Recently, my company crafted a report for the US Securities and Exchange Commission that summarizes progress on Title III of the JOBS Act of 2012, also referred to Regulation Crowdfunding or Reg CF. This newest securities exemption was added to the options that smaller companies could utilize to raise both debt and equity capital within the US.
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. At the end of 2017, there were 36 FINRA approved crowdfunding portals.
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.
Key findings of our report:
- The number of unique offerings increased 267% 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 $100 million in funded offerings during the first quarter of 2018. When considering the growth of securities-crowdfunding globally, we expect the market to reach $1 billion 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 and a recent report by the US Department of Treasury advocated to enact an increase in the cap and other improvements.
In looking for how to consider the growth rate and size of this market over time, one can look at the UK crowdfunding 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. In the US, we should expect, at a minimum, to match what has been accomplished across the Atlantic.
Jason Best is co-founder and Principal of Crowdfund Capital Advisors (CCA), Jason Best co-authored the crowdfund investing framework used in the JOBS Act to legalize equity and debt-based crowdfunding in the USA. He has provided congressional testimony on crowdfunding and was honored to attend the White House ceremony when President Obama signed the JOBS Act into law on April 5, 2012. Jason co-founded the crowdfunding industry trade group that works with the Securities and Exchange Commission and FINRA as they create the rules for crowdfund investing. Jason also works with angel groups, PE/VC firms as well as governments and NGOs, including The World Bank, to understand the crowdfunding ecosystem and create successful crowdfund investing strategies. He was instrumental in the successful effort to have CCA selected by the US State Department’s Global Entrepreneurship Program as a Key Partner.
Sherwood “Woodie” Neiss, is co-founder and Principal of Crowdfund Capital Advisors, is an expert at building successful businesses. As a 3-time INC500 winner whose company won E&Y’s Entrepreneur of the Year, Sherwood understands the keys to entrepreneurial success from concept to company to sale. As a serial entrepreneur and investor during the credit crunch, Sherwood saw a need for a change in outdated securities laws and did something about it—as a co-founding member of Startup Exemption, Sherwood co-authored the Crowdfunding Framework used in the JOBS Act that was signed into law by President Obama on April 5, 2012. Within Crowdfund Capital Advisors (CCA), Sherwood works with clients ranging from governments and banks that are looking for ways to boost economic development in their countries to investment firms looking for access to increased deal flow that crowdfunding creates. Sherwood serves as an advisor to several crowdfunding platforms and crowdfunding technologies giving him a unique understanding and view of the industry and market. As an industry leader, Sherwood contributes to several publications including VentureBeat and TechCrunch. He additionally wrote Crowdfund Investing for Dummies through Wiley & Son’s.