff – Ellenoff, Grossman & Schole
• Youngro Lee – CEO of NextSeed
• Tyler Gray – COO of Microventures
• James Dowd – Managing Director North Capital
• Kendrick Nguyen, CEO of Republic
• Ryan Feit – CEO of SeedInvest
• Karen Kerrigan – Small Business and Entrepreneurship Council (SBE Council)
• Ron Miller – co-founder of StartEngine
• Nick Tommarello – CEO of Wefunder

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:

• Over 1,000 companies have filed with the SEC to raise money on online platforms that are registered with FINRA to facilitate capital formation.
• Over $137M has been committed to these issuers. 95% ($130.4M) of that capital was funded and invested into 715 companies (68.5% success rate).
• These 715 companies are supporting 4,172 jobs and producing over $249M in revenue.
• Issuers have filed in almost every state in the Union.
• Issuers have been funded in 80 industries (according to Morningstar’s Global Equity Classification Structure).

The cap should be adjusted because:

• There has been zero fraud, competent issuers have been able to raise serious capital from investors that believe in their products or services, and retail investors (for the first time in recent history) have a transparent, systematic way to back companies they believe in.
• Successfully funded companies are supporting and creating valuable jobs and providing substantial economic activity in a broad range of locally important industries all around the United States.
• The initial cap of US$1M was meant to be adjusted. Only once since the launch of Regulation Crowdfunding has this been adjusted and at the time only by $70,000. Such de minimus adjustments do not fully allow meritorious issuers to fully benefit from this new form of online finance nor expand the opportunity for issuers seeking to raise in excess of $1M.
• The current $1M level is now far below what startups and SMEs need for seed stage capital. May 2018 data indicates that the median sized funding round for Angel or Seed stage companies in the US is $2M. This means that even for the smallest funding round the current limits do not allow an issuer to raise their entire round via Regulation Crowdfunding. This dramatically increases costs and time spent on raising capital by US businesses. This reduces the number of American innovators and job creators in the United States.
• While the “funding gap” that Regulation Crowdfunding was meant to address is filling the void. The funding “opportunity” really comes from those small/medium firms that are seeking to raise up to $20M. Raising funds under $20M has become increasingly challenging as Venture Capital/Private Equity has moved upstream over the past decade. Raising the cap will allow issuers that wish to utilize this form of online finance the ability to raise in excess of $1M and tap their local investors without having to deal with the costly, time consuming process of either filing a full prospectus with the SEC or spending hundreds of thousands of dollars on a private offering.
• Many companies forego Regulation Crowdfunding in favor of Reg D, 506(c), because of the low Reg CF limit. This has the effect of reduced disclosure to investors, since Form D provides less information even than Form C. In addition, ordinary investors are cut out of some of the most attractive deals that have already attracted institutional funding, which seems unfair and counter to one of the goals of Reg CF.
• Both the United Kingdom and Germany have adjusted their caps to 8M EUR (US$9.4M). The United States should not be a follower but a leader

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

How to Crowdfund and Not Fall Flat on Your Face: Best Practices for Investment Crowdfunding Offerings and the Data to Prove It

Using data published by Crowdfund Capital Advisors, Zachary J. Robins wrote the following article for the Mitchell Hamline Law Review.

Find Investors and Finance Your Business with Equity Crowdfunding

ABOUT THE PRESENTER(S)

Sherwood Neiss, is a Principal at Crowdfund Capital Advisors and a Partner at Crowd Capital Ventures. He is a serial entrepreneur, investor and avid worldwide speaker discussing crowdfund investing and how to build winning companies.

Sherwood Neiss

Co-Founder, Crowdfund Capital Advisors (CCA)

Today’s best crowdfunding platforms — by the numbers

The following is a reprint of an article we wrote for VentureBeat. You can find the original here.

For startups and small businesses interesting in raising money online, it can be tough to choose a crowdfunding platform — there are so many out there. And they rank differently depending on whether you’re looking at the size the platform, the total amount of capital it has raised, its overall success rate, or the average amount the platform raises per deal.

My team decided to find out who was the leader in each of these categories. We pored over two years of data. Then we reached out to the top platforms to get their feedback. Their answers were surprisingly similar: Sourcing the best deals leads to the best results. Yet at the end of the day, the data shows one platform leads in an area that may make all the difference in the eyes of the entrepreneur: average capital raised.

