Crowdfunding

SEC says YES to Equity Crowdfunding!

After over three years in regulatory limbo, the Securities and Exchange Commission (SEC) has finally voted the adoption of the Title III of the Jumpstart Our Business Startups (JOBS) Act at a public meeting, Friday 30 October 2015. SEC is led by Chair Mary Jo White with Commissioners Luis A. Aguilar, Kara M. Stein, and Michael S. Piwowar. Three Commissioners – White, Stein and Aguilar – voted yes to equity crowdfunding law.

President Obama signed the JOBS Act on 5 April 2012. While Title II (Regulation D) and Title IV (Regulation A+) have been given the green light on 23 Sept 2013 and 25 March 2015 respectively, there has been much hesitation where Title III (Equity Crowdfunding) was concerned. This present decision will shake up the crowdfunding world as non-accredited investors will no longer be barred from equity investing.

Press Release: http://www.sec.gov/news/pressrelease/2015-249.html

Final Rules: http://www.sec.gov/rules/final/2015/33-9974.pdf

1Although the SEC had allowed private firms to make general solicitations to the public, only accredited investors, those with net worth over $1M excluding their private residence, were able to participate in investments. It was believed that the general population was not educated enough to be able to understand how the market works and to make smart investment decisions.

There are many individuals who had amassed small fortunes over the years, as well as pensioners, who had the ability to make large investments but were unable to do so because legally they were not qualified by virtue of SEC standards. This is one of the reasons the SEC has been under pressure to adopt Title III, dubbed the real crowdfunding law. Six members of Congress wrote a letter to SEC Chair Mary Jo White on 5 October 2015 urging her to come to a positive decision where this rule was concerned. This may have been what spurred the decision to come to a vote once and for all.

Under Title III of the JOBS Act, entrepreneurs will have a wider pool of funds to tap as they dip into the pockets of the average citizen. More small business ventures will be funded, creating more jobs. Investors will be able to meet their funding needs faster since there is a wider network.

2The process has been a long and trying one as I recall being a part of the team that lobbied for the JOBS Act in Congress. One month before President Obama signed the JOBS Act into law, on Sunday 18 March 2012, I founded the Crowdfunding Intermediary Regulatory Advocates (CFIRA) with Startup Exemption and Gate Tech, a branch of it being the Crowdfunding Professional Association (CfPA). I made efforts to not only educate individuals on crowdfunding, but also to track the growth of the platforms as they emerged. The 2015 Times Realty News Real Estate Crowdfunding Report gives insight into the top and emerging firms in the real estate crowdfunding industry. It has been remarkable to see how taken the market has been with the concept as the real estate sector, more than any other, grew significantly after Regulation A+. Now with Title III being adopted, and everyone given the right to invest according to their funding capabilities, the market is expected to catapult even further.

Crowdfunding platforms will be expected to comply with “funding portal rules” as well as the newly established rule 4518 which will help FINRA to accurately keep record of entities subscribing to Title III. The funding capability has been increased dramatically and as such, so will the potential for fraud. There is the fear among some as they remember the great depression of the 1930s that initiated the creation of the SEC to govern securities. Blue Sky state laws had left many loopholes that were manipulated, leaving the market open and vulnerable to the beating it took. While this fear is reasonable, the market has evolved since that time and sufficient rules have been established to allow for a smoother transition. FINRA implementation of the law will delay its effectivity date, and we may have to wait till late spring 2016 before transactions can be done.

Just after JOBS Act was enacted, in December 2012 I wrote that this equity crowdfunding law will take more than 3 years before it is approved. Now that this law has been passed, no one can reasonably tell the natural outcome of this law but the market is ripe for it. Many expect that the full implementation of equity crowdfunding will be the turning point for alternative financing. The United States of America finally follows Italy to be the only two countries in the world with a specific crowdfunding law.

