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In May, the third and final part of the 2012 JOBS Act, Regulation Crowdfunding, went into effect and 2016 ended with much promise for entrepreneurs seeking funding and our government seeking jobs.
Regulation Crowdfunding allows any American startup or small business to raise up to $1 million from friends, family, and followers on debt and equity crowdfunding platforms registered with the Securities & Exchange Commission (SEC). Just like on platforms like Kickstarter or Indiegogo, entrepreneurs launch campaigns and use their social network to invite people to review their business plans, market opportunity, financial statements, and video pitch. However, instead of getting the entrepreneur’s product in exchange for a donation, backers get shares in the business or interest repaid on a loan.
So how did regulation crowdfunding perform it’s first calendar year in action?
21 platforms launch; one dies
During the course of the year, we saw 21 debt and equity crowdfunding platforms launched and one, Ufunding Portal, shut down by the SEC because it seemed to be missing some of the statutory requirements required of a funding portal (like a communication channel where potential investors could ask questions to entrepreneurs raising money).
79 campaigns succeed; $17.9 million invested
186 companies launched campaigns, and 79 of them hit their minimum funding target (MFT) — the minimum amount a company must reach in commitments in order to be funded. Investors committed $19 million to the 186 campaigns and transfered $17.9 million to the 79 funded campaigns.
Depending on who you are, you might see $17.9 million as a large or a small number. We see it as a great start. This money was raised in a fraction of the time that it would have taken if these entrepreneurs had gone to VCs. It was also raised by many companies that don’t qualify for VC capital because they don’t hit the sweet spot for VC investment.
Keep in mind, not all these investments were for equity. Both the company and the crowd seem to understand that if there isn’t a clear exit opportunity, debt financing is the way to go.
Investors give, on average, $833
Over 21,000 individual investments were recorded for 2016. The average investment was $833, and the average number of investors in a funded campaign was 331. Month-to-month, the number of investors coming into regulation crowdfunding grows at a healthy pace, showing that there is a growing interest in experimenting with these alternative investments.
If you are a company seeking capital, keep in mind that raising $1 million is hard to do, and you should expect to raise closer to the average. The key to success is how big your social network is. There is a strong correlation between the size of your social network and how much money you raise.
Average fundraise is about $227K
The average funded campaign raised $226,578. The average fee paid to the platform for a funded campaign was $11,329. Three companies, Beta Bionics, Hops & Grain, and LegionM raised $1 million.
Valuations are in line with VC funded companies
It was good to see that when we removed some of the outliers, the average valuation for funded campaigns was in the ballpark of what VCs are paying, proving the crowd isn’t being taken advantage of. The average valuation for a funded campaign was $5.3 million.
Job creation looks good
Finally, it is apparent that Regulation Crowdfunding is a jobs engine. Together, the companies funded in 2016 plan to create about 173.8 jobs over the next 90 days; that’s about 2.2 jobs per funding company. If the incoming administration is looking for an easy way to stimulate the economy, it would do well to promote Regulation Crowdfunding, especially since many funded campaigns are creating jobs in underserved communities and since the majority of investors in these campaigns tend to fund businesses in the communities where they live.
Sherwood Neiss is a partner at Crowdfund Capital Advisors. Neiss helped lead the U.S. fight to legalize debt and equity based crowdfunding, coauthored Crowdfund Investing for Dummies, and cofounded Crowdfund Capital Advisors, where he provides strategy and technology services to those seeking to benefit from crowdfund investing. Neiss and Jason Best are credited as the fathers of Title III of the JOBS Act. After attending the bill-signing ceremony at the White House, they formed Crowdfund Capital Advisors to study what is happening in crowdfunding, analyze results, report trends, and follow opportunities. They are active investors in the crowd finance space.
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