Regulation crowdfunding (Reg CF) 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 a crowdfunding website that is registered with the Securities and Exchange Commission (SEC). Since its launch, nearly 1,000 companies have registered with the SEC on 50 platforms, and over $127 million has been committed to campaigns. But that funding hasn’t been evenly distributed across campaigns or platforms. Eight platforms have already gone belly up, 25 have done fewer than 10 deals each, and only eight platforms have raised over $1 million for their campaigns. Clearly, deals and dollars are flowing to a select few. Competition for quality deals is fierce among platforms, entrepreneurs are heading to the top players, and investors are looking for opportunities across industries and regions. So who are the leaders?

Category: Campaigns – leader StartEngine

Of the nearly 1,000 companies that have registered to raise money online, 50 percent chose to register on either Start Engine or Wefunder. And according to the data, it is a tight race, with StartEngine leading. According to Ron Miller, CEO of StartEngine, the platform’s success has to do with sourcing and setting expectations. “We have more successful campaigns because we source the very best entrepreneurial talent out there. We also set appropriate expectations in terms of how much work it takes to make a campaign successful, and we provide the coaching and support at each step of the process.” This sourcing and coaching probably explains why, over the past two quarters, the company’s new deal volume has surged.

Category: Capital commitments – leader Wefunder

When it comes to total amount of money raised by platform, Wefunder is the leader, with over $38 million. To put this in perspective, since the market began almost one out of every three dollars committed to all campaigns went to Wefunder. According to Wefunder cofounder and CEO Nick Tommarello, the company’s strength on this front has to do with its experience with Silicon Valley entrepreneurs and investors. “Our edge against other platforms comes from our background as product-oriented tech founders who want to empower communities, not broker/dealers who want to take a slice of a transaction. When we attended Y Combinator, we were immersed in an environment where our friends went on to start billion-dollar unicorns. From 2013-2016, Wefunder then invested in these types of startups. We had to learn how to get access to high-quality “oversubscribed” deals. Our DNA applied these lessons to Reg CF deals.” And it seems to be working.

Category: Success rate – leader Nextseed

When it comes to who closes the most deals, Nextseed leads the pack with a 93 percent success rate. Twenty-eight of 30 of its deals have been funded. Nextseed CEO Youngro Lee said the platform’s high success rate has to do with focusing on a particular crowdfunding model (debt), businesses types (retail, bricks and mortar), and immediate, easy-to-understand returns. “We viewed the passage of the JOBS Act as an opportunity to democratize private financing in local communities — allowing everyday people to invest in local businesses. We thus focused our efforts on businesses and investment terms that an average investor could actually understand and appreciate. We only work on debt crowdfunding for brick and mortar businesses, and all investments have a finite maturity and monthly payment requirements. We also seek to provide comprehensive services to our issuers throughout their campaign creation process from start to finish, including marketing and PR advice, providing templates, and supporting post-closing investor communication and payment servicing.”

Category: Average raise per campaign – leader SeedInvest

However, when you drill down and look at what really matters — how much money the average campaign raises — the data reveals something powerful. While StartEngine and Wefunder might lead in the number of successful campaigns and Nextseed in success rate, SeedInvest leads in this category, with an average raise of $435,780 per campaign. From an entrepreneur’s point-of-view, this metric is likely the most important one. SeedInvest CEO Ryan Feit said the high average raise amount comes down to extreme vetting and the investor base. “With over 37,000 accredited investors, SeedInvest is by far the largest platform in terms of the number of high net worth investors. In addition, unlike other platforms, we have family offices, venture funds, and high net worth individuals who can write checks between $250,000 and $2 million. This sets us apart from all other platforms and ultimately results in larger raises for startups on SeedInvest. We have never been interested in simply trying to list more startups than other platforms or generate the most investment volume. Historically we have only launched 1 percent of the startups that apply to raise capital, and we invest meaningful time in those startups we select.”

The bottom line

If you are a brick and mortar entrepreneur looking to improve your odds of getting financed, consider heading to Nextseed. Chances are you’ll hit your funding target and do so in less time than applying for a bank loan. If you are looking to get your campaign in front of potential backers, head to StartEngine (or Wefunder, where you’ll pay less in success fees). Keep in mind, you’re going to have to bring the majority of your investors to the deal; they don’t just show up. But if your priority is simply to raise the most money possible, try SeedInvest (and I mean “try,” since they only accept 1 percent of applicants). Entrepreneurs on SeedInvest are raising 89 percent more than the current industry average of $244,000. If you look at the last two quarters alone, investors are pouring their capital into SeedInvest deals ($9.5 million vs $7.7 million for StartEngine and $6 million for Wefunder).