Image

Credits

Image 1: First meeting of Crowdfunding Intermediary Regulatory Advocates (CFIRA) with Securities and Exchange Commission (SEC) on 20 April 2012. From left to right: Vince Molinari (Gate Tech), Brian Meece (RocketHub), Douglass Ellenoff, hidden (Ellenoff Grossman & Schole LLP), D.J. Paul (Crowdfunder), Candace Klein (SoMoLend), Jason Best (Startup Exemption), David Drake (LDJ Capital and The Soho Loft), Chance Barnett (Crowdfunder), and Alon Hillel-Tuch (RocketHub). Photo credit: The Soho Loft

Image 2: The Crowdfunding Intermediary Regulatory Advocates (CFIRA) founders first met with Financial Industry Regulatory Authority (FINRA) on 20 April 2012. From left to right: Vincent Molinari (Gate Tech), David Drake (LDJ Capital and The Soho Loft), Jason Best (Startup Exemption) and Sherwood Neiss (Startup Exemption). Photo credit: The Soho Loft

David Drake is an early-stage equity expert and the founder and chairman of Victoria Global, LDJ Capital, a New York City-based family office, and The Soho Loft Media Group, a global financial media company with three divisions: Corporate Communications, Publications, and Conferences with 200+ annual global summits and talks on finance and investments. Mr. Drake has been involved in technology, media, telecommunications and impact investments for more than 20 years. He is an advocate of the US JOBS Act and was invited to the White House Champions of Change and represented the US Commerce Department to the European Union in Rome and Brussels as a Small and Medium-sized Enterprise expert.

 

A Better Model For Crowd Equity Funding?

Ian Maxwell has a slightly tongue in cheek proposal for Crowdfunding originally published on his blog.

In its current form Australia’s proposed Crowdfunding Legislation, with its limits of $10,000 per non sophisticated investor per year and maximum of $2500 per company per investor, looks pretty bloody useless.

My guess is the feds are working hard to protect small investors from losing their money on an investment that they can’t do a proper risk assessment on.

The fear? That the same small investors, after they lose their money, will cry foul and blame the government for not protecting them from their own ignorance.

I have a solution!

Put all the relevant companies into a pool (say a specific exchange) and when an investor puts their money in they are assigned a randomly picked stock.

Given that the pool will without doubt lose money and that there will only be a small fraction of companies that make money, this then creates a ‘lottery’ situation. Most importantly the mean return for all money going will be negative, just like any good tote scheme.

Since this is without doubt just a pure gamble, the investors gains would not be taxable as income.

And their losses? Well, bad luck – it would be like losing your money on a horse or a lottery ticket.

I would also create a PIPE (Private Investment Public Equity) scheme, where these same companies could sell stock directly to private investors (at the same price) which would be treated under capital gains tax rules.

 

ED: The feature image in Ian’s original article reminds me of the original Crowdfunding Schemes in England in the 1500-1600’s.

The Queen who understood how important it was to establish and fund international trade and the development of new technology to support that (think Ships, Armaments, Agriculture and later steam) got their wealthy gentry and supporters together to fund worthy exploration and trade in foreign goods, often funding a particular voyage or mission and forming companies to continue the trade.

This later led to the formation of the original Royal Exchange.

Developing technology, rallying the gentry to help fund ambitious missions and entrepreneurs.

Sounds like a head of state with amazing vision and foresight…..

You can read more about it here.

3 Equity Crowdfunding Platforms Australians Can Use Now

Three months after the submission of the CAMAC Crowdfunding Legislation recommendations we are expecting further delays of 12 – 18 months before we see meaningful change in Crowdfunding legislation in Australia.

Clearly this government has more pressing issues at hand including passing even a few of their budget measures, acting on the recommendations doesn’t appear to be a priority as nothing has been heard of the recommendations since being lodged some months ago and CAMAC has now been disbanded.

