Regulation Crowdfunding has Best Month in History – July Sees Record Investments, Offerings and Investors

Online Investment Sees the Highest Month of Activity in July
Small Firms Most Affected by COVID-19 Find Ready Investors and Capital
The Time is Now for Washington to Invest Alongside the Crowd
Online investment by both retail and accredited investors into startups and small businesses was legalized by the JOBS Act in 2012. Regulation Crowdfunding, one of the provisions in the Act, allows firms to raise up to $1.07 million online each year and went into effect in May 2016. The industry was slow to gain traction but 4 years later, momentum is building. July, which has typically been one of slowest months, saw records for the highest number of offerings in a single month, the highest amount of commitments, as well as the highest number of investors.

Our data analysis signals a few things:

  1. Based on the number of firms that reference COVID-19, many companies are coming online to search for capital where they can’t get it from banks or government programs like the Payroll Protection Program (PPP). We expect this to continue.
  2. Based on the number of firms that are more than 3 years old and are revenue generating, companies see online finance as a viable alternative that puts them in control of their fundraising efforts as opposed to relying on a bank or venture capital.
  3. Market awareness about this new method of raising funds is finally gaining traction and expanding at a rate we have yet to see.

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Here is how July 2020 compares:

Offerings:

  • July is typically the second slowest month for new offerings.
  • This July was the highest month of new offerings since the industry started with 128 new offerings. This was 74 more offerings than July 2019 or a 137% increase.
  • The next month closest to that was October 2019 with 100 new offerings.
  • Since the launch of Regulation Crowdfunding there have 2,768 offerings. Of all these offerings 11% happened in the first quarter of this fiscal year.

Commitments:

  • July was the highest month of investor commitments at $23.2 million. The next closest month was October 2019 with $18.5 million. (See chart below)
  • June and May of this year were the 3rd and 4th highest months of commitments.
  • The first quarter of this fiscal year saw more commitments than the entire first year of Regulation Crowdfunding.
  • We expect this trend to continue throughout the year.

Investors:

  • July was the highest month of investors with more than 40,000.
  • According to interviews with the platforms and issuers, 80% of investors are retail and 20% are accredited and 80% of capital comes from friends, family, customers and followers.
  • October 2019 was the second highest at 39,400.
  • There have been more investors in the first quarter of this fiscal year than the first seven quarters of Regulation Crowdfunding.
  • This proves that there is an appetite among local investors to support their local businesses as more than just customers but as investors as well.


The figures above indicate that we are probably at the tipping point for the industry. More than 70 online investment platforms have registered with the Securities and Exchange Commission to facilitate these offerings. And there has been over $700 million committed to Regulation Crowdfunding, Regulation A and 506c offerings on these platforms.

According to a SEC report, there has been zero fraud. With the introduction of supporting technology platforms like LawCloud that facilitate offering documents and disclosures, more and more issuers are entering the space with the confidence that fundraising doesn’t have to be as complicated, scary or costly as it used to be. Market awareness is also growing to a point whereby issuers have a choice of which platforms they wish to approach, and platforms are building verticals to differentiate themselves in the space.

Company Statistics:

  • The average number of employees for issuers raising funds in July was 6.4. The average number of employees overall is 3.6.
  • Average revenues for companies raising funds in July was $463,000. The average revenues of all Regulation Crowdfunding companies raising funds online was $342,000.

The growth in both average number of employees as well as average revenues has been a continual trend and shows that more mature companies are turning online for their capital needs. We expect this trend to continue as the SEC proposed raising the limits issuers can raise under both Regulation Crowdfunding and Regulation A+. This will lead to larger firms turning online. (We encourage the SEC to take up the vote and adopt the amendments such that struggling firms can leverage online fundraising).

COVID-19:

  • 13 companies referenced COVID in their fundraising campaigns since March 2020.
  • Some of them provide services like food delivery, some of them were raising funds to make it through the pandemic, some were focused on technologies to enable remote learning, while others were developing diagnostics to test for COVID-19 or other telehealth services.

As we’ve seen in economic downturns in the past, opportunities are flourishing. Many of these companies are trying to survive COVID-19 with the help of community investors while others are launching new products or services to address how we will live in a post-pandemic world. We should be doing more to support these businesses.

How Washington can Help:

While our government is focused on bail-outs for big business what we need is a program to prop up and support local communities/businesses. These entities are responsible for the majority of the jobs and economic activity in cities all across our nation.

It is time for our government to create what the United Kingdom has done, the Future Fund. The Future Fund is a co-investment vehicle that invests alongside the crowd. It doesn’t pick winners but helps support business and jobs that local investors believe in. If we can encourage local businesses to seek capital from their local customers and turn them into investors while adding on government stimulus we’ve accomplished a few things:

  1. We now have a vested group of customers who will frequent those businesses (solving for the problem of how do we get customers back into businesses so they can survive)
  2. We have addressed the credit crunch these local businesses are facing (solving for the capital crisis at the local level that our government cannot address at a macro level)
  3. We have created a process to support local economies (solving for the problem of how do we get Americans back to work).
A co-investment fund will allow Washington to support local businesses in local economies all across the USA without having to pick winners or layering on unreasonable covenants that make business owners decide between taking capital or not (and risking going out of business).
Our government should carve out $1 billion or more to support these businesses.
If they did, they would be having a direct impact on communities all across the nation. Because the crowd is in control, no one should have to worry about “Washington insiders” getting all the money. And because everything is happening online with a digital footprint, we actually have a real-time understanding of where the money is going and how it was used. This type of transparency is built into the system of how Regulation Crowdfunding works and it doesn’t exist in any other stimulus program the government is backing.

If you think our government should carve out $1 billion to co-invest alongside the crowd in supporting local businesses, contact us or contact your representatives and let them know!

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