Both private and public markets slowed dramatically during 2022. While the year started off relatively positive, the realities of persistent (and not transitory) inflation hit everyone hard. This, combined with geopolitical challenges such as Russia’s unprovoked war with Ukraine and China’s chest pounding, pushed investors to go risk off. As the US Federal Reserve drove rates higher, people moved their money to more mundane products. Private markets raising capital under various exemptions dropped.
CI has received a copy of Crowdfund Capital Advisors‘ Investment Crowdfunding Annual report, which puts numbers to Regulation Crowdfunding (Reg CF) activity both for 2022 and since the exemption became actionable in 2016.
According to CCA, while the number of firms seeking growth under Reg CF increased slightly during the year, both the number of investors and aggregate deal amount declined in 2022.
In brief, for 2022, Reg CF issuers (firms raising money) actually increased slightly to 1584 in 2022 in comparison to 1563 in 2021. Looking back, in the first year (beginning in May of 2016), just 188 firms raised capital under the exemption. At the same time, in 2022, 1132 offerings were funded (452 were not), a slight decline from 2021 as the success rate dipped to 71.5% (from 74.8% in 2021).
Total funded capital, according to CCA, declined to $506.7 million in 2022 from $564.5 million in 2021 – about a 10% drop.
The average raise declined from $455,000 in 2021 to $428,000 in 2022. It is important to remember that the funding cap was raised to $5 million in 2021 from the prior $1.07 million. Investment volume since 2016 now stands at around $1.63 billion.
The report states:
“With over $4.8 billion [since inception] being pumped into local economies, creating an economic stimulus the government could never do, Investment Crowdfunding should be seen as a success. By supporting over 226,000 jobs, Investment Crowdfunding lives up to the namesake of the legislation that gave birth to it, the JOBS Act.”
CCA predicts that the number of issuers will hit a record in 2023, adding that by 2030, Reg CF will be responsible for over $200 billion being contributed to the economy while creating 2.4 million jobs. In total, there have been 5,588 firms that have raised money using the exemption since 2016.
Top platforms raising capital under Reg CF include Wefunder and StartEngine – both for all-time amounts and during 2022.
There is a lot of information included in the report including by location, sector, and more.
CI touched base with CCA co-founder Sherwood “Woodie” Neiss to get some more perspective on the data and his thoughts on the industry overall.
Neiss said it was a wild year, with so many geopolitical and macroeconomic effects finding their way down to Investment Crowdfunding, it was sure to have an impact.
“Investor sentiment was definitely down, as indicated by a 69.5% drop in the number of checks written. However, their average check size rose to record levels as issuers seemed to double down on their faith in Issuers. I wasn’t expecting to see twists like this from the data,” said Neiss. “The dataset seems to grow exponentially each year and gets more fascinating. We can identify trends and make better predictions. But most importantly, we can see that Investment Crowdfunding is an absolute success. This law is creating an economic stimulus that is responsible for pumping $4 billion into local economies across the USA and supporting hundreds of thousands of jobs.”
Neiss said that one of the impacts of Reg CF, of which he is most proud, includes its effect on women and minority entrepreneurs as they have a 25% greater chance of a successful funding round while making up 50% of the issuers and raising around 50% of the capital.
“Arguably, there is no other area of the private capital markets more democratized for them than Investment Crowdfunding,” Neiss stated.
He also noted that after seven years of experience and growth, they can officially announce the ‘Valley of Death’ is dead – alluding to the phenomenon that most startups cannot make it past the friends and family round so they die before they have a real chance of generating traction.
“The average raise since the industry launched has grown to $365K, expanding beyond where the Valley existed previously; $25 to $250K. There has always been this talking point about the Valley of Death and doom and gloom. It should be nice to talk about opportunity and capital now that Investment Crowdfunding has proven itself.”
Neiss said that investors are now more confident in issuers as the market grows and issuers are showing strength in the terms of their stage as more mature firms utilize the exemption.
“In 2022, 48% of successful issuers were older than three years. When the industry launched, that was 35%. And in 2022, they had average revenues of $1.1 million. When the industry launched, that was $567,000. The profile of issuers coming online is changing. This will continue to lead to better companies and better deals. In addition, the current macroeconomic environment will also force more issuers that can’t access venture to come online this year.”
Investment crowdfunding is critical, claims Neiss because without it companies would struggle and probably die and the government needs to be doing more to promote online capital formation. At the same time, investment Crowdfunding has brought a higher level of transparency to private capital markets.
“With such success, both Congress and the SEC should consider increasing the maximum raise to $20 million so larger, more established, less risky enterprises that need in excess of $5 million can go online to raise capital from their customers, friends, family, and followers. Fraud has been de minimus. There really is no reason not to.”
Neiss said that with $54 billion in economic value allocated to successful Reg CF issuers, liquidity, and returns will be forthcoming to many of these early investors with many being ordinary retail investors.
“Investment Crowdfunding might be seen as a democratizer of access to capital and a democratizer of wealth. Where else has this opportunity ever existed for the average Joe?”