Unless it’s a legislative change the Government of the day is sponsoring the process will probably go something like this

  • Government delays action for 6-12 month until the noise gets too loud
  • If they are being pushed into the change it will take two years to work out what they want to implement
  • Political announcement to gain mileage Month 1
  • They form a working group and terms of reference – Month 3
  • Working Group calls for submissions – Month 6
  • Working group study the submissions Month 8-12
  • They complete their report and submit their recommendations to the Government, Month 12
  • The Government reviews the report month 12-18,
  • They work out what is manageable given the political tone of the day,
  • They make pubic political mileage announcements Month 18
  • They request a draft amendment to the relevant Act to be drawn up Month 18-20
  • It goes through many rounds of negotiation, review and amendments in the party room and then the Lower and Upper house Month 20-24
  • Gets stopped at the Senate so they can bend the Government over the pork barrel to get whatever that particular Senator wants for his district that month,
  • Gets amended again
  • Then 18-24 months after the initial a watered down version emerges from the mess, but by the time it is enacted the party is now in election mode and a few months later after a either a leadership or Government Change the amendments get pushed aside…….

Despite this local Crowdfunding players are not sitting on the sidelines waiting, these companies are getting on with crowdfunding or near-crowdfunding platforms or establishing their platforms overseas.

Pozible, i-Pledge, The Crowd (as proposed by Mark Carnegie) and CrowdfundUP have all announced they will provide equity platforms when legislation allows.

The delay in updating Crowdfunding legislation is causing major headaches with some of the Crowdfunding platforms deciding to focus their efforts overseas and others using non obvious paths via New Zealand to provide a workaround.

ASSOB

After raising $140,000,000 over the last 6 years ASSOB is claiming its place as the oldest and most successful equity crowdfunding platform (Ed: ASSOB was crowdfunding before it was called crowdfunding). They have been operating in accordance within a well-defined exemption of the Corporations Act.

ASSOB-Funded

ASSOB can only act as a business matching service and can’t advertise deals publicly or allow participants in the market to do so using social media tools that have become “tools of the trade” in crowdfunding generally.

ASSOB however is ready to transform Crowdfunding locally and recently struck a deal to license its IP to OfferBoard in USA and OfferBoard now has active fundraising campaigns underway.

Offerboard

Offerboard

Offerboard

Offerboard

Yes it appears that despite our home-grown world-class Crowdfunding talent and technology, we can only export it at the moment.

ASSOB has also started a Regional Hub strategy that allows the local community to fund local businesses within the processes of ASSOB and the existing law.

They have started with Far North Queensland (Cairns) and have plans for another 7 Hubs in the near future.

ASSOB is well positioned to spread the word and capacity of local businesses to get funding.

Local Businesses and communities rather than high tech businesses may have a greater appetite for Crowdfunding judging from some of the results from both the UK and USA.

VentureCrowd

VentureCrowd is the well-backed fund-of-funds operated by Artesian Capital – one of the most active VC’s in the country.

VentureCrowd

VentureCrowd

Their platform is only open to Sophisticated Investors ($250k, PA income + or net assets of $2.6m).

This method is legal and probably very good for high net worth individuals that want to play in the startup ecosystem and “pick winners’.

But this model necessarily leaves out a crowd of people that are not Sophisticated and who would like direct equity in the company they support, its a very narrow base.

Equitise

Probably the most interesting player at this stage is Equitise . Equistise has launched a licensed equity crowdfunding platform within the NZ regulatory framework.

Equitise - NZ Based Crowdfunding Platform

Equitise – NZ Based Crowdfunding Platform

The Australian Law Society advocated such a strategy 3-months ago which is achievable due to the longstanding bilateral trade agreements between Australia and New Zealand that encompasses aspects of financial products and markets. As a result Equitise can now offer a Crowdfunding platform to Australian companies and investors  as long as their plans include a NZ branch of the business.

They are in effect an Australian equity crowdfunding platform with access to the Australian market but governed within the New Zealand laws.

This is not a situation any proud Aussie should ignore. We are losing talent and markets for funding businesses to New Zealand!

When we hand New Zealand the mantle of being more innovative than us we might as well collectively pick our sorry butts up and go back to mining.

By delaying Crowdfunding Legislation Amendments Australia has stupidly and unnecessarily ham-strung our startups at a time when sophisticated capital markets of the USA are evolving quickly and the red-hot Asian markets like Singapore or Hong Kong are taking off.

