As SEC Continues to Deliberate on ‘Crowdfunding,’ States, Investors Push Ahead

Over two years, President Obama signed the JOBS Act, a bill authorizing a variety of significant changes to securities laws. Among those changes, the Securities and Exchange Commission (SEC) was mandated with implementing rules for equity crowdfunding within 270 days – approximately January 2013. However, the rules still remain in draft form. This SEC slow play has led to grassroots lobbying efforts by crowdfunding industry professionals; 30 members of the U.S. House  of Representatives’ Innovation and Entrepreneurship Caucus drafting a letter to pressure the SEC into adopting the new rules; and, federal lawmakers proposing new federal legislation to revise the original JOBS Act proposed crowdfunding rules.

While federal crowdfunding rules remain in limbo, states have been working to pass intrastate crowdfunding exemptions. Since the SSTI Digest Legislative Round-up, several states have taken steps towards enacting intrastate crowdfunding exemptions including the Texas State Securities Board being in the final stages of rendering for the crowdfunding initiatives exemption. According to a recent handout from the National Conference of State Legislatures, the 13 states that currently have intrastate crowdfunding exemptions include Alabama, Georgia, Idaho, Indiana, Kansas, Maine, Maryland, Michigan, Nebraska, Tennessee, Utah, Washington, and Wisconsin.

California may make it 14 states by the end of 2014; AB 2096 has passed the state’s Assembly and awaits Senate approval. The California legislature adjourns until November 30. Over the last couple years 23 states and the District of Columbia have introduced some form of an intrastate crowdfunding exemption with 19 of those occurring in 2014. The District of Columbia’s exemption is currently in comment period, but should be enacted before the end of the year.

Accredited & Institutional Investors Take Advantage of General Solicitation
While crowdfunding to unaccredited investors remains in draft form, accredited investors and select equity crowdfunding portals have taken advantage of new provisions of the JOBs Act that pertain to general solicitation. 2013, 20 equity crowdfunding portals have been launched and are currently providing companies a mechanism for the general solicitation of investments. However, the sites are only open to investors who can provide documentation of accreditation. In addition to growing popularity of equity crowdfunding by angels, the crowdfunding industry has seen an increase in the number of successful large crowdfunding projects (those that have raised at least $100,000) on reward-based platform. These successful projects have started to gain the attention of the venture capital (VC) industry and other intuitional investors. A recent CB Insight report highlights the success of reward-based hardware projects that have gone on to receive VC funding.

In March, Keith Higgins, Chief of the Corporate Finance staff of the SEC, in his address at the Angel Capital Association’s annual Summit announced SEC statistics on Rule 506(c), the JOBS Act provision that permits the use of general solicitation to offer securities as long as two conditions are met:

• The securities can be sold only to accredited investors; and,
• The issuer must take "reasonable steps to verify" the purchaser's accredited investor status.

Between September of 2013 and March 2014, the SEC has received 900 new offerings conducted in reliance on the exemption, raising more than $10 billion in new capital as of the end of last week. These deals have been made using equity crowdfunding portals and other general solicitation methods including written and recorded announcements of solication.

In comparison, during the same time frame the old "private" Rule 506 exemption – now called Rule 506(b) – was relied upon in over 9,200 new offerings that resulted in the sale of over $233 billion in securities. The 506(b) exemption is the exemption traditionally used to solicit an angel investment and during pitch events. The SEC looked at disclosure statements made by companies, which are required to file with federal securities regulators within 10 days after completing their fundraising under the new rules.

According an infographic from OurCrowd, a growing number of angel investors have already started to use equity crowdfunding portals to search for and invest in companies. Since 506(c) went into effect, over 50,000 angel investors from 26 countries (approximately 10 percent of all active angels) have registered with equity crowdfunding portals. Of those 50,000 registrants, approximately 1 percent of angel investors have made an equity investment using a crowdfunding portal. According to OurCrowd research, active angels engaged in crowdfunded projects have made an average investment of $25,350 per company, an average individual investment portfolio of $93,590, and have an average 3.7 companies in their portfolio. In Q1 of 2014, angels invested $90 million using portals. This data does not include 506(c) deals that were done without an equity crowdfunding portal. Read more…

In a special report, CB Insights analyzed VC financing and crowdfunding data to identify trends among crowdfunded hardware companies that began on Kickstarter or Indiegogo – the two most popular, successful crowdfunding sites. Using data from 443 hardware projects that raised at least $100,000 on one of the two platforms, CB Insights found:

• $321 million – Total VC financing to-date to crowdfunded hardware projects; and,
• 9.5% – The percentage of crowdfunded hardware campaigns that have gone onto raise VC.

However, there doesn’t appear to be a relationship between the amount a campaign raises on a crowdfunding platform and the amount it raises from VCs.

Learn More at SSTI's 2014 Annual Conference!
Join us for Trends in Tech-Based Economic Development, an interactive plenary session led by Dan Berglund, SSTI’s president and CEO, that ties together what attendees learned through the last day and one-half with SSTI’s distillation of the latest trends in tech-based economic development, the most daunting challenges ahead and their implications. It is a perennial conference favorite! For more information about this session and many others visit the conference website: http://ssticonference.org/