VIDEO: How to Save America’s Small Businesses/Local Economies by Turning Customers into Investors

Sherwood Neiss’ interview with Devin Thorpe

SEC Makes Emergency Amendment to Regulation Crowdfunding Rules to Help Restore America’s Small Businesses

The $62.5 Billion Dollar Main Street Co-Investment Fund that could reemploy 20 Million Americans within 60 Days

While well intentioned, a significant portion of the first round of PPP funds did not reach Main Street businesses. We need to expand a financing service already up and running in the US since 2016 that is 1) targeted at true small businesses;  2) fast – that can be rolled out in 60 days or less; and 3) harnesses communities in partnership with the government to reopen businesses that we all count on in our daily lives. How do we know it will work? The British government has run a similar program for the last 4 years with great success and no fraud.

The Federal Government can form a partnership with online investment platforms to leverage the power of Regulation Crowdfunding (Reg CF) to immediately launch a $62.5 billion dollar co-investment fund. Reg CF allows small businesses to raise money from any American as long as companies provide disclosures and leverage platforms that are registered with the Securities and Exchange Commission (SEC). This tool has been in the works for 4 years now and there has been no fraud. Most importantly, it supports small businesses in communities all across the United States in over 80 industries and supplies critically important jobs.

Why $62.5 Billion? Consider this:

1. According to data from companies that have leveraged Reg CF, the average small business employs around 7 individuals.
2. Between independent contractors and support vendors that provide critical products and services an additional 49 employees are supported (according to data from Paychex).
3. This is a total of 54 direct and indirect jobs created and supported by each small business.
4. If there are 27 million people that filed for unemployment, that’s 500,000 business affected (27 million unemployed / 54 jobs supported per business).
5. If we assume on average they need $250,000 cash to get back up and running, the crowd comes in with $125,000 and the government matches up to $125,000 that the crowd invested. That’s $62.5 billion from the local community ($125,000 * $500,000 businesses) and $62.5 billion from the government.
6. Together with the crowd that would be a $125 Billion dollar investment into local communities. These businesses would re-employ those individuals that lost their jobs. The money would reinvigorate these local economies.
7. The Crowd and government could be repaid in full, with interest, over an agreed upon period of time.

How would it work?
A co-investment debt fund could engage local customers/citizens to invest in local businesses they use and trust. These lenders would have a vested interest in the outcome of the business and hence would be frequent users and brand ambassadors for the business. By investing $1 from the fund for every $1 that came from the crowd, the cash infusion would double and the oversight would be greater than traditional debt investments from banks.

This type of program could be implemented fairly quickly. Since the technology and regulation is already in place and operating, it could be immediately launched. Since the platforms that exist are already registered with the Securities and Exchange Commission as well as FINRA these platforms are known entities. The regulation already requires that companies seeking funds have disclosures necessary to inform investors so investors aren’t making blind decisions. And the framework requires that companies exceed minimum funding targets that they set, so if a company fails to reach its minimum funding target, no money is transferred to them and the crowd doesn’t lose. A co-investment fund could start as a trial and then expand if successful, thus mitigating risk and also increase speed to market.

Strategy 
The Federal government would work with online investment platforms to co-lend to America’s small businesses and entrepreneurs. The loans could be up to $500,000 with the crowd able to fund up to $250,000 and the Federal Government to match the loans, dollar for dollar, up to $250,000. (A majority of the loans would be less than $500,000 … with the mean loan being around $250,000 with half coming from the local community).

In 2012, the JOBS Act was enacted on a bipartisan basis to create new sources of funding for small businesses and entrepreneurs. There are now over 50 online funding platforms that  enable entrepreneurs and small businesses to raise money from local investors, customers, and fans. These funding portals enable businesses to raise money via debt or equity (stock) instruments. The platforms are licensed and regulated by the SEC and FINRA. This provides infrastructure to activate this program immediately.

Investment Instruments Available
While there is no limit on the type of securities a company may issue under Reg CF, it is suggested that initially, bonds, debt and revenue-based financing vehicles would be the types of securities for this pilot program.

