Equity Crowd Funding Webinar 9-26-2013

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  • 1. Raising Capital Through Equity Crowdfunding James Hoffmire, Ivon Yeap, Erica Flemming, Liu Yifei
  • 2. The Funding Gap
  • 3. Equity-Based Crowdfunding is Playing an Increasingly Large Roll in Closing That Funding Gap
  • 4. Overview Intro to Crowdfunding Legislative Changes in the US Equity Crowdfunding Platforms How to Crowdfund Successfully
  • 5. What is Crowdfunding?
  • 6. Four Types of Crowdfunding (Source: Massolution) EQUITY-BASED (includes revenue and profit-sharing models) REWARD-BASED LENDING-BASED DONATION-BASED REWARD-BASED
  • 7. Equity-Based Crowdfunding High growth and large fund per project Selling equity in a company using one of the crowdfunding websites In return for investing in the company, the investors receive a share of the profits (dividends or distribution) Source: wsj.com
  • 8. Project Funds Paid for Donation and Reward Crowdfunding Source: Massolution
  • 9. Project Funds Paid in Equity-Based Crowdfunding Source: Massolution Crowdfunding by selling equity brings in BIGGER dollar amounts
  • 10. Growth in Crowdfunding Internationally Source: Massolution 2.8 Billion Dollars raised in 2012 and this number is expected to grow even more
  • 11. Growth in the Amount of Crowdfunding Platforms by Category Based on a sample of 143 CFPs Source: Massolution Equity-based Crowdfunding is rapidly growing
  • 12. Crowdfunding vs. Traditional Methods of Funding Bank Loans Angel Investors Venture Capitalists Crowdfunding ● Traditional source of capital for small businesses ● However, banks are not lending as much as they use to ● Need collateral, previous business financials, and a relationship with a bank ● It is often hard for small businesses to meet qualifications ● A wealthy individual or small group of individuals providing capital in exchange for partial ownership ● Typically they make bets on companies in their earliest stages (seed funding) ● Investments usually range from $25,000 to $100,000 or ● Investors (usually firms, not individuals) invest in the early stage of startup companies with high potential and high risk in exchange for owning equity ● Have significant control over company ● Investments range from $1 million to $10 million ● Raising small amounts from many individuals through the Internet and other social media ● Projects can vary greatly ● Lending is less costly than traditional methods ● Investors may be connected and involved
  • 13. Crowdfunding vs. Traditional Methods of Funding Bank Loans Venture Capitalists Crowdfunding Collateral Time Required Relationship Success Rate Management Control Needed Not needed Not needed Long Long Relatively Fast 8.2 Weeks Previous relationship with the bank helpful Have to know the right person Can gain support from many people Varies, unlikely to secure a large loan 0.07% No Large Influence No Varies by platform Ourcrowd accepts 7-8%, followed by a success rate of at least 33%
  • 14. Legislative Changes in The US In April 2012, Congress passed the JOBS (Jumpstart Our Business Startups) Act. ● The JOBS Act makes it easier for startup companies to find investors, and makes many changes in the financing process for private companies. ● The JOBS Act instructs the SEC to revise their rules concerning the sale of private company equity. Some of these rule changes have not yet been implemented. ● We encourage you to read about the details of this act, if you have not already.
  • 15. The JOBS Act aimed to end the legislative chaos surrounding equity crowdfunding. federal legislators presented at least five conflicting pieces of legislation that would have regulated equity crowdfunding. JOBS combined pieces from these and other bills.
  • 16. Summary of JOBS Act in Relation to Equity Crowdfunding ● A private company may have up to 2,000 shareholders. ● Soliciting and advertising private equity publically is allowed (This allows for solicitation on Facebook, Twitter, Linkedin, Television, etc.) In effect this week ● Some public offerings may be exempt from SEC restrictions that face public companies. Through these exemptions, equity may be exchanged through crowdfunding portals. Companies looking to sell equity through crowdfunding must request an exemption from the SEC ● Private companies are allowed to raise up to $1,000,000 of equity annually through an SEC exempt public offering (crowdfunding).
