Welcome to the latest bulletin offering entrepreneurial insights from the Startup Owl. Enjoy and learn.
This issue is mostly about capital funding for rural and small town startups, especially equity crowdfunding.
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| US Equity Crowdfunding Future |
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Global Crowdfunding Market Set to Double in 2015
Global crowdfunding experienced accelerated growth in 2014, expanding by 167 percent to reach $16.2 billion raised, up from $6.1 billion in 2013. In 2015, the industry is set to more than double once again, on its way to raising $34.4 billion, according to Massolution. These figures may be 'inflated' so far as startups are concerned, since real estate crowdfunding involves such big bucks.
Crowdfunding enables people to make investments in projects or ventures, often in small amounts, outside of a regulated exchange, social media platforms facilitating direct interaction between investors and individuals or businesses.
There are three main types of crowdfunding: equity-based, loan-based (or peer-to-peer), reward-based. According to crowdvalley.com, equity-based crowdfunding is the biggest part, globally, even though it is somewhat hamstrung in the US at present. In the last quarter of 2015, the global split of investment models was like this
The US Equity Crowdfunding Situation
The United States startup funding scene is changing fast and getting faster. There is a pent-up demand for more people to be able to invest directly in startups and small businesses. Startups and small businesses are pressing for better ways to raise capital.
The JOBS Act, passed three years ago was designed, among other provisions, to open up small business equity investing to the wider public, as well as allowing small firms to raise money publicly, without constraints of the traditional cumbersome and expensive process of public offerings.
However, to date, equity crowdfunding in the US is only open to so-called 'accredited investors' (under Title II of the Act). Title III, on the other hand, would allow equity crowdfunding for the general public. To date, the SEC has not published the Title III Rules.
Therefore the only crowdfunding currently open to the masses, is reward-based crowdfunding, where the company seeking money gives backers a reward of anything from simple public acknowledgement of their generosity, to various levels of 'gifts', frequently in the form of providing products as rewards.
New SEC Equity Crowdfunding Rules This Year?
While the SEC continues to drag its feet on releasing final Title III crowdfunding rules, Mary Jo White, SEC Chair, reiterated on June 3 that, "it is one of my priorities to complete the crowdfunding rulemaking this year." This probably means that they would be in effect in 2016.
Reward Crowdfunding: US Experience To Date
Though there have been examples of significant sums being raised, most crowdfunding campaigns only raise modest sums and many fail altogether. The Pebble Time smartwatch raised over $20 million in March 2015 on Kickstarter and sold 4000,000 watches last year, and more than 104 projects have raised over $1 million to date.
In 2014, over 22,000 projects were funded on Kickstarter, though many were not, of course startups, unless you consider the making of a film a startup. Film, video and music were by far the biggest group of campaigns-about 8,000 (nearly 40%).
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Intrastate Equity Crowdfunding
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SEC Only Allows the Rich to Do Equity Crowdfunding
Equity crowdfunding in the US is currently limited to so-called accredited investors-those with annual incomes of at least $200,000 and with an expectation of that continuing, or have a net worth of more than $1 million. The rule was introduced in the Securities Act of 1933-during the Great Depression to protect the unwary small investor.
On the other hand, individual States are introducing exemptions allowing companies to sell securities in offerings exempt from SEC registration, through makin filings with their respective State securities commissions. This form of equity crowdfunding allows non-accredited investors the opportunity to make equity investments in startups and early-stage businesses. This State-level movement shows no signs of slowing down.
25 States Open Equity Crowdfunding to Ordinary People
Twenty-five American States have so far introduced special rules to enable equity crowdfunding for ordinary people (non-accredited investors). They permit the buying of small equity stakes in companies, if the investor lives within the State and the company is registered in the State-hence intrastate. More than a dozen other States are working on doing the same.
These intrastate equity crowdfunding rules generally limit the size of offerings (between $1-2.5 million) and the amount that any individual can invest ($5-10 thousand). There are also a few other rules designed to protect the parties.
The States with intrastate provisions at June 2015 are: Alabama, Arizona, Arkansas, Colorado, District of Columbia, Georgia, Idaho, Illinois, Indiana, Kansas, Kentucky, Maine, Massachusetts, Maryland, Michigan, Mississippi, Montana, New Mexico, North Carolina, Tennessee, Texas, Vermont, Virginia, Washington and Wisconsin.
It is interesting to note that relatively few companies have raised capital using the intrastate exemptions. This may change once the SEC does finally publish rules for Title III, especially if the national rules are more exacting than State legislation. |
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Thanks for reading this issue of Entrepreneurship Insights. If you have any comments or would like help with your startup, do write to me: will@startupowl.com
Sincerely,
Will Keyser
a.k.a. The Startup Owl
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Platforms to Pitch Your Startup
Gust is a global funding platform for the sourcing and management of early-stage investments. It enables entrepreneurs to collaborate with investors and angel networks by virtually supporting all aspects of the investment relationship.
But Gust is not alone. There are several other similar platforms you should look at. One is AngelList, another platform for startups, where you can post a pitch for your venture, both for investors to see, or to find co-founders or other people whom you might need.
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Microloans are traditionally seen as a way of helping micro enterprises in the developing world.
However, they are becoming an investment instrument of choice for small starts in the industrial world, too, especially for people who find it difficult to raise loans from banks.
Muhammad Yunnus, the Nobel Prize winner, is frequently considered the father of microfinance. He founded the Grameen Bank in Bangladesh. Now the Bank is active in the US in form of Grameen America that helps women who live in poverty build small businesses to create better lives for their families, with microloans, training and support.
Another organization that has moved in a similar direction is Kiva. Kiva Zip in the US, uses an entrepreneur's network to measure creditworthiness.
The main part of Kiva raises loans for the third world micro-business community.
Kiva Zip is essentially in the field of peer-to-peer (P2P) lending, like the big boys in the business: Prosper and Lending Club. In both of these P2P business loans are only part of their activity, since they also do personal lending.
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Community Sourced Capital
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Rachel Maxwell, the Founder and CEO of Community Sourced Capital established the business so that businesses could access affordable capital from their community. If a business isn't ready to access a community loan, the team at CSC connects them to a network of partners who can.
By connecting community members, small business owners and mission-aligned funders to the goal of creating healthy communities, they're introducing a new purpose for financial systems, removing barriers to success for entrepreneurs, and building meaningful relationships around money.
Based in Washington State, Rachel got her MBA in Sustainability at the Bainbridge Graduate School and has significant ambitions for the future of CSC. Watch this space.
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Mission-driven businesses are on the up. The same is happening in the field of equity capital.
One example is Advantage Capital Partners that invests in entrepreneurial small businesses in communities underserved by traditional sources of capital.
Another is Investor's Circle, is a seed capital network for early-stage impact investing. It's dedicated to improving the environment, education, health and the community.
If you write to me, I can tell you about others. There will be an increasing number of these kinds of investors, you can be sure. |
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