Think of crowdfunding and the first thing that is likely to come to mind are those small denomination charitable fundraiser sites on social media like GoFundMe. That site, though, has had many successful campaigns raising surprisingly large sums – Las Vegas Victims Fund, $11.9 million, Humboldt Broncos junior hockey team bus accident tragedy, $17.2 million. And, the largest of all previous fundraisers was the “Times Up” Legal Defense Fund, $22.1 million. Businesses, not only tragedies and causes, can use the power of crowdfunding also. In fact, according to Crowdfund Insider, securities-exempt small businesses raised over $23.2 million in the month of July alone, the highest month of investor commitments ever achieved – an average of $342,000 per company. These investments were made by an approximated 21,000 investors and were spread over 13 different crowdfunding platforms. The Significance of Crowdfunding to Private Equity
Crowdfunding, What Exactly is It?
The Significance of Crowdfunding to Private Equity
Simply put, crowdfunding is the process of individuals and businesses raising money online from a multitude of people willing to invest in a variety of needs – from emergencies to funding real estate projects, to funding new businesses, etc. This funding comes in three basic categories: Reward crowdfunding to receive a gift, Debt crowdfunding to loan funds, and Equity crowdfunding to buy into a portion of ownership.
Crowdfunding in Private Equity
Crowdfunding became relevant to private equity capital raises in the wake of the 2008 financial crisis that set in motion a series of bills in congress intended to revitalize the economy. In 2012, the Jumpstart Our Business Startup Act (JOBS, https://www.sec.gov/spotlight/jobs-act.shtml), was the first in a series of bills and adjustments designed to make it easier for companies to go public and for private companies to raise capital. Title III of that Act known as the Crowdfund Act (Reg CF, https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm) paved the way for small businesses to use crowdfunding to raise capital. In 2015, Regulation A of the Securities Act (Reg A, https://www.sec.gov/smallbusiness/exemptofferings/rega) allowed qualified companies to engage in equity crowdfunding to offer and sell securities at two different levels. Tier 1 companies became enabled to raise up to $20 million annually with their investment circular reviewed by the SEC without ongoing audited reporting. Tier 2 companies could now seek to raise up to $50 million while meeting SEC audited reporting requirements. Then, in 2018, Regulation A+ was enacted to preempt state laws and enabled Tier 2 companies to solicit unaccredited investors as well. Each year crowdfunding under these regulation adjustments has gained traction not only among startups, but also with an increasing number of established, revenue generating companies. These companies are now turning to crowdfunding as an alternative source of capital that puts them in greater control of their finances than turning to banks or venture capital. The Significance of Crowdfunding to Private Equity
How Does Private Equity Crowdfunding Work?
Equity crowdfunding capital raises are conducted by businesses selling securities ranging from convertible notes to revenue shares to debt. The securities must come from a private company that is not, therefore, traded on any stock exchange. Prior to these regulation changes private equity funding was limited to qualified investors only, because of the large sums of investment they were required to make. Now, however, investors can participate with much smaller investment required, as low as $1,000 in many cases. This accounts for the tremendous growth in the appeal of equity crowdfunding. It is common for equity crowdfunding early-stage companies to issue shares to raise substantial sums by individuals contributing relatively small amounts. Shares of company stock are then issued to individual investors proportionate to the amount of their investment. The issuing entity’s valuation is a function of the dollar amount raised compared to the amount of equity being offered. This enables an investor to realize appreciation in value if the entity grows, and potentially realize a substantial return on investment upon the entity’s liquidity event – selling or conducting and IPO. Via crowdfunding companies can also use a combination of equity, equity and debt, or debt only. Debt crowdfunding is more common, of course, in later stage companies that have accumulated assets during their growth years. The Significance of Crowdfunding to Private Equity
Finding the Top Equity Crowdfunding Sites
Here is a sampling of the top equity crowdfunding platforms that appeal to accredited investors and those that appeal to unaccredited investors as well. In all cases investors are required to provide their identity, income and asset verification to participate in listed company funding rounds.
One of the oldest equity crowdfunding platforms, originally founded to connect high-net-worth (HNW) investors with emerging tech companies, offers three primary ways to invest in listed companies. Deal-by-Deal investments align a pool of investors with a lead investor, often a Silicon Valley venture capitalist, to make low six figure investments in a single offering. The AngelList Access Fund which for a $100,000 minimum puts investors into a diverse variety of individual opportunities. And, there is a service for professional investors with a $500,000 minimum.
Lead by a former credit manager for Dell and PayPal, Bill Clark, MicroVentures has over 110,000 investors funding 400+ companies with over $220 million. Minimum is $100 with a strong emphasis on fintech companies. And, because this platform allows secondary trading, it has landed some high profile companies such as Airbnb, Robinhood and Palantir.
One of biggest names in crowdfunding, Kickstarter has raised over $5 billion with over 182,000 projects funded since its founding in 2009. In its all-or-nothing platform investors set a goal and timeframe and are not charged unless their campaign goal is met.