  • 17. JOBS Act Summary (Continued) ● Accredited investors are allowed to invest up to $100,000 (per company) annually through equity crowdfunding ● (Not yet in effect) Non-accredited investors (average people) may purchase equity through crowdfunding, up to $2,000 per company . Private companies may only have 500 non-accredited shareholders ○ If 500 average people can invest up to $2,000, that means that Crowdfunding can raise up to $1,000,000 from non-accredited investors
  • 18. What is an Accredited Investor? The federal securities laws define the term accredited investor in Rule 501 of Regulation D as: 1. a bank, insurance company, registered investment company, business development company, or small business investment company; 2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million; 3. a charitable organization, corporation, or partnership with assets exceeding $5 million; 4. a director, executive officer, or general partner of the company selling the securities; 5. a business in which all the equity owners are accredited investors; 6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person; 7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or 8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes. (Taken from SEC website)
  • 19. JOBS Act is Slowly Kicking In ● Some provisions of The Jobs Act took effect immediately ● Most provisions of the JOBS act to the were deferred to the SEC to draft the final rules. On July 10th, SEC amended their rules to allow for public solicitation. These rule changes took effect on September 23rd. ● SEC has proposed filing requirements that are generally opposed by the crowdfunding community. One requirement is that companies must inform the SEC 15 days before they begin selling equity. ● A private company that fails to meet SEC filing requirements will be banned from selling equity for one year ● SEC has not amended all of their rules to comply with the JOBS act. More rule changes are expected this year
  • 20. State Legislation ● Under the belief that the Jobs Act does not loosen crowdfunding restrictions enough, or that it is taking effect too slowly, some states are passing their own crowdfunding legislation. ● Kansas and Georgia have passed legislation that allow unaccredited investors to more easily participate. ● Washington, North Carolina, and Wisconsin are currently debating similar legislation. Equity crowdfunding legislation has passed on a state and federal level by large margins, so it is likely that these states will also successfully pass their legislation. ● State legislation encourages interstate investing. (Unaccredited investors in Kansas may invest in a
  • 21. Successful Example Lucid Energy (US based company): -Objective: To expand its in-conduit hydro turbine operation to foreign shores -Market: -6% of all energy in the US is used to move water -Over 2/3 of the states in the US have renewable portfolio standards (RPS) requiring the use of renewable energy -Industry: Hydro turbine/ Renewable energy -Platform: OurCrowd (Israel’s hybrid venture capital/crowdfunding platform) -Capital raised: $1,632,000
  • 22. Key Financials: Annual Sales (Estimated): $210,000 Prescreen Score: High Risk Location Type: Single Location (Portland, OR) Plant/Facility Size (sq. ft.) (modeled): 2,570 Employees (All Sites) 3 Primary Industry Electrical Contractors Lucid Energy
  • 23. Cost to do an Equity Crowdfunding Project Fees to the platform (fees are generally 5% to 10%) ● E.g. CrowdCube keeps 5% Time and energy to set up the Crowdfunding project ● 10 hours to potentially thousands of hours of time and energy to set up project ● Hire or delegate someone to manage the project along with anyone else needed Promoting the crowdfunding initiative ● Advertising: Varies by website, if any Bank commission ● Paypal: 2.4-3.4% ● Credit Card: varies by bank Taxes ● Depends on whether the money is received by a company or by an individual. ● Depending on the type of crowdfunding used.
  • 24. Sample Fees Structure - OurCrowd
  • 25. Top 10 Crowdfunding Platforms-Source: Forbes 1. Kickstarter is a site where creative projects raise donation-based funding. 2. Indiegogo approves donation-based fundraising campaigns for most anything — music, hobbyists, personal finance needs, charities and whatever else you could think of. 3. Crowdfunder is a crowdfunding platform that focuses on private businesses. It originally offered a blend of donation-based and reward-based crowdfunding. Crowdfunder is transitioning to equity-based crowdfunding individuals and angel investors for businesses, with a growing social network of investors, tech startups, small businesses, and social enterprises. 4. Rockethub powers donation-based funding for a wide variety of creative projects. RocketHub has expressed interest in offering equity-based crowdfunding. 5.