Repayment Process
This program would be similar in structure to the PPP program, but more targeted to small businesses.

• The maximum funding is to be determined by the Federal Government. If the pilot program is deemed successful, it can choose to expand the program over time.
• The Federal Government could choose to forgive part or all of their portion of the funding.
• Funds are repaid in full, first to private investors.
• The Federal Government is repaid after all private investors have been repaid.
• The Federal Government can choose to forgive part or all of the loans.  Examples would be to forgive 50% or 75% of the government’s portion of the loan, providing the private sector has been fully repaid on time.

Oversight
As with any type of financing, oversight is critical. The following key levers will provide oversight for the program:

1. Fund manager provides oversight on fund operations and works with the fund administrator to deliver periodic reporting to the appropriate government agency on fund performance and operations.
2. Fund managers engage with platforms to provide oversight.
3. Portals provide oversight on individual company diligence.
4. Community investors provide oversight on company performance.

We need bold action now.  This program can quickly deliver capital to the small businesses that puts millions of Americans back to work, and delivers services that everyone will depend on to start feeling some sense of normalcy back in our lives.

For details of a draft plan, contact us.

Innovative Way Federal (or State) Government(s) Can Support Small/Medium Enterprises During the COVID Cash Crunch – A $250 Million Co-Investment Fund

After almost 4 years in action, Regulation Crowdfunding has not only proven to be a successful model for investing into startups and small businesses but how such investments can mitigate risk, invigorate local economies and provide critical jobs. Since May 2016, almost half a million individuals have invested over $360 million via Regulation Crowdfunding into 1,4000 businesses in over 80 industries across the United States. Despite the collapse of the public markets since the beginning of the Coronavirus pandemic, the private markets have been resilient. This is some positive news as now is the most critical time for small businesses that are struggling to stay afloat, are in a cash crunch and have nowhere to turn as government programs for small businesses run out of fuel. Crowdfunding platforms like Wefunder and Nextseed have created programs to leverage the power of the crowd to assist businesses during the COVID crisis. But there is more that our government can do … and not as a bailout but as a partner to small businesses. The government could leverage one of the tools in its tool chest, the Small Business Investment Company (SBIC) program, to develop a new $250 million co-investment fund that will invest alongside the crowd where campaigns hit their funding targets. If the government invested $1 for every dollar that was invested into local economies, that would be a half a billion dollar boost to regions of the country that are most impacted. Think about that in terms of economic activity and jobs.

Why the SBIC Program?

This isn’t about creating something new that the government is unfamiliar with. This is about finding something the government is already doing and expanding it to apply to the current crisis. It is also about layering on new methodologies (i.e. Regulation Crowdfunding) to existing practices such that the risk is less for the government. The SBIC is a program that helps finance small businesses. An SBIC is a private lending company which is licensed and regulated by the Small Business Association (SBA). SBICs offer venture capital financing to higher-risk small businesses and SBIC loans are guaranteed by the SBA. An added advantage of SBICs for small businesses is that, in addition to funding small business growth and more jobs, SBICs offer management expertise and assistance to companies. SBICs are privately owned and managed investment funds, licensed and regulated by the SBA. These companies use their own capital, along with funds borrowed with an SBA guarantee, to invest in qualifying small businesses. SBICs use a combination of funds raised from private sources and money raised through the use of SBA guarantees to make equity and capital investments in small businesses. The SBA matches SBIC funds at the rate of $2 for every $1 the SBIC puts in.

How Could this Work with Regulation Crowdfunding Platforms?

Crowdfunding platforms could apply with the SBA to be “Limited SBICs.” The approved platforms would have access to the $250 co-investment fund. In order for small businesses to qualify for co-investment funds they must meet certain criteria. For example, it might be required that a crowdfunding campaign hit its minimum funding target or a minimum dollar amount (like $50,000 from the crowd); that a certain number of investors be part of the offering, that those investors have a 1^st or 2^nd degree connection to the company, etc. Triggers like this will mitigate risk for the government by making sure there is an engaged group of investors looking out not just for the company but their investment as well. In a way, the crowd will act like the SBIC management company by providing capital and oversight.

