Last month, CI hosted a webinar to review the securities crowdfunding market of 2022 as well as expectations for 2023. While the consensus of the group was that online capital formation softened in the waning months of 2022, panelists participating in the webinar were more optimistic for the coming year.
There are three main securities exemptions that enable firms to raise money online. Regulation Crowdfunding (Reg CF) allows an issuer to raise up to $5 million, Regulation A (Reg A+) can be used to raise up to $75 million after an offering document is qualified by the SEC, and Regulation D (Reg D 506c) may be used to raise an unlimited amount of funds but only from accredited investors.
According to Crowdfund Capital Advisors (CCA), total funded capital under Reg CF declined by about 10% in 2022 in comparison to 2021. During 2022, companies raised $506.7 million versus $564.5 million in 2021. The decline was disappointing, especially after the SEC increased the funding cap for Reg CF issuers in 2021 from $1.07 million to $5 million. But when you consider the economic challenges of 2022, the drop in activity is understandable.
According to data from the Securities and Exchange Commission (SE), firms raising money using Reg D (506c) collected $148 billion (July 1, 2021, to June 30, 2022). Old Reg D (not able to raise money online) remains far larger at $2.3 trillion during the same period.
Reg A+ saw $1.8 billion raised during the July to June period, with real estate dominating the securities exemption at $755 million in money raised.
Private markets continue to learn and adapt to online capital formation while allowing smaller retail investors access to an asset class previously only available to the wealthy.
Rebecca Kacaba, co-founder and CEO of Dealmaker, shared some data on 2022 activity that indicated securities crowdfunding has been more resilient than venture capital. She shared that in comparing Q4 2022, VC deals dropped by 46% while securities crowdfunding dropped by just 14%. Kacaba said that crowdfunding has been “insulated” in contrast to VC money.
Kacaba noted that Dealmaker saw an increase in Reg CF issuers – bucking the market trend – as her platform experienced a 21% growth year over year.
Paul Stannard of World Digital Foundation shared market information surveyed by his company about expectations for 2023. Stannard said that his company completed the poll at the end of 2022.
According to the survey:
- 86% of respondents said they are confident or very confident about private securities markets for 2023
- 65% of private companies responding indicated their intent to raise capital at some point this year.
- 80% of firms responding said they would consider equity crowdfunding as an option to raise growth capital.
- 98% indicated that secondary trading is vital for the future of private securities.
A vast majority (78%) of business respondents said they have an engaged community that can be leveraged to raise money online.
Stannard said that if you are going to be successful in a securities crowdfunding offering, it is best to have an engaged community to participate in a funding round.
“Issuers really need to put a lot of effort and thought into the planning of their marketing, as well as the fuel” … and it is “lifetime value which is created,” stated Stannard.
He explained that a committed community can become a supportive ecosystem that participates in future funding rounds – similar to venture funding.
Etan Butler, Chairman of Dalmore Group, said they are seeing strong interest from issuers with solid activity so far this year. He noted they have recently experienced some strong “yield-based” offerings for companies using Reg A+. He pointed to a recent client that has launched their 4th funding round, this time seeking up to $75 million – having raised $20 million so far, including $3 million in a single week.
“They are not looking at these as a one-and-done raise but building a community that you can bring an ongoing number of [investment] opportunities.”
Butler said they are working with a number of REITs [Real Estate Investment Trusts] that can generate consistent returns for investors.
Asked about the 2023 pipeline, Kacaba admitted to some market choppiness but reported that new deal count is increasing. Notably, the highest growth is in Reg CF. She agreed that companies are becoming more sophisticated about building communities to establish ongoing funding relationships.
Asked about valuations – a current topic regarding private firm funding rounds, Kacaba said they have anecdotally seen valuations coming down. This reflects what is being reported in venture-backed deals.
As there are numerous bills circulating in Congress, the panelists were asked their thoughts about recent hearings taking place in the House of Representatives that may be supportive of innovative private firms.
Kacaba said an expanded definition of an accredited investor would definitely help offerings using her platform. The House may push through legislation later this year that broadens the definition.
Butler said there is a discussion about tightening the definition of an accredited investor – reflecting on current SEC leadership. He believes this would push more companies to Reg CF and Reg A+.
Asked about access to capital, Kacaba said the reason she got into this business was because of the challenges facing private firms in raising growth capital. She said that Reg CF and Reg A+, combined with secondary trading, is the wave of the future.
“The rise of the ATS [alternative trading system] is going to be a big focus .. this year.,” said Butler. He predicted more issuers using investment crowdfunding exemptions and more of these firms trading these securities on regulated marketplaces. Butler also said he expects “market making” at some point in the not-so-distant future.
Stannard said he has been involved in three IPOs, and he remembers the pain, but at the same time, firmly believes that regulation is important. He shared that he recently spoke to a well-established company that has been in business for over 100 years that is considering online capital formation due to the community benefits. He said public trading in private securities will be very commonplace in the coming years.
Asked if Reg CF should be increased to $10 million – another legislative possibility, everyone said it was a great idea.
“It is a good number to look at next,” said Butler.
You can watch the webinar here.
Register for CI’s next webinar here.