US Small Business Administration Publishes Report on Small Business Equity Crowdfunding under Reg CF

The US Small Business Administration (SBA), Office of Advocacy, is out with a report reviewing the status of small business crowdfunding. According to the SBA, equity crowdfunding was particularly popular among very young firms. Nearly a third of firms were six months or younger when initiating their securities crowdfunding offer, and 88% were five years or younger at the time of filing.

The report (see link below), was authored by Economist Lindsay Abate and part of a series on alternative finance. Entitled “One Year of Equity Crowdfunding: Initial Market Developments and Trends,” Abate analyzes SEC data following the implementation of “Regulation Crowdfunding” or Reg CF a year after implementation.

According to the SBA:

  • Small businesses raised an aggregate of more than $30 million during the first year of equity crowdfunding activity, with an average of $289,000 raised in a successful campaign.
  • There was significant geographic clustering among crowdfunding firms, with 50 percent of firms being located in California, Florida, and Texas.
  • Equity crowdfunding was particularly popular among very young firms. Nearly a third of firms were six months or younger when initiating their crowdfunding campaign, and 88 percent were five years or younger at the time of filing.
  • A total of 326 businesses attempted to raise capital through Reg CF equity crowdfunding campaigns during the first twelve months of the exemption taking effect. 17 businesses conducted more than one crowdfunding campaign, producing a total of 343 filings between May 16, 2016 and May 16, 2017.
  • Crowdfunding firms reported employing a total of 1,574 people, with an average of five employees per firm.

From the 343 crowdfunding offerings made between May 16, 2016 and May 16, 2017, the most common types of securities offered were common stock (34%), Simple Agreements for Future Equity (SAFEs) (25%), and debt (22%), together representing over 80% of all transactions.

Still More Work to be Done

The report is of the opinion that the SEC may want to consider whether certain aspects of the regulatory scheme are too complex or costly for small businesses to navigate and comply with. It must be noted that everyone engaged with the space will be in agreement with this statement.

While these are still early days, more needs to be done by encouraging underserved markets, minorities and women to utilize investment crowdfunding.

While not mentioned in this report, it is largely agreed that the Reg CF cap is far too low and should be raised to $10 million to help broaden the utilization of the exemption.

Another topic not covered is a need to enact a federal angel tax exemption, similar to what exists in the UK, to make backing innovative young firm even more enticing.

 

The report may be downloaded here.

 

SBA Crowdfunding_Issue_Brief_2018

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