7 Actionable Facts About Equity Crowdfunding to Raise Capital in the U.S.
The question on the table is, is equity crowdfunding in the U.S. worth the effort, as a means of raising capital in the later part of 2016 and 2017?
I'm going to take a contrarian and therefore useful approach to this question.
Here I'm referring to crowdfunding for innovative companies, not real estate, not charity projects and not consumer loans. And here I'm referring to the sale of risky securities (such as stock, convertible debt or revenue royalties), not the sale of products or rewards ("rewards-based" crowdfunding.) Such sale of securities are called "Regulation CF" according to the SEC. Such offerings are "equity-like", that is, dependent on company performance, and therefore they are lumped into the category of "equity crowdfunding" as covered by Title iii of the JOBS Act.
Title iii of the JOBS Act became active May 16, 2016, allowing the sale of up to $1,000,000 in securities to the general public with relatively light regulatory supervision. I'm also here not referring to the more IPO-like Title iv offering - so-called Regulation A+ offerings, or "mini-IPOs," which at greater expense and effort are permitted to raise up to $50,000,000 in the U.S. This article covers only Regulation CF offerings.
So the full question is, is it a good idea to raise capital by means of Regulation CF ("equity") crowdfunding, assuming you only need to raise up to $1,000,000 in your current tranche. Common wisdom is that you've got to have an amazing product or a well-known name to succeed. What's the truth here?
The only way to know is to look at the companies that have actually succeeded and failed so far.
The most recent statistics I could find are as follows: As September 7, 2016, 82 Title III Regulation CF crowdfunding campaigns were filed with the Securities and Exchange Commission and 28 campaigns have so far exceeded their target amounts. That’s a 34% percent success rate which is many times the success rate that most rewards-based crowdfunding campaigns report.
The average investment commitment to date is about $810,000, which is more than an order of magnitude larger than the average rewards-based donation.
7 Facts About Regulation CF - aka Equity Crowdfunding
Here are the seven actionable facts we know about Regulation CF offers since they became available:
- Investors come from everywhere: Investors have participated from all fifty states with $6,949,071 invested so far.
- California leads: Over 1,700 investors have come from California alone. That’s almost three times the 483 investors from New York.
- It's not all about tech: Of the three campaigns that reached the limit of $1 million, none of them were traditional tech companies. Rather, they were a fan-owned studio, a bionic pancreas developer, and a local brewery in Austin.
- Not all platforms are created equal: Of the top five crowdfunding platforms, Wefunder comes out ahead having raised $5,532,262 (or 80% of Reg CF’s capital so far), followed in second place by NextSeed, whose campaigns have raised $816,200, then StartEngine with $338,573, SeedInvest with $170,000 and FlashFunders with$92,036. Wefunder has funded 20 offerings, while StartEngine and NextSeed have both funded three and SeedInvest and FlashFunders have funded one successful offering so far.
- Having an established community is key: Issuers who have an established community, like the on-demand stock photo platform Snapwire, do best.
- It's a liquid market: 10 of the 28 successful offerings have been alcohol-related ventures.
- Setting realistic targets predicts success: A low target goal of Regulation CF offerings has been the best predictor of success. This is not surprising, but still instructive: Companies that set lower and realistic target goals have exceeded these minimums by 423 percent.
So what can you conclude from these numbers? With so many success stories to date and the likelihood that many of the failures will later succeed after they correct deficiencies in the offers, it's fair to conclude that if you follow the leaders and do what we know works, your chances of success are high.
The idea that $1,000,000 is too small for most emerging growth companies and startups is bad thinking. Thinking creatively, the logically best way to raise capital is in a series of tranches, where each tranche is used to reduce risk substantially before you offer the next tranche, assuming you can raise enough to survive to the next tranche. So $1,000,000 can be used creatively as the beginning of a series of offers of increasing size.
Let's put our heads together and design a series of fundraising campaigns to reach your goals. Intelliversity's "Put the Fun back in Funding" high-touch training program can show you the way. 100% of the companies that followed the best practices recommended in this program have succeeded in raising the capital desired. See IntelliversityCampus.org/put-fun-back-in-funding
Chances are you'll find the beginning of a pathway to success at conferences such at the Global Crowdfunding Convention in Las Vegas, October 15 to 17, 2016 where industry leaders will gather for the first time after Title iii (Regulation CF) crowdfunding became available in the U.S. See thegccworld.com for registration. I'll be there representing Intelliversity with members of my team, to spot trends and answer questions.
Thanks for reading! Rob