For many years our established startups have had to move to the US to access growth capital, while access to local Angel & early stage funding market appears to be improving Crowdfunding holds the promise of allowing startups to access a wide base of local funding, but continued delays along with the destruction of Commercialisation Australia means that the startups of 2013-2015 will probably have to go offshore to get funding.

Despite the self harm our government is causing with the delays to Crowdfunding legislation it is great to see the likes of ASSOB, VentureCrowd and Equitise finding ways to meet the market needs.

MetalTree’s HUGE 3D Printer demos at Sydney Maker Faire

Meet the Metaltree 3D Printer maker Jason Crowe.

Metaltree-Jason Crowe

Metaltree-Jason Crowe

At 1.2m high this is the biggest 3D printer I have seen (and none of it is support cabinet), earlier in the year we researched over 50 printers in our 3d printers comparison and this is significantly larger build volume than anything I have seen on the market short of the industrial versions.

It uses a Delta configuration which means that the extruder head moves around on 6 arms and the build plate doesn’t move at all.

This simplifies construction and allows for a larger build space for a given size and weight than a traditional 3d Printer where the extruders move X Y but the build plate moves up and down as the item is printed.

Metaltree Extruder Head

Metaltree Extruder Head

This is still a prototype so its not ready for production yet, Jason is working towards getting it production ready and plans to launch a crowdfunding campaign to sell them next year.

 

 

 

 

Dominic Green is Nailing it

This weeks Nailing It goes to Dominic Green. I first met him through my brother (David) some 5 years ago in Dubbo (Regional NSW).

Full disclosure: I am one of Dominic’s clients, he did a lot of the work in drafting my Crowdfunding Legislation Reform submission to CAMAC.

At that stage Dominic had left the big city lights where he was a recently graduated lawyer and economist studying carbon accounting.

Dominic Green - Green & Associates

Dominic Green – Green & Associates

In the “bush” he was able to exercise his brain on the many evolving carbon and renewable energy projects taking place West of the great divide.

He started pioneering legal work on carbon sequestration through pyrolysis (burning plant waste in the absence of oxygen) among other things.

Dominic was young, brash and direct. He had a career as a male model under his belt so his presence in a country town along with his ex-model fiancé was noticed.

After the breakdown of his relationship he returned to Sydney where his litigation and broad skills were more in demand. But being seen as inexperienced he started at the bottom of the food chain.

He quickly rose through the ranks to become the company top earner and whilst he wanted to become a Partner there was “no room at the inn”.

So he upped and left to start his own firm Green & Associates.

The firm he’s created is startup friendly with fixed price, win-only fees or variable fees as the client needs. This flexible, client-friendly nature reflects Dom’s desire (impatience) to get things done.

From representing alleged criminals to startups he truly has one of the most interesting case-loads and day-to-days of anyone I’ve met.

It is rumoured he jointly represented two bitter rivals that took the legal and non-violent path to reclaiming money from someone that owed them both. This person could only have the funds if he proved the existence of an artwork in his possession was authentic.

This verification was long and complicated but eventually resulted in a sale and in turn repayment to the rivals. Dominic was said to have managed all the parties through the transaction.

But Dominic is not all about wheeling and dealing, he has done pro bono work for environmental regeneration charities and more recently has assisted me with drafting crowd-sourced equity funding (CSEF) legislation.

This inspired his tag line: law in black, white and green. On top of his legal work he is also privately developing resorts in Indonesia and dating some of the most beautiful women on the planet.

Whilst this type of nailing it contrasts with the usually wholesome family-raising qualities espoused by this column, I can still recognise (as most would) that in the world Dominic occupies he is definitely nailing it.

For your environmental work, legal brain and social nous, thank you for helping me and others like me – you are nailing it.

