Equity Crowdfunding World News - What's Been Happening?
So, the big news at the end of 2016 was the rumour that US based Indiegogo, which was thinking of offering equity crowdfunding, has now turned this thought into a reality.
Indiegogo started life much the same way as Kickstarter in the USA, as a pure rewards-based crowdfunding site. The two companies can claim to be the trail blazers for the whole crowdfunding phenomenon. Indiegogo has been supporting creatives and start ups for eight years, so well before 2011 when equity crowdfunding first appeared. The company claims to have 8 million ‘backers’ and they have in turn funded 700,000 campaigns, raising almost $1bn. Almost half of these ventures have been for business start ups, the other half being for creative projects like a new book, album or film. The company claims that it gets site traffic of 15 million users per month.
When you consider that the UK’s largest equity crowdfunding platform, Crowdcube, boasts 340,000 investors, you begin to understand the possible seismic shift Indiegogo’s entry may have. It is already scaled up, has already done the hard yards in this sector, already has a brand name which is instantly recognisable and has been associated with success at the highest level. It knows, as we do, that it will not be rudely interrupted by its arch US rival Kickstarter, which has already stated it will not be entering the equity crowdfunding space.
So what are the possibilities for Indiegogo in equity crowdfunding? It has teamed up with MicroVentures, a US platform which launched in 2011. To date, MicroVentures has relied on Title II equity crowdfunding, which only allows HNW individuals to invest and has some strict criteria for pitches. Under the newly passed Title III law, the Jobs Act allows ordinary individuals to invest up to a couple of thousand dollars or 5% of their income a year this way. However, unlike in the UK, platforms have to be SEC accredited and the accreditation is not easy or cheap. A combination of MicroVentures accreditation and Indiegogo’s brand and following, may just be what the US needs to get the equity crowdfunding sector going there.
After just two months in operation, Indiegogo has helped 5 different companies raise $1.4 million, with over 2,600 investors getting in on the action. It has immediately shared details of several more new deals on the site, with the volume of equity deals only likely to go in one direction this year.
What it demonstrates is the flexible thinking behind this new partnership. In the UK, we have always had minimum targets, which must be achieved or your pitch gets no money. So for example, if a campaign to raise £500k ends with only £400k raised – the investment is cancelled, leaving the company and the investors with nothing. This is a key feature of Indiegogo’s equity operations - by setting a minimum raise target and then a top target, providing all is transparent, a pitch that only reaches 80% of its final target is still able to secure investment.
Another feature of Indiegogo that competing platforms will need to understand quickly is that the company already has a global presence. And it already has enterprises that have raised some very large sums based on their rewards-only model.
For example, an Australian father and son team, who invented a new hive for bees called FlowHive, raised over $13m on Indiegogo. Another Canadian based venture, Core, raised $1.5m for the launch of its wireless speaker. The list goes on. Now, these examples have raised money on the back of offering rewards – just imagine what they might do if they were offering equity. After all, who doesn’t know the Oculus Rift story?
The vast majority of the press in America has bashed equity crowdfunding as an idea that will simply not work until existing limitations are reduced. Examples of stifling restrictions include:
Form C - current regulations require a business to file a Form C with the SEC before it can solicit investors. This is a 25-page document that can take up to 50 hours to complete, and requires a lawyer to act as an adviser. Time-consuming and costly.
12(g) Rule - this rule stipulates that if a successfully crowdfunded company reaches a point where it has $25million in assets, it will be required to begin reporting as a public company. As such, a company could be forced to become public whether it’s ready or not.
Shareholder Management - the SEC explicitly banned SPVs or nominee shareholder structures for equity crowdfunded businesses. As such, all new shareholders must be included on a company’s CAP table. This is a substantial turn-off for early stage companies.
All Isn’t Well Down Under
A bill that would mean unlisted public companies with less than AU$25million in assets can raise capital via equity crowdfunding was shot down by the Australian Labour Party in December of last year. As a result, startup founders have labeled the lack of progress in getting the Crowd-Sourced Equity Funding (CSEF) bill through parliament as embarrassing. With other nearby countries including New Zealand and Singapore adopting a similarly liberal regulatory approach to the UK, scores of high profile figures in the Australian entrepreneurial ecosystem are concerned that they will fall behind in the global startup funding rat race that we’ve witnessed over the last decade.
VC + Equity Crowdfunding = A Win Win
We have seen increasing involvement from VC firms in equity crowdfunding in the UK. Simon Cook, CEO of VC firm Draper Esprit, last week wrote an article in City AM detailing the company’s involvement with the industry, citing the networks, expertise and guidance that a seasoned VC brings to any investee company, combined with the relative speed and accessibility provided by equity crowdfunding.
At its core, what equity crowdfunding has enabled is a new avenue for wealth creation for both members of the public, who might be considered retail investors, as well as the more sophisticated investor who hasn’t been able to readily access the kinds of opportunities that EIS investments now offer. With more VCs getting in on the action, this will only help to validate the industry further, crowding out poorer quality deals, paving the way for even more investors to add to the already growing pool of liquidity for early stage UK companies.
Who is Dexster?
Sometimes controversial, always trenchant, Dexster is Growthdeck's resident blogger. Dexster will bring you his/her views on the crowdfunding scene covering a wide range of topics, including the growth of the equity crowdfunding industry, the risks faced by platforms, how businesses are faring, what investors need to look for when choosing a provider and much more.