Companies on the crowdfunding platforms could apply for matching funds from the “Limited SBIC COVID Co-Investment Fund.” Since the crowdfunding platforms don’t handle any funds (funds are held in escrow) they could notify the SBA when a company qualifies. Depending on how much the company has raised, the “Limited SBIC COVID Co-Investment Fund” would come in with a matching investment. This money would be automatically transferred to the company.

Since the crowd is “investing” in these offerings. The government would be investing as well. A popular type of investment vehicle that works well for cash flowing small businesses is a revenue share note. With a revenue sharing note, investors can earn a multiple on their principal, such as 1.2x (each deal has a different potential return). Businesses pay investors a small percent of their monthly revenue (for example 3-6%) over a set period of time (usually 4 years) or until the multiple is paid. Revenue sharing notes could work particularly well for businesses in crisis because when revenue is slow, paybacks (that are based on a percent of revenue) are lower as well. This eases the cash burn on these establishments. Then when business picks up, the note repayments pick up as well. Hence when these COVID affected businesses are back up and running, customers will be short-term investors, we will have saved local economies, businesses will have cash to survive and thrive, they will also be generating revenue and be able to repay their loans. Most importantly the money the government put up will be returned to the government with interest as opposed to all these current loan forgiveness programs.

Conclusion

The government could support startups and small businesses affected by COVID (and keep local economies invigorated as well as people employed), by creating a co-investment fund that matches (perhaps $1 dollar by US Government to every $1 by the crowd) into local businesses that raise funds to keep them going.  A $250 million co-investment fund could then equate to $500 million invested into local economies. The government won’t be taking all the risk. The community is sharing in this risk. And because these local investors have a stake in the outcome of these local businesses, they will visit them and be marketing agents for them such that they thrive (and the investors get a return on their investment).

If this seems innovative, it isn’t. Right now, governments like Malaysia already do this with any company that is raising funds under their equivalent Regulation Crowdfunding regimes. Now is the time for fast acting solutions, this could be one of them.

Crowdfunding Update – How Regulation Crowdfunding Stood up to the First Weeks of Coronavirus –Almost Opposite of the Public Markets

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 the 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.

Crowdfunding Update – SEC Proposes Increasing Reg CF Cap to $5 Million!

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:  raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million; amend the investment limits for investors in Regulation Crowdfunding offerings by: not applying any investment limits to accredited investors; and revising the calculation method for investment limits for non-accredited investors to allow them to rely on the greater of their annual income or net worth when calculating the limit on how much they can invest. For Regulation A:  raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million. For Rule 504 of Regulation D:  raise the maximum offering amount from $5 million to $10 million. “Test-the-Waters” and “Demo Day” Communications.  The Commission proposed several amendments relating to offering communications, including: a proposed new rule that would permit an issuer to use generic solicitation of interest materials to “test-the-waters” for an exempt offer of securities prior to determining which exemption it will use for the sale of the securities; a proposed rule amendment that would permit Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the Commission in a manner similar to current Regulation A; and a proposed new rule that would provide that certain “demo day” communications would not be deemed general solicitation or general advertising. 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.

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.

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″]

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.

  

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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.

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)

4 Questions that Show Where U.S. Entrepreneurs are Succeeding with Regulation Crowdfunding

(The following is a reprint of a story we wrote for Crowdfund Insider. The original can be found here)

The first Fiscal Year of Regulation Crowdfunding has come to an end and our data continues to deliver valuable information for investors, founders and government officials. Overwhelmingly, California has taken the early lead in Regulation Crowdfunding from both an entrepreneur (aka issuer) and investor point-of-view. Currently, Texas is in second place and New York is third. If you are an entrepreneur in any of these states, you have an increased chance that potential investors in your network/community may be familiar with Regulation Crowdfunding already.  States including Idaho, Connecticut, Massachusetts, Utah, Alabama, Colorado and West Virginia also have higher than average number of backers which may indicate a warming of those markets to Regulation Crowdfunding over the last 12 months.