Sherwood Neiss is a partner at Crowdfund Capital Advisors. He helped lead the U.S. fight to legalize debt and equity based crowdfunding and coauthored the book Crowdfund Investing for Dummies.

2017 State of Regulation Crowdfunding Report

The 2017 State of Regulation Crowdfunding –
U.S. Securities-based Crowdfunding Under
Title III of the JOBS Act[1]

Regulation Crowdfunding allows startups and SMEs to raise up to $1,070,000 per year from both retail and accredited investors by utilizing registered funding portals (or broker-dealers) to conduct exempt offerings online. This exemption requires issuers to file in a Form C and post online disclosures about a company’s operations, team, financials and other material information for investors to review. Regulation Crowdfunding started in the United States on May 16, 2016. The second calendar year for the industry ended on December 31, 2017. Because data about issuers, their financial wellbeing, and the capital that is committed is public information we can analyze the data and bring transparency to a segment of the markets (exempt private offerings) that has been fairly opaque until the JOBS Act went into effect.

Show me the CCLEAR Regulation Crowdfunding Dashboard

Key findings:

• The number of unique offerings increased 267%[2] from 178 in 2016 to 481 in 2017
• Proceeds increased 178% from $27.6 million in 2016 to $49.2 million in 2017. Total proceeds by the end of 2017 was $76.8 million
• The number of successful offerings increased 202% from 99 in 2016 to 200 in 2017
• The average success rate of offerings to date is 66.7%
• The total number of investors in Regulation Crowdfunding increased 158% from 28,180 in 2016 to 44,433 in 2017
• Issuers that filed annual reports and reported creating jobs created on average 13.9 jobs.
• Revenues for Issuers that filed annual reports increased on average 131% between the year in which they leveraged Regulation Crowdfunding and the Prior Fiscal Year.

Analysis:

• The results of this data show that the market, while still in its infancy, is growing at a rapid pace.
• The velocity of capital into funded offerings appears to be steady without showing signs of abnormal activity or irrational investor behavior.
• The rapid increase in the number of offerings and investors proves that there is appetite for Regulation Crowdfunding from both issuers seeking capital as well as investors looking to diversify.
• Given the high success rate for offerings, Regulation Crowdfunding represents a very structured yet viable alternative for access to capital for startups and SMEs.
  Given the ability for firms to leverage capital raised to scale operations and create jobs, Regulation Crowdfunding should be promoted by local Chambers as well as the Small Business Administration.
  Given the lack of irregularities or fraud, Regulation Crowdfunding (and the structure under which it provides for transparency), should be advocated by policy makers and government organizations.

Conclusion:
2017 represented a strong first complete calendar year for Regulation Crowdfunding. We expect the industry to exceed $100M in funded offerings during the first quarter of 2018. When considering the growth of securities-crowdfunding globally, we expect the market to reach $1B in funded offerings within the next 5 years. This can be further supported by making adjustments to the exemption that would allow for greater issuer caps.

In looking for how to consider the growth rate and size of this market over time, one can look at the UK market for data. With now 5 years of active equity crowdfunding in the UK, according to Cambridge University’s Center for Alternative Finance, in 2017, 17% of all seed stage capital in the UK came via equity crowdfunding. The CCLEAR database will continue to track these markets both domestically and globally as we begin to offer services to other regulators outside of the United States.

Download the full report here.

[1] This report is an excerpt of a report we wrote for the Securities and Exchange Commission (SEC) that summarizes the year end cumulative results for Title III of the JOBS Act (aka Regulation Crowdfunding)
Show me the CCLEAR Regulation Crowdfunding Dashboard

[2] Given Regulation Crowdfunding started on May 16, 2016, the first calendar year of Regulation Crowdfunding only encompasses 7 ½ months. Had it been a full calendar year, this growth percent would have likely been lower.

10 reasons the $1 million crowdfunding cap should be $20 million

The following is a piece we wrote for VentureBeat. The original can be found here.

10 reasons the $1 million crowdfunding cap should be raised to $20 million

It’s been18 months since the final rule of the JOBS Act went into effect, allowing equity crowdfunding. In those 18 months, everything proponents of the rule said would happen (and none of what the detractors said would happen) has become a reality. Over $82 million dollars of previously untapped capital from local investors has been committed to over 650 companies. No fraud has been perpetrated. And everyone (including investors, the Government, the Securities and Exchange Commission, and the media) has more insight into the private capital markets than has ever existed before, bringing a new level of transparency, accountability, and data analysis. This is the time to raise the maximum a company can raise from $1 million to $20 million.