The founders of Wefunder have been instrumental in promoting crowdfunding legislative changes. While most crowdfunding platforms require a $1,000 minimum, Wefunder has a $100 minimum requirement. Staff evaluations/recommendations are provided for early-stage companies in the biotech, clean energy, insurance, logistics, retail and packaged foods industries. Metrics include business models, financials, and interviews with company leadership.
SeedInvest, which has also had a strong influence on regulation changes that now extend higher value offerings to unaccredited investors, has over 300,000 investors with over 200 companies funded. This platform specialized in a limited number of highly vetted opportunities, claiming that only 1% of companies that apply are accepted. Individual investments can start as low as $500.
Crowdfunder has approximately 200,000 members with a total of over $160 million raised. With an average deal size of around $1.8 million, only accredited investors are accepted. Investments can be in individual deals or in an index fund for portfolio diversity. Primarily focus is technology opportunities with consumer products, green energy and real estate deals available as well.
Republic has over 500,000 investors and over $100 million invested in companies ranging from real estate to blockchain to the global event series for entrepreneurial women, Sheworx. In the first half of 2020 Republic has seen a 42% jump in investment opportunities it offers.
With focus strictly on real estate PeerRealty features mostly commercial or multi-family developments. Minimum is $5,000 on single or multi-property portfolios for transactions through its escrow system. PeerRealty offers one of the few secondary exchange programs in crowdfunding for current investors to have the option of selling their shares to other PeerRealty investors.
This platform matches investors with startups that have a tangible product – primarily in consumer and retail products companies in high growth stage – through a machine learning program that helps them evaluate a massive amount of data points on a target company’s business model, management, financials, etc. Investments, which are made directly or in a “CircleUp” of many companies, are usually in the six or low seven-figure range, with minimums as low as $250.
According to an SEC report cited in the Wall Street Call, there has been zero fraud found in any of the prominent crowdfunding platforms as more offering documentation and disclosures are constantly becoming available to investors.
How Much Do Equity Crowdfunding Sites Charge?
Revenue for these platforms comes primarily from fees charged listed companies – a small percentage of overall earnings. In an all-or-nothing crowdfunding model, the company receives no funding unless the campaign goal is met. Investors pay fees including annual investment management fees and processing fees in the range of from 3% to 5% per transaction.
Help in Choosing the Best Equity Crowdfunding Platform
The upside of equity crowdfunding is easier access to capital for early-stage companies. There are potential downside risks, of course, that we help our clients work out when they are considering taking this route when investing or seeking funding.
- Are you ready to share your ownership stake in a company with scores of other investors? Managing large numbers of small investors brings challenges in costs, logistics and management time. For companies at the Tier 2 level, described above, reporting and auditing responsibilities can prove costly as well.
- As in any private equity investment, careful due diligence is required. The due diligence service Crowd Check investigates online security offerings to determine legitimacy and legal compliance. They find continuing gaps in the due diligence process of crowdfunding listings including the fact that as many as 40% of all companies did not have properly vetted financials. Efforts like the Crowdfunding Intermediary Regulatory Advocates are working to set industry standards, particularly as they will apply to valuations and compliance.
- From the descriptions of platforms, above, equity crowdfunding alternatives exhibit strengths from experience in specific verticals. It is imperative to understand the focus and strengths of platforms under consideration.
- How do the equity crowdfunding platforms select the companies to feature? Do they accept most any applicant to let investor decide whether or not to participate? Or, is there a selection criteria that benefits investors, the companies seeking funds, and the platform facilitating the transaction.
- Legal advice – consult with a law firm skilled in structuring legal documentation associated with the level of risk of the investment being contemplated.
- A Competent Investment Advisory – preferably an advisory experienced in equity crowdfunding that is thoroughly familiar with the industry trends that will affect future ROI.
Recently amended regulations to the Securities Act have cleared the way for early stage companies to access capital. Entrepreneurs now have equity crowdfunding to enable initial and growth capital raises on a path potentially quicker and less complicated than traditional funding sources – with exposure to thousands of potential investors along the way. There is no question, however, that equity crowdfunding is riskier than traditional sources of funds. Turning to competent advice for guidance with appropriate due diligence is still the first step in capitalizing on this rapidly growing source of capital for the immediate needs of emerging businesses.
How We Can Help
At Highway 33 Capital Advisory we excel at structuring deals to meet client investment strategies in trending segments like Crowdfunding and Blockchain as well as our core expertise in highly regulated markets that include: Biotech, Healthcare, SaaS, Fintech, CBD/Hemp, Cannabis and ancillary tech companies. We provide investors with thoroughly vetted companies looking to drive growth and enterprise valuations through M&A, non-dilutive debt financing and/or capital investments ranging from $5M to $100M+. The Significance of Crowdfunding to Private Equity
Let’s talk about putting the power of this expertise and our network to work for you.