Which States Have Built an Early Lead in Number of Campaigns?

As the image above shows, as of June 30^th California leads. Of the 399 total offerings across the USA, California had 34% (134) of the total. Behind that is New York with 30 offerings and Texas with 29. The fact that California is 447% higher in the number of offerings than New York shows that there is much more awareness about Regulation Crowdfunding in California than anywhere else.

Digging a little deeper, the data shows us that almost 50% of the companies were based in greater Silicon Valley area – (an area replete with Angel Investors). This might be due to a few reasons: a) The ingrained startup culture in the region with entrepreneurs flocking to the area b) Since there are many startups in Silicon Valley they are actively competing for investor dollars and c) Because VCs are now requiring more “social proof” of a company’s business model, companies are turning to Regulation Crowdfunding as that evidence.

Texas demonstrates similar city concentration effects within the state because the clear majority of the offerings are split between Austin and Houston. (A full breakdown by City, State and Industry can be found here).  Again, these are 2 cities in Texas that have significant experience in Angel investing/risk capital deployment.  Austin has more experience with Angel investment in technology companies, and Houston has significant experience in deploying risk capital for early stage oil and gas ventures.

Which States Lead in Dollars Raised?

The top 4 states in total funds raised via Regulation Crowdfunding are: California ($20.3M), Texas ($6M), Massachusetts ($3.5M) and New York ($2.7M).  While California may lead in the number of offerings and the overall dollars committed they do not lead when it comes to the average amount raised by campaign. If we look at data from campaigns that closed and exceeded their Minimum Funding Target, (and we require at least 5 successes in a State to add some credibility to the averages) we find that Massachusetts leads the way with $445k on average (n=6), followed Texas $312k (n=15), New York $278k (n=6) and then California $255k (n=54). The average of all successfully funded campaigns for the first fiscal year was $302k. The takeaway here: In the first year, entrepreneurs in Massachusetts and Texas raised more per campaign than the national average. A key reason stakeholders in those states should be promoting Regulation Crowdfunding as an alternative for of fundraising.

Which States Have Engaged the Most Investors?

Next, we look the size of the crowd that is investing in 2 ways:  First, the total number of investors in the state. California led the way with over 21,750 people investing in Regulation Crowdfunding campaigns. Texas followed with 4,500 investors, New York with 3,900 investors, and Connecticut with over 2,500 investors. Interestingly, Massachusetts, Utah, Delaware, Colorado, Alabama, Idaho, Washington and Ohio all had over 1,000 backers.

Second, we looked at the average number of investors in a campaign, by state.  Interestingly, Massachusetts leads with the highest average number of backers 595, followed by New York (518), California (368) and Texas (352).

Which States Have Investors Making the Largest Average Investments?

Finally, we answer the question where do investors write the largest checks? Texas leads with the average check size of $1,364 for campaigns that hit their Minimum Funding Target. Colorado at $1,154, Delaware follows at $962 followed by California at $847 and New York at $537.

Is this early data?  Yes, this is just the first years’ worth of data.  Are the number of campaigns still small at this point? Yes but they are growing every day and we have controlled the data where possible for statistical significance.  Is there any indication of where this may lead? Sure.  When we look at the UK data, we can see significant market growth in years 2 and 3 regarding campaign size, total number of campaigns, and average investment.  We expect to see similar dynamics in the US over the next 12 months.  Will we see different states building expertise in using different types of securities or becoming more successful in crowdfunding different industries?  The data is beginning to show that to be true. Will the time to reach funding goals decrease over time as more people become familiar with securities-based crowdfunding?  Stay tuned…we will continue to report on the data to provide early signals to the market.

Looking for Regulation #Crowdfunding Data? Email: Sherwood@theccagroup.com for more information.