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Good day, This is a notification to inform you that there is a new blog posted on the site. Crowdfunding – Everything You Wanted to Know but Were Afraid to Ask Posted by Andrew Romans on Saturday, December 8, 2012 The crowdfunding space is unfolding as I write. The Founders Club is actually signing up numerous players in the crowdfunding sector and so this is a game changing space we are following closely. When I say signing up that means that the founders of some crowdfunding portals / businesses are investing some of their founder stock into our equity exchange funds in return for ownership in the fund owning all of the underlying stocks from these and other technology companies. Crowdfunding is not really a new idea. Raising funding for the Statue of Liberty in New York City was one of the biggest crowdfunding transactions in history. The people of France gave the actual statue as a gift to the US ambassador to France, but lack of funds delayed the building of the pedestal. Fundraising efforts came to an impasse until Joseph Pulitzer, publisher of The World newspaper and noted for the Pulitzer Prize, leveraged his newspaper to ask Americans to donate. Mr. Pulitzer used his newspaper to access millions of readers and solicited donations to fund the construction of the pedestal. Over 120,000 individual donations with average 85 cents per donation raised the funding needed to build the pedestal. The funding campaign took five months to complete. Today, the Internet serves the function that the newspaper served in 1884. Crowdfunding is nothing new in this context, but just another example of using the Internet to do online what is done in the real offline world. Equity investment crowdfunding has been in the making since at least the year 2000, but became a legal reality on April 5, 2012, when President Obama signed the JOBS Act into law. The crowdfunding sections of the JOBS Act authorize online “funding portals” or broker/dealers to offer crowdfunding investment opportunities of up to $ 1m per year per company raising investment. Investments will be limited to between $2,000 and 10% of the investor’s annual income depending on the investors net worth or annual income (we are told this is being revised to 5% in the SEC rules). Although Obama shot the starting gun on April 5th, all equity based crowdfunding web sites and organizations must be registered with the Securities Exchange Commission (SEC) and comply with their regulations, which are only now being drafted and may not be released until early 2013. While the crowdfunding sections of the JOBS Act gave the SEC 270 days from April 5, 2012 to draft their rules, the US government is notorious for missing deadlines. Crowdfunding CEOs, VCs investing in or tracking the industry and many others have speculated on when the SEC will release their rules and this game changer will be implemented. Further FINRA rulemaking following the SEC’s final rules may extend implementation of investment crowdfunding yet further. To help shape the outcome of this rulemaking process, a group of early crowdfunding companies banded together following the passage of the JOBS Act to advocate for rules that protect investors and work for the new investment crowdfunding industry. David Drake, a founding board member of Crowdfund Intermediary Regulatory Advocates or CfIRA, recently wrote that he believes the aggregate delays will push implementation of equity crowdfunding into 2014, but our crowdfunding CEOs and Carl Esposti, CEO of massolution, a division of Crowdsourcing LLC, believe we will expect equity based crowdfunding to launch in Q1 2013 possibly as early as January or February. Eric Mack posted this on Crowdsourcing.org last Monday. “Outgoing Securities and Exchange Commission chair Mary Schapiro opted to slow down the process of implementing Title II of the JOBS Act at the last minute over concerns about her legacy at the SEC and after receiving pressure from a lobbyist.” With the US presidential election now over and SEC chair Mary Schapiro leaving on Dec. 14, we are hoping the new chair Elisse Walter will stop the delays and get equity crowdfunding implemented in Q1 of 2013. The SEC wants to come up with rules to protect naïve investors from being taken advantage of by con artists gaming the system. It is pretty easy to imagine someone in Miami coming up with a business pitch every week that raises a few thousand dollars, goes bust and the founder keeps the company car and company yacht. Imagine this con artist going from one crowdfuding web site to another, recruiting new accomplices to be the listed CEOs to avoid being caught as a serial failure. Crowdfunding companies want to figure out how to stop that from happening. They are keen to put in place barriers to entry and carve out market verticals for themselves. We will see some crowdfunding sites focus on a single niche like charity, film projects, high-tech startups, individuals’ university education, large art projects or a poets’ and painters’ pilgrimage to India. While equity investment crowdfunding is most relevant here, it is worth noting that there are other types of crowdfunding platforms that specialize in different Crowdfunding transactions. These fall into four main categories: Donation-based Rewards-based Lending-based Equity-based Each of these types of crowdfunding platforms uses a different approach, but in brief the way this works is that a person or startup can list their cause, product, or investment opportunity on one of these platforms and then leverage their social networks to make some noise and get the attention of funders, raising small amounts of funding from many people. Massolution, a crowdfunding research company, conducted a survey and found as of April 2012, there were 452 crowdfunding platforms active worldwide. Massolution projects that could reach 530 CFPs by the end of 2012. North America was the largest market, raising $837m in 2011. Globally over 1 million campaigns raised nearly $1.5bn in 2011. A senior executive at Kickstarter told me that they do not believe these numbers are accurate considering that Kickstarter raised only $100m of funding in 2011 and they are considered to the be largest. Kickstarter concluded that these Massolution numbers must include microfinance and other forms of fundraising that they do not consider to be crowdfunding. Kickstarter also explained they do not do equity crowdfunding and that 95% of their projects are creative artistic projects