Communities like yours are using Crowdfunding to take matters into their own hands

David Drake - CEO - LDJ Capital - Credit Linkedin.com

David Drake – CEO – LDJ Capital – Credit Linkedin.com

While Crowdfunding gets most of its publicity due to massive campaigns for sexy devices on Kickstarter our US Crowdfunding expert David Drake says that increasingly companies like Fundrise are running projects that use Crowdfunding to fund real estate, in particular providing investors access to wholesale development deals and giving members of the community the ability to fund  local community real estate projects.

ED: Funrise recently announced they have raised ~$30 million infunding from Chinese Social Networking company RenRen

Crowdfunding has now grown from a niche to a legitimate platform for funding projects of all kinds by raising money from the public at large. Nowhere has this been more pronounced than the real estate sector where there are now a number of crowdfunding platforms offering investors the chance to participate directly in real estate projects. Traditionally, the real estate market has been the exclusive preserve of wealthy and well-connected individuals with the exception of real estate investment trusts (REITs).

Credit - Fundrise.com

Credit – Fundrise.com

Leading real estate crowdfunding platform Fundrise takes a slightly different approach from other platforms because it emphasises the social benefits that arise from investors having a say in the development of their own communities.

A case in point is the Transfer Station in Philadelphia which set out to test the market and got $1.8 million committed on a target of only $500,000 to create a community-oriented co-working, retail, education and event space.

It points out that local residents have a better appreciation of their community needs and should have a say in what happens there.

Sometimes, the dominance of large investors can lead to a disconnect between fund managers and the properties in which they invest.

The process is relatively straightforward with developers listing projects on the website and investors buying shares in these projects for sums starting as low as $100. Returns to the investors come from rental income and capital appreciation when the property is sold.

Fundrise is a pioneer in offering “Regulation A” investments, which allows any investor, and not just the wealthy individuals, to invest in real estate and receive attractive returns.

A good way of getting the flavor of how they operate is to look at the details of its recently closed third public offering, which was a property where any resident of DC, Virginia and Maryland could invest in for as little as $100 each. Fundrise ended up raising $350,000 from 378 investors, and what is interesting is that 25 percent of these investors live within a distance of 1 mile from the property.

The total project cost was $1.7 million with a projected return of 8 percent. Of the 378 investors, 51.6 percent (195) came from Washington DC of whom 16 percent were accredited investors; 24.9 percent (94) from Virginia of whom 29 percent were accredited investors; and 23.5 percent (89) from Maryland of whom 21 percent were accredited investors. Of the total investors, 51.4 percent were between the ages of 18 to 35 years, 41.1 percent between 35 years and 55 years and the remaining 7.9 percent were over 55 years old.  The average age of an investor is 37 years.

The maximum number of orders was 100 for $100 apiece, followed by 80 orders for $500 each. The average order size was $926.

The numbers and the structuring may vary from transaction to transaction but this is a good representation of the investment trend on Fundrise. All their offerings have been fully funded. There is clearly considerable demand for small value investments as well as a reasonable amount of demand from investors who live in the neighbourhood.

When you tie in the fact that investors are comfortable with real estate and that diversification can be easily achieved with multiple investments in different properties in the Fundrise portfolio, the value of crowdfunding as a legitimate and credible means of funding real estate projects is clearly established. This model is certainly one template for structuring real estate crowdfunding in the future.

 David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City-based family office, and The Soho Loft Media Group, a global financial media company with divisions in Corporate Communications, Publishing and Conferences.

The metrics behind the top Equity Crowdfunding Campaigns

Paul Niederer CEO of ASSOB, Australia’s longest running and most successful Crowdsourcing platform shares the best in class results from the last sixteen capital raisings on the ASSOB platform.

Success leaves clues

I wondered, what is “Best in Class” in raising funds from predominantly retail or unaccredited investors.

Best way to find out was to look at 16 of the most successful, recent Startup equity raises on the ASSOB Equity funding Capital Raising platform. These 16 raised over 11 million dollars together on ASSOB.

Most of these companies were after their first capital, meaning there was usually some sweat equity already, maybe some family money, but most were not ready for Angels or VC’s. Thats why they came to ASSOB.