  • 26. Top 10 Crowdfunding Platforms -cont. 6. Somolend is a site for lending for small businesses in the US, providing debt- based investment funding to qualified businesses with existing operations and revenue. 7. If you want to build the next new mobile app and are seeking donation-based funding to get things off the ground or growing, then check out appbackr and their niche community for mobile app development. 8. If you’re a tech startup with a shiny lead investor already signed on, or looking for Silicon Valley momentum, find equity or debt investments through AngelList. 9. donation-based fundraising for a specific group or niche in the market. 10. If you’re an inventor, maker, or tinkerer of some kind then Quirky is a place to collaborate and crowdfund for donation-based funding with a community of other like-minded folks.
  • 27. Equity Crowdfunding Platforms - Internet platform which connects investors and entrepreneurs - Investor provide entrepreneurs with capital in exchange for equity - Generally selective, screens applicants and reject companies that do not seem profitable
  • 28. OurCrowd (ourcrowd.com) ● Founded in Israel, expanded internationally ● Hybrid venture capital - crowdfunding platform ● Provide mentor for entrepreneur ● High base investment of $10,000 with only accredited investors ● Intend to be exclusive and will not open up to general public ● The platform invests 10% in each company they take on ● Plans to fund 40-50 deals in 2013 ● Funded largest equity crowdfunding deal $2.2M for AE Squared
  • 29. AngelList (angel.co) ● Exclusively sells equity, mostly for startups ● Oversees startups by providing mentorship and template business plans ● Currently only accepts accredited investors. Plans to expand to accept non-accredited investors ● Allows users to apply for employment at selected companies ● Found investors for pinterest.com
  • 30. Crowdfunder (crowdfunder.com) ● ● Initially debt and revenue share based, recently has shifted to equity based ● Mostly serves startups that are tech-based, often web-based ● Sponsors entrepreneurship contests. Startups are awarded cash prizes and exposure to investors ● Direct engagement with US House, Senate, and White House around legislative efforts that became the JOBS Act
  • 31. Other Equity Crowdfunding Platforms Platform Focus CircleUp Consumer products and retail EarlyShares Seed stage businesses Fundable Seed stage businesses Seedups Early stage tech-startups StartupValley Technology startups and businesses Bolstr Local small business, revenue sharing Fundable Equity and reward based crowdfunding SecondMarket Market for all kinds of illiquid asset (equity, debt…) SeedInvest Platform for angel investor Wahooly Connect social network for promote startup Wefunder Seed stage businesses
  • 32. Keep in Mind ● Selling equity means giving up a part of your business. Selling a lot of equity means giving up a large part of your business.
  • 33. Keys to a Successful Equity Crowdfunding Campaign● ● Pick the right platform ● Set a realistic goal (sometimes all-or- nothing campaign) ● Build your pitch ○ The problem you’re trying to solve ○ Company, market, competitors, and consumers ○ How money raised helps ● Network + Social Media ● Video Marketing Your Crowdfunding Campaign
  • 34. Leverage Your Network ● Family and friends ○ Have commitments from family and friends before launch ● Social media ○ Twitter, Facebook, LinkedIn, email subscribers ● Press ○ Newspapers, magazines, blogs, anything that will increase visibility
  • 35. Most Important Factor for a Successful Campaign: Friends and Family (Seedrs) Seedrs has found that all of their campaigns have succeeded once they have received 35% of the funding It is important for each company to have commitments from family and friends Because independent investors will only invest if there is momentum in the campaign
  • 36. Pitch Video In Kickstarter, campaigns with video are 60% more likely to succeed! ● Idea (Scalability) ● Credibility (Name-drop)
  • 37. If your company is interested in equity based crowdfunding, you can send any questions to me at jhoffmire@wisc.edu Note that I am not a lawyer, and I recommend consulting with one before you venture into crowd funding.