January 20, 2017

By Grant Harvey

2016: Year in (Reg CF) Review

As we begin the new year by swearing in a President that has many nervous about pretty much everything, we are finally starting to see some data on how equity crowdfunding fared in 2016 that will hopefully calm some uneasy hearts and minds. After all, there is nothing more comforting than that sweet cha-ching!

Thanks to a “2016 Year in Review” report put together by Sherwood Neiss and the team at Crowdfund Capital Advisors, we now know Regulation Crowdfunding had a total of $21M in overall capital commitments since the rules went live in May, $19.6M of which has been invested into 79 offerings that have successfully reached their minimum funding targets (according to Wefunder’s last count).

To quote the Wu Tang Clan, nearly $20M in funds raised ain’t nothing to f&@# with, especially for so many pre-revenue startup companies who wouldn’t have been able to raise anywhere near that much in the same amount of time without Reg CF. However marginally exciting you find this, that magic $20M number falls way short of Title II’s first year, which totaled 4,712 offerings receiving capital commitments of $385.8 million (according to Crowdnetic).

Dang. Talk about a bubble-burster.

All kidding aside, Reg CF has been picking up steam lately, with two more offerings  reaching the maximum raise of $1M (Sondors Electric Car and Hopsters Make Your Own Brewpub) and all signs point to more companies choosing to go this route to pursue funding, especially now that heavy-hitter Indiegogo is in the mix.

So, what else do we know about Reg CF in 2016? According to Crowdfund Capital Advisors, 186 companies launched campaigns across 21 FINRA regulated portals, one of which, uFunding Portal, has already been shut down. The big winners so far have been Wefunder, who self-reports having raised a total of $12.7M for campaigns, followed by StartEngine with nearly $3M, Nexseed with $1.5M, Indiegogo with $1.3M, Republic with $669K, and SeedInvest with $341K. Wefunder’s lead in capital raised makes sense given their lead in total offerings, with CCA reporting the platform’s deals represent 35.8% of total Reg CF deals.

CCA’s report went on to conclude that the $19.6M raised consisted of over 21,000 individual investments (Wefunder reports over 23,000 as of early morning Friday) at an average of $833 per investment and average investor pool of 331 individuals per campaign. To this point, CCA noted a healthy month-over-month growth rate of investors interested in experimenting with crowdfunding, but added that if issuers expect to raise $1M out of the gate, they have a long road ahead unless they have a large social network, further noting a strong correlation between social network size and dollars raised.

CCA went on to say that the average funded campaign amounted to roughly $226,578 with issuers paying the platform an average fee of $11,329. To put that in perspective, according to Crowdnetic, in the first year of Title II, the average offering raised approximately $405,295 per successful issuer, so slightly less than double what your average Title III campaign raised.

An exciting thing to consider going into 2017 is the viability of running a Title II and Title III offering at the same time, in which a successful Reg CF round raising the average from a larger pool of non-accredited investors could round out a Title II round of accredited investors. As far as my money’s worth, this seems like a good strategy for raising capital if you’re considering using either of these regulations, and I think we’re going to see more issuers pushing in this direction.

To wrap up the “Year in Review” report, Crowdfund Capital Advisors left us with a few parting thoughts worth mentioning, the first of which was the average valuation for funded companies. According to CCA, after removing the outliers, the average valuation of funded companies ended up at $5.3M, a number in the ballpark of what VCs are paying and in CCA’s words, proved “the crowd isn’t being taking advantage of.”  At least, not yet.

The most interesting conclusion from the CCA report was Title III’s potential effect on creating jobs, citing the potential creation of approximately 173.8 new jobs over the next 90 days from all of 2016’s funded companies and averaging a total of two jobs per successfully funded company. CCA sees promoting Reg CF as an avenue for stimulating the economy for the incoming administration, as many of the funded campaigns are creating jobs in underserved communities thanks to people who invest in businesses in the communities where they live.

While CCA is predicting $100M will be raised across the entire Reg CF industry in 2017, I’m going to keep my expectations low. I have no doubt the trends will continue and more companies will jump on the crowdfunding bandwagon, but the deals must be good and the crowd must understand what they’re getting into. As more platforms take on potential issuers, there’s a larger pool of offerings that could potentially fall flat or mislead investors into falling for a bad deal. Growing pains will be unavoidable. It’s more important than ever for platforms to vet issuers carefully and not rush entrepreneurs to launch an offering before their company is up to the burden of raising capital from the crowd.

CCA’s report is proof that Regulation Crowdfunding can be the disruptive tool for democratizing online capital formation we all thought it could be – but it’s a specific tool meant to be used for a specific purpose. Reg CF isn’t a Swiss Army knife – it’s an allen wrench. Handle with care.

Contact Grant Harvey: grant@dealflow.com