Bootstrap, then ASSOB, then Angels then VC’s.

ASSOB-Infographic

Best in Class

Lets determine what is “Best in Class” from the sixteen recent ASSOB raises that raised on total $11.4 million.

  • Raise size. $425,000 to $1,592,000 with an average of $637,666. You may seek to raise less or more than $600k but our experience has shown that an opportunity with a convincing, compelling and credible story, coupled with a balanced, passionate and likeable team generally raises from $500k upward for an equity raise.
  • Average amount raised daily. $680 to $6,076 with an average of $1685. So if you are out to raise some equity funding from unaccredited investors $1685 per day is a good figure to start with to work out how long you will need to raise your money. Best in class $6,076 a day. Lets say $6000.
  • Crowd size. Generally the larger your crowd  the more you raise. Gathering a crowd is essential to a raise. The stats show that the crowd size is usually between 335 and 991 people. These are people that have visited your profile page and have had more than just a brief look. The average crowd size is 667 people. Of these 667 people around 40% actually download details about the offer including the offer document. On average 8% of them invest. Best in class is a crowd of 991. Lets round that off at 1000.
  • Investor locality. 60% of investment comes from the same state or province so geography matters.
  • Investor type. Over half of investment came from retail or unaccredited investors. While the average was 56% the number of retail investors in raises ranged from 32% to 79% Usually the first $200,000 to $300,000 came exclusively from this group. Here is the breakdown.
    • Retail  / Unaccredited investors 56%
    • Existing Shareholders 17%
    • Sophisticated / Accredited investors 15%
    • Overseas investors 6%
    • Associates of he business 4%
    • Professional / Accredited investors 2%
  • Raise Sectors. Not every company is headed for a Silicon Valley exit. Most are not as exciting as the SnapChats and Ubers of this world. The 16 raises included here covered a broad range of sectors. All companies were Australian with Australian innovation. Fitness, Pharmaceutical, Welding technology, Cloud technology, Designer Furniture, Robotics, Wealth Management, Risk Management, Dental Technology, Online Photos, Open Source Software and Senior Welfare.

What will it take?

So what does all this mean if you are seeking equity capital?

If you are preparing for an equity crowdfunding raise, including retail/unaccredited investors, then it is well worth playing around with these “Best in Class” stats to get a feel about where your investment could come from and in what amounts.

Say you want to raise $600,000 based on performing like the “Best in Class”.

  1. If you do a good job, and work hard, the fastest you should be able towrap it up is in 100 days
  2. You need to gather a crowd of just under 1000. That means you need to drive 1000 interested people to your profile page on the equity funding platform.
  3. Focus at least 60% of your effort on local investors.
  4. Retail investors are needed to get initial traction. By the end of the raise you will have at least 32% of your investment from this group and in some cases as high as 79%.

In a sentence ?

$600k in 100 days from a gathered crowd of 1000 with 60% local investors and over half retail/unaccredited investors.

paul-niedererPaul Niederer is the CEO of the Australian Small Scale Offerings Board (ASSOB), Australia’s largest and most successful business introduction and matching platform and one of the more structured methods of raising early stage investment funds with a focus on compliance, disclosure and corporate governance.  To date ASSOB has raised over $135 million for Australian startups. You can read more of Paul’s thoughts on crowdfunding and early stage investing at his blog Paul Niederer.

About : http://paulniederer.com/

Crowdfunding Update – Interview with John Kluver CAMAC, Alan Crabbe Pozible & Paul Niederer ASSOB

A few weeks ago CAMAC released the Crowd Sourced Equity Funding Report May 2014. (right before being axed in the Federal Budget)

Join us on the 26th of June for a Google Hangout with Startup88.com contributor and Crowdfunding proponent Andrew Ward from 3Minute Angels interviewing John Kluver (CAMAC), Alan Crabbe & Rick Chen (Pozible) and Paul Niederer (ASSOB) to discuss CAMAC recommendations and ask your questions.

If you want to put a question to the panel please ask it here