hey there sudo-crowd -
i'm reposting several articles i've found interesting and useful as part of the
resources section of the Sudo wiki.
this one is from about a year ago, actually.
please feel free to share relevant articles/resources/events/ other info to this list.
thanks,
eddan
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.
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