Crowdfund Capital Advisors (CCA) has published a new report that investigates trends in online capital formation under Reg CF (Regulation Crowdfunding). CCA was co-founded by the creators of the JOBS Act – the legislation that legalized investment crowdfunding.
While the bill was signed into law in 2012 during the Obama Administration, the Reg CF securities exemption was not actionable until mid-2016. Initially, the exemption allowed firms to raise just $1 million, eventually increased to $1.07 million – a rather anemic amount when you consider both the cost to pursue a funding round online and the growth capital needs for a startup or early-stage firm.
In 2020, under the leadership of former Chairman Jay Clayton, the Securities and Exchange Commission changed the funding cap to $5 million, thus making the exemption more viable. Today, there are dozens of FINRA-regulated Funding Portals and a handful of broker-dealers that help firms to raise growth capital in an online securities offering. Frequently, these platforms also support other securities exemptions.
The Investment Crowdfunding Trends Report shares these high-level data points of the Reg CF industry:
- Over 6800 issuers have utilized Reg CF
- More than 8000 individual securities offerings
- Total funded rounds are now over $2.2 billion
- Over 1.9 million individual investors
- An estimated 310,000+ jobs created
- An estimated annual stimulus of $6.8 billion
- Total enterprise value created – $75.6 billion
While there were, and remain, investment crowdfunding detractors, when reviewing the macroeconomic results, it appears to be a big win for the economy. Along with other forms of finance, the digitization or leveraging the internet to raise money in an online securities offering is a natural step for venture or angel investing.
Sherwood Neiss, co-founder and Principal at CCA, describes investment crowdfunding as a transformative force that is redefining access to capital. The new form of capital formation has “unlocked a new era of opportunity.”
“This movement not only fosters job creation and stimulates economies but also amplifies the value of enterprises to new heights,” states Neiss. “As a beacon of progress, investment crowdfunding heralds a future rich with potential and shared prosperity.”
While many early-stage ventures fail – approximately 50% according to the report, which cites the US Department of Labor Statistics, funded companies that have used Reg CF are largely operational after funding. CCA reports that just 17.8% of funded companies have gone out of business. Hopefully the percentage holds in the coming years as the sector evolves.
Other highlights of the report:
- 47.3% of firms claim at least one female or minority founder
- The success rate of issuers is around 75%
- The median valuations of firms has continued to increase. Approximately $14 million today. This means more mature issuers are using the exemption.
- While traditional innovation regions garner much of the funding, companies from across the country are benefiting from the funding option.
- Tech and software is the most active sector raising funds
As for the most active platforms since inception, the top platforms are as follows:
- Wefunder
- StartEngine
- Republic
- Mainvest
- Honeycomb Credit
Honeycomb is a debt-only platform, acting as an option for a bank loan.
In 6th place is Canada-based platform DealMaker, a relatively new entrant in the industry that operates a broker-dealer.
The top three platforms have garnered the bulk of funding, but the industry is still young, and new entrants continue to join the space. Wefunder and StartEngine have listed the most issuers raising more than $1 million.
There is a lot of good information in the CCA report. The company has been providing data on Reg CF since the inception of the industry. While much progress has been made regarding online capital formation, early success should be foundational for improvements. Policymakers should recognize the benefits of fueling innovation and entrepreneurship – and not look to stymie the industry. Many industry insiders would like to see the funding cap of Reg CF increased to $10 million or $20 million. The goal is to create a step ladder strategy where smaller firms may start with Reg CF, raising sequential rounds until they graduate to another exemption such as Reg A.
The one data point missing is aggregate returns for investors by vintage (year). In the end, the industry must not only be able to provide access to capital, and platforms must turn a profit, but investors should generate a commensurate return, on average, for committing their money.
While the benefits of supporting entrepreneurs should be clear to all, you must remember that funds raised go into the real economy – goods and services are purchased, and employees are hired. And these employees learn valuable skills that can be used in the real world, supporting an innovation-driven economy – something that makes the US more competitive globally.
The report is available on the CCA website.