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Crowdfunding Made a Splash in 2013, 2014 Could be Turning Point

January 15, 2014

Crowdfunding was poised to make a major splash on startup financing in 2013, aided by the passage of the 2012 JOBS Act, a projected explosion in the number of crowdfunding portals and the adoption of state crowdfunding exemptions. However, the crowdfunding industry did not have the anticipated gamechanging impact on startup financing, mostly due to the Securities and Exchange Commission’s (SEC) cautious approach to the adoption of the crowdfunding rules mandated by the JOBS ACT. The SEC eased into the crowdfunding era by allowing for the general solicitation by businesses to raise equity from accredited investors via secure web-based portals. Finally, late in 2013 the SEC released proposed rules that would allow for equity crowdfunding from unaccredited investors sometime in 2014.

States Push Ahead with Intrastate Crowdfunding Exemptions
While the SEC carefully developed its rules and regulations, states developed their own intrastate crowdfunding exemptions focused specifically on increasing the availability of  and retaining startup capital in their communities. On December 31, Michigan Gov. Rick Snyder signed into law Public Act 264 that will allow Michigan businesses to raise up to $2 million from non-accredited Michigan investors. In November of 2013, Wisconsin Gov. Scott Walker also signed a bill (2013 Wisonsin Act 52) that will allow intrastate crowdfunding in the state. These states join Georgia, Kansas and North Carolina that have intrastate crowdfunding exemptions. However, due to lack of knowledge and other roadblocks, entrepreneurs have been slow to file for these exemptions. Since established in 2011, Kansas has only granted eight crowdfunding exemptions.

Non-SEC Regulated Crowdfunding Thrived
While debt and equity crowdfunding remained mired in the SEC-rulemaking process, many entrepreneurs focused on engaging the crowd via donation- and perk-based crowdfunding websites. Kickstarter, one of the most popular crowdfunding portals, helped entrepreneurs and others raise almost $480 million worldwide in 2013, up from 319.8 million in 2012. Another site, Indiegogo, also continued to build on their successful performance in 2012. In August 2013, Jonathan Lau and Edward Junprung found that Kickstarter and Indiegogo helped almost 1,100 tech companies successfully raise money via the crowd since their inceptions. These and other similar portals helped many individual crowdfunding campaigns raise more than a $1 million dollars in 2013.

Equity Crowdfunding Ecosystem Grows in 2013
With the launch of numerous equity crowdfunding portals, an entire ecosystem rapidly developed in 2013 to support the demands of the equity crowdfunding industry by developing products and services for the system’s stakeholders including businesses, platforms and investors. In a recent paper from TheCrowdCafe.com, Jonathan Sandlund mapped the crowdfunding ecosystem. Jonathan segmented companies into six categories:

  • Technology infrastructure;
  • Financial & compliance infrastructure;
  • Due diligence products & services;
  • Campaign products services;
  • Data & analytics; and,
  • Media & education.

These support businesses range from startups created bottom-up to solve new and unique challenges of the equity crowdfunding market to companies re-segmenting their products/services to the market.

Looking Ahead into 2014
With the rapid growth of the donation- and perk-based crowdfunding markets, growing support from the members of the angel capital community and the anticipated release of the final SEC rules on the sale of crowdfunding securities to non-accredited investors, the crowdfunding experts anticipate that 2014 could be an important turning point for the industry. Several notable trends from 2013 are anticipated to grow in 2014 including niche crowdfunding markets, regional crowdfunding models (especially in rural regions) and the amount of money invested. In an article for Forbes, Bill Perish projects the market will grow to $10 billion in 2014, up from $3.7 billion in 2012. Perish, the CEO of Mosaic, believes growth will be driven by equity investments made by social investors. Will 2014 shape up to be a pivotal year, or will the industry again fall short of expectations?

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