Regulation Crowdfunding is somewhere in the top half of the first inning of a nine-inning ballgame. I’m not even sure the first batter has seen more than a pitch or two. It will certainly be fascinating to see how the game develops. I, for one, am convinced that the new avenues of fundraising enabled by The JOBS Act will forever change the landscape of small business capital formation. No longer will entrepreneurs have to rely on the goodwill of their parents or the usurious interest rates charged on credit card borrowing to raise the much-needed funds required to pursue their dreams.
In this early stage, it is worth reflecting on some of the trends we’re witnessing as the industry develops – though I’m not sure we have enough data yet to oblige the Law of Large Numbers. We’re seeing two primary use cases for issuers that want to engage in a Regulation Crowdfunding (Reg CF) Offering on our platform:
1) Either the companies have an impassioned user base – which means happy customers, a lot of fans or a large social media presence; or
2) The company wants to use our templated legal documents to save money on the offering.
Let’s dissect these points, one at a time.
The first point is, perhaps, rather obvious in hindsight. But I have to admit that I had not made that assumption early on. I thought the merits of the investment opportunity would be the strongest indicator of success.
Granted, the attractiveness of an investment opportunity is a difficult metric to assess, especially with an early stage company. However, we have not seen many successful business – to – business (B2B) companies, nor have we seen many successful companies operating in a non-sexy industry.
Is it because, ostensibly, B2B and non-sexy companies aren’t able to bring enough early followers to create the demonstrable traction that leads to campaigns going viral?
I suspect the answer lies in the early data, but I also suspect the situation will change over time as the industry develops.
If we look at Goldman Sachs’s The Future of Finance research report, we see that millennials dominate the crowdfunding space across every category. They have the highest propensity to make online and mobile donations on traditional crowdfunding platforms, which appeal to millennials because it allows them to be a part of the creative process.
Studies show that millennials are less invested in stocks than prior generations, hold significantly more cash and are more likely to participate in crowdfunding than other generations (47% of millennial respondents have backed or are likely to back a crowdfunding campaign vs. 30% of gen-xers, 13% of boomers and 4% of matures).
The nature of equity crowdfunding platforms appeals more to millennials, as they tend to seek an emotional connection to the campaigns they support, seeking opportunities that reflect their values.
According to a US Trust survey, millennials are more likely to sacrifice return and accept higher risk if the company has a positive impact on society or the environment, while less likely to invest in a company that has a negative impact on society or the environment, despite potentially outsized returns.
Over time, as equity crowdfunding goes mainstream and attracts mainstream investors beyond the millennial early adopters, I expect the space to become more efficient and the merits of the investment opportunity to be one of the ultimate considerations. As Benjamin Graham, father of the value investing ethos posited, in the short term, the market is a voting machine. In the long term, it’s a weighing machine.
The second point, that companies want our templated legal documents to save money, speaks to the ingenuity of America’s capitalists.
In the proposed and final rules, the SEC estimated the cost of a Reg CF Offering to vary between ~$7,000 to over $100,000 depending on how large the issuance, ranging from less than $100,000 to more than $500,000. However, less than one year after the rules went into effect, we’re seeing platforms significantly reduce that cost. Issuers are using templated offering documents on many platforms (subscription agreements and Form C creation) along with other tools to help them assess their valuation, complete all SEC filings, required background checks and all investor flows during the investment process. The issuer may incur modest third party expenses – like an accountant’s independent review, but these tend to pale in comparison to the $5-25k that a lawyer might charge just to create traditional offering documents. We discovered this point after being approached by a few accelerators that sought access to our platform solely for the legal offering documents for their current cohorts and alumni.
We’re certainly anxious to see the industry develop. Part of the fun of entering a brand-new field is the ability to put your assumptions to the test and see how the market responds. Even though our team has a substantial background in finance, many (many) of our assumptions have proven incorrect.
Soliciting feedback from our users is so important for us and we urge you to weigh in. Do you like the securities we’re issuing or do you think a different security would be more interesting? Do you like the look and feel of the company’s campaign or are we missing something?
Finally, in these early days, we find the most formidable barrier continues to be educating users on exactly what the new changes in securities laws brings to local businesses and entrepreneurs across America.
I believe that together, we can usher in the game changing avenues to capital formation that congress intended.
Ken Staut is the founder and CEO of GrowthFountain an SEC registered funding portal and FINRA member that provides securities crowdfunding. Ken co-founded GrowthFountain because he wanted to level the playing field for small businesses. His dad was a small local business owner from Pittsburgh (Go Steelers!) and at a very young age, he saw firsthand the positive impact a small business can have on the local community. With over 15 years of experience in finance – including co-founding and selling a hedge fund – he combines his grass-roots entrepreneurial spirit with his Wall Street background.