such as music and art rather than the next technology startup seeking funding. Note that much of the $100m number Kickstarter is quoting is pledged and not been paid out yet. The CEO of Massolution told me the reward category in total was $116m for 2011 which included ~$48m from Kickstarter. Source: Massolution Equity-based crowdfunding is a small cross section of the bigger picture. Rewards-based is even smaller, while roughly half of crowdfunding is donation-based, with another 40% being lending-based. The chart below shows funding by category in USD millions. Source: Crowdsourcing.org Over $1.5bn was raised in 2011 via crowdfunding; that number is expected to double in 2012. As a single platform, Indiegogo has funded over 60,000 projects. While investment crowdfunding is still a very small slice of the pie, the potential addressable market is huge. For example, Fred Wilson from Union Square Ventures made the point that if every American family were to put just 1% of their investments in crowdfunding, this would bring $300bn into the venture asset class and blow out VCs. This illustrates the potential for crowdfunding to be a game changer. I believe VCs should not feel threatened by this, but leverage the trend. VCs might put down 10% of the risk capital for a new deal and let 90% be shouldered by the crowdfunding unwashed masses. VCs would also be smart to follow the leading trendsetters rising to the top of the crowdfunding platforms as a measure of user validation. Then, when the company is ready for proper $5m+ VC funding, the VC is there and incumbent in the deal. In this hypothesis, the fact that the VC would lead the deal would give the crowd confidence to follow the branded VC into the crowdfunding / angel round. This is all good for entrepreneurs, VCs and angels. Seeing the game changing rapidly, several hundred crowdfunding platforms have been launched in recent months to capitalize on current rewards-based crowdfunding and to prepare for the changes likely to come from the JOBS Act. Separate from investment crowdfunding, reward-based crowdfunding campaigns are like those found on Crowdfunder, where the investor receives a tangible item or service in return for their funds. For example, if your startup wants to raise $500k to produce a great new widget, you put a profile and video on Crowdfunder and if enough people pledge to buy your widget, a form of a reward, and the target amount has been raised, then the cash is transferred to the startup. The new company makes the widget and distributes the promised products. Kickstarter was founded in 2009 and is growing nicely. They have raised $380m for 70,00 projects, giving their projects a 43% success rate of meeting the target and raising funding. The money pledged on Kickstarter grew in the early months of 2012 from $4m in January, $5m in February to $7m in March. Indiegogo as a single platform has funded over 60,000 projects. Thousands of other crowdfunding websites have been launched in recent months. Beyond rewards-based crowdfunding, investment crowdfunding provisions of the JOBS Act are slow in coming, as outlined previously. That said, a few key changes in the JOBS Act took effect more quickly and updated the archaic laws that limited what entrepreneurs could do to raise funding in the past. These are in effect now and should be understood. Previously it was illegal to promote one’s angel or VC funding round (often referred to as a “506 offering” or “Reg. D offering”) too broadly as doing so would trigger requirements to register the offering with the SEC at considerable cost. I remember participating at funding events in New York many years ago where the organizers strictly forbade us from listing the amount of funding we were seeking to raise with over 500 live investors sitting in the audience. Now there are no restrictions on promoting your 506 offering and conducting general solicitation. There is no longer the limit of 500 shareholders before a company must file IPO reporting with the SEC. This has now been expanded to 2,000 shareholders and crowdfunding investors will not count towards that number anyway. This may change when the new regulations have been announced, but it appears that investors making direct investments without the crowdfunding web sites must still be accredited investors. The definition of an accredited investor in the US as listed on the SEC web site as I write is the same now as it was in the late ‘90’s when I was first raising angel funding. Individuals must have a net worth of $1m or more or have annual income of at least $200k for the last three consecutive years. Depending on the type or stage of the company, different offerings targeted at the accredited investor or unaccredited investor community may be most appropriate. In either case, more companies will get funded and we will see more startups launch. The failure rate of startups will remain high, but some of these will get traction and provide better deal flow for classic angels and VCs. Clearly this is good news for entrepreneurs, sophisticated angels and VCs; although it will be bad news for some naïve retail investors. Crowdfunding investors will have some rights to get their cash back if they prove that the entrepreneur misrepresented the opportunity; some investors will lose their investment, if the company fails despite their best honest efforts. Hopefully this does not lead to increased litigation risks for the startups involved. At The Founders Club, we considered managing our own crowdfunding web site where any deal we put on the web site would be vetted by us and should therefore be funded quickly; but we decided against doing this. We prefer to raise cash funds, avoid some of the pain points of crowdfunding and work with these emerging platforms for the seed deals. We have developed relationships with the strongest crowdfunding portals so that we can work with them to both generate the best deal flow to come from these portals, but also to harness these funding platforms to raise seed financing for companies we are helping. We also believe that our equity in the best of these will become valuable equities for our exchange funds From my perspective, crowdfunding is a wonderful development and will result in many folks getting the seed funding necessary to take the entrepreneurial plunge I wish all the crowdfunding companies best of luck and hope the SEC does a good job both regulating this incredibly important industry. View post » To unsubscribe from the site, please click here.