Why? Entrepreneurs all across America are finally raising funds faster than they could through traditional channels. Investors now have a transparent and efficient way to support local businesses that they love and believe in by receiving information about these offerings online. Regulators have transparency into the private capital markets, an auditable trail of disclosures, and a digital footprint full of data. And our government has a jobs engine, a way to promote women- and minority-run businesses, an economic booster, and a tax engine. Not bad!

So if it’s working, why raise the cap to $20 million? Let me explain:

1. We can make it a bigger jobs engine. Data from companies that have been successful with an equity crowdfunding offering shows they hire on average 2.7 people within 90 days of a $300,000 raise. That’s about one job per every $100,000 raised. If we increase the cap to $20 million, that could equate to 200 new jobs for each issuer that raises $20 million. So raising the cap would make equity crowdfunding the Main Street jobs engine we expected it to be.

2. It will provide regulators with more transparency. Companies that raise money via equity crowdfunding file specific disclosures about their businesses, their operations, and their financial wellbeing. All of this is digitally recorded, and For the first time in 80 years, regulators can actually see where capital is flowing in the private capital markets, which can allow them to further protect investors. Increasing the limit to $20 million will attract larger firms that seek more capital down this public path. This means regulators AND investors will have real-time actionable visibility into a larger part of the private capital markets.

3. Startups can make a bigger impact. $1 million dollars is nice, but consider how much more a company can do with $20 million. Increasing the cap doesn’t mean every company would get $20 million (currently only about 50 percent of companies are successful with their campaigns and raise on average $300,000), but those that are worthy and can win over the support of the crowd can take on much greater goals.

4. Communities will get more engaged. Want to know how to engage local communities? Make them investors in the local businesses that are not just mom and pop shops but large employers and high-growth startups. They will have a vested stake in the performance of those companies, and by default these businesses will benefit from the marketing power of the community. Increasing the cap to $20 million gives local investors a greater stake in their local communities. Research shows that money invested locally circulates in the local economy rather than being sucked out.

5. We’ll see gender and minority benefits. Data my firm has been collecting proves that equity crowdfunding is democratizing access to capital among women- and minority-founded businesses. Increasing the cap to $20 million means more capital to this underserved group of founders.

6. Investors can diversify their portfolios. Increasing the cap to $20 million will give investors the ability to diversify more into their own communities. This doesn’t mean they should take all their investments out of the public markets, but why not put it into a local company that might be less likely to be impacted by fluctuating oil and commodity prices?

7. More data analytics. More data online means more opportunity to analyze it and present it to consumers of media. This data analytics can educate new issuers, give investors more opportunities to compare companies in similar industries and show our government where the greatest economic impact is taking place.

8. It will fix Title IV, Tier I of the JOBS Act. Title IV, Tier I allows companies to raise up to $20 million online from both retail and accredited investors but requires state review. Getting one state approval is slow and cumbersome. 50 is nearly impossible and insanely costly. Increasing the limit to $20 million will solve this problem and still provide state regulators information, disclosures, and data on all companies raising money from investors in their state.

9. It will allow the platforms to experience their true potential. Platforms are playing the role of intermediary incredibly well. As an extra benefit, they are acting as a vetting mechanism, only listing deals that meet minimum criteria and working to make sure issuers provide full and robust disclosures. Increasing the limit to $20 million will further enable these platforms to play this vital role and earn the fees to help support their operations.

10. Address the emerging blockchain/ICO nightmares. Let’s face it, there is a lot of uncertainty about blockchain and ICOs from regulators and Washington. This is particularly true given the amount of capital flowing through this unregulated industry. Increasing the cap to $20 million will allow ICO issuers that wish to sell security tokens on the blockchain a regulated process to follow. The emerging ICO marketplace would have an approved regulatory process to follow, giving blockchain startups the opportunity to sell their security tokens and give investors confidence that they aren’t risking their capital without some recourse.

Let’s not wait. The SEC should update the amount now or Congress should intervene to do so.

Sherwood Neiss is a partner at Crowdfund Capital Advisors. He helped lead the U.S. fight to legalize debt and equity based crowdfunding and coauthored the book Crowdfund Investing for Dummies.