A report shared at the most recent meeting of the SEC’s Small Business Capital Formation Access Committee (SBCFAC) on women and minority-owned businesses participating in Reg CF (Regulation Crowdfunding) provides an update on exits for firms utilizing the securities exemption.
Authored by Melody Change, PhD, from the University of Southern California, Marshall School of Business, the report states that 14 firms that raised money using Reg CF have pursued public offerings (IPOs) and 71 acquisitions. While the report does not include specific terms of the acquisitions or the status of traded shares, both paths provide an opportunity for early investors to exit.
The report states:
“Investing in startups is an inherently long-term commitment. Similar to venture capital and angel investments, returns on equity from crowdfunding generally materialize when a startup “exits,” which occurs either through an initial public offering (IPO) or acquisition by another entity. However, it’s critical to recognize that not all startups achieve a successful exit, with the vast majority of early-stage companies failing to yield any returns for their investors. For the limited number of businesses that do exit, industry reports note
that this typically takes 5 to 10 years after inception. Since the establishment of Reg CF seven years ago, there have been 14 IPOs and 71 acquisitions to date of businesses that conduct a Reg CF offering, though the precise terms of these acquisitions and the exact proceeds distributed to investors are often not disclosed. These instances, albeit infrequent, demonstrate that Reg CF possesses the capacity to deliver financial rewards to investors, highlighting its potential as an investment avenue.”
On the other side of the equation, the failure rate for Reg CF issuers is 19%.
It is still early days for this securities exemption and another milestone is a future funding round for these firms. The report states that across all Reg CF participants, 9.5% of businesses raise money through Reg D after their Reg CF offerings, with an average amount of $7.5 million.
There are other benefits of funding early-stage ventures as these firms use funds raised, injecting it into the real economy while employees earn new skills. The report also includes some recommendations as to how policymakers can improve the securities exemption – awareness continues to be one of the challenges – especially for underserved communities.
