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Equity crowdfunding short on delivery but showing promise

April 19, 2018

Startups and small businesses raised $30 million during the first year of equity crowdfunding (also known as regulation crowdfunding or Reg CF) with an average of $289,000 raised in a successful campaign, according to a recent report published by the Small Business Administration’s (SBA) Office of Advocacy. While equity crowdfunding hasn’t been the game changer that it was touted to be by many of its advocates, several studies indicate that the first year plus shows promising findings for this new source of startup capital authorized by the Jumpstart Our Business Startups Act (JOBS Act).

Equity crowdfunding’s first year

In One Year of Equity Crowdfunding: Initial Market Developments and Trends published by the SBA, Lindsay Abate used SEC Reg CF filing data to identify several trends based upon the 343 Reg CF offerings that were made during its first year (May 16, 2016 to May 16, 2017) including:

  • Approximately 88 percent of Reg CF filings were made by firms that were five years or younger at the time of filing;
  • Approximately one-third of firms who filed Reg CF offerings were six months or younger when they launched their crowdfunding campaign;
  • Nearly 50 percent of firms were located in California, Florida, or Texas;
  • A total of 326 companies filed Reg CF offerings during that span, including 17 businesses that conducted more than one crowdfunding campaign; and,
  • The 326 companies employed a total of 1,574 employers (approximately five employees per firm).

The report also provides a breakdown of common types of securities offered to investors. The majority of the deals were either common stock (34 percent of all deals), Simple Agreements for Future Equity (SAFEs; 25 percent), or debt (22 percent).

Economic impact of successful campaigns

In a blog post from the Crowdfund Insider, the authors looked at the economic impact of 53 firms that had successful Reg CF offerings (i.e. hit their fundraising goal) during the first six months of offerings (May 2016 to December 2016). To identify the impact of a successful Reg CF offering, they compared the financial data before and after a crowdfunding campaign. Their findings include:

  • Companies with a successful campaign doubled their revenue growth compared with the year before; and,
  • On average, companies added 2.7 employees after crowdfunding.

The earliest movers

Millyard Tech Law published a report on the first 100 equity crowdfunding campaigns based upon SEC data. The report highlighted some interesting findings about the types of industries and stages of businesses that were engaged in those first 100 campaigns including:

  • Approximately 33 percent of those companies were mobile app/internet services companies;
  • Approximately 12 percent were consumer gadget companies;
  • Approximately 60 percent were in business one year or less; and,
  • Approximately 80 percent of companies had a minimum target amount of $100,000 or less.

Millyard Tech Law also found that a majority of companies were pre-revenue stage with a valuation of between $1.5 and $4 million.

For the earliest movers, equity crowdfunding offerings were slow. Only 28 percent of campaigns that opened in May 2016 hit their goal. However, many more companies were able to exceed their fundraising minimum.

Reaching $100 million invested

In one of the most recent updates on the equity crowdfunding market, Crowdfund Insider reports that in January, equity crowdfunding offerings topped $100 million in capital raised (approximately 18 months after the authorization of Reg CF offerings). The $100 million was raised via 731 campaigns. Approximately 101,000 individuals invested in a campaign with an average $992 per investment. Companies raised $360,691 per campaign. It took 410 days for the industry to break the $50 million mark, but just 209 days for the industry to raise the next $50 million.

 

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