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Delineating Securities-Based Crowdfunding

Jonathan Sandlund
Jonathan Sandlund | @jsandlund | As of 11/2/2013

@jsandlund
...
about me
thecrowdcafe.com 

leading provider of research, data and analysis on the
global crowdinvesting industry
localinv...
Thank you!
TheCrowdCafe.com Sponsors

Leading law firm serving the
crowdfunding industry

!3
rewards vs. investment
Reward-Based
‣ Receive no financial return
‣ Rewards / Perks
‣ Legal today

Investment-Based
‣ Secur...
The Legalities of Investment Crowdfunding
Title II & Title III of the JOBS Act

Jonathan Sandlund | @jsandlund

!5
The JOBS Act
Title II

Title III

‣ Lifts ban on general solicitation
and advertising on security
offerings to accredited
...
Title II In Action

Demo Days

!7
Title II In Action

Startup Investing

“You can pick your own winners, and invest as little as $1000—
or invest $5000 in a...
Title II In Action

Real Estate Investing

!9
Title II In Action

Global Deal Flow

“As a result of the new SEC regulations, effective today, all of
OurCrowd’s deals wi...
Title II Impact
‣ Brings dramatic efficiencies to private capital
markets
‣ Geographically indiscriminate

‣ Creates frictio...
Investment Crowdfunding
The Mechanism

Jonathan Sandlund | @jsandlund

!12
the mechanism

Rewards-Based
CUSTOMERS
FAMILY

AFFINITIES
FRIENDS

$

$

X

= Funded

$
$

$

!13
the mechanism

INVESTORS
CUSTOMERS AFFINITIES
FAMILY
FRIENDS

$

$

X

= Funded

$
$

$

!14
the mechanism

INVESTORS
CUSTOMERS AFFINITIES
FAMILY
FRIENDS

X

$

$
$

$

= Funded

$

!15
the mechanism

INVESTORS
CUSTOMERS AFFINITIES
FAMILY
FRIENDS

$

$

X

$

$

= Funded

$

!16
the mechanism

INVESTORS
CUSTOMERS AFFINITIES
FAMILY
FRIENDS

X

$

$
$

$

$

= Funded

!17
the mechanism

INVESTORS
CUSTOMERS AFFINITIES
FAMILY
FRIENDS

$

$

X

$
$

= Funded
$

!18
the mechanism

INVESTORS
CUSTOMERS AFFINITIES
FAMILY
FRIENDS

X

$

$

$
$

$

=

Not
Funded

!19
So… why is investment-based
crowdfunding such a big deal?

!20
rewards vs. equity
Median Fundraise
~$5,000

~$160,000

~$775,000
!21
SmallKnot

!22
!

The U.S. Market

Jonathan Sandlund | @jsandlund

!23
Platforms market segmentation
Investment Crowdfunding Platforms

Startups

SMBs

Niche/Affinity

!24
Platforms market segmentation
Startups

!

1. Angellist48!
2. Gust20!
3. Seedups28!
4. MicroVentures21!
5. Seedinvest13!
6...
Platforms market structures

The Curation Spectrum
Very High
Curation

High

Moderate

5%

25%

50%

No
Curation

100%

ac...
Platforms business models

20% Carry

10% Success Fee + 10%
Carry

$19 - $69 / month

* selected samples
The U.S. Market
Concluding thoughts…
‣ Investors Productization
‣ Investors Secondary markets
‣ Investors Portfolio manage...
!

Global Snapshot
What’s the data say?

Jonathan Sandlund | @jsandlund

!29
!30
Macro-Data: Selected Sample

Equity
180 Deals
$132 Million 


Equity
11 Deals
$954k

* Selected sample of platforms; as of...
$300+ Million in Crowdfunded Security
Transactions...
300+ Equity
Placements
2,900+
Loans

!32
The Disruption — Not If, But When

Jonathan Sandlund | @jsandlund

!33
Investment Crowdfunding
Two mega-trends colliding

Technical
Disruption
Entrance of the internet
into private capital form...
Internet-driven Disruption
Before

Technical

After

Music

Travel

Retailing
!35
Nearly all service industries re-imagined by
the internet...

Source: Quora

Technical

But not fundraising... yet
!36
A fundamentally more efficient
capital formation process

Technical

A Big UK Bank

Source: http://www-core.nesta.org.uk/lib...
A fundamentally more efficient
capital formation process

Technical

!38
Technical Disruption
Summed up...
✓

✓

The first major change
in security law in 70+
years; 

Invites the internet into
th...
Cultural

But it’s not just structural change
driving the disruption.

It’s also cultural.

!40
Chicago Booth: 13% of Americans trust the stock
market

Cultural

Chicago Booth Financial Trust Index

Distrust is pervasi...
Cultural

Today
little alternative to public markets

Tomorrow 

individuals empowered to invest in the the companies,
peo...
Where are we?
Market Adoption: S-Curve

Penetration

Time
!43
Thank You!
Jonathan Sandlund
@jsandlund

Jonathan Sandlund j@thecrowdcafe.com
!44
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Crowdfunding.Hawaii VC Summit. Day1

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Transcript of "Crowdfunding.Hawaii VC Summit. Day1"

  1. 1. Delineating Securities-Based Crowdfunding Jonathan Sandlund Jonathan Sandlund | @jsandlund | As of 11/2/2013 @jsandlund !1
  2. 2. about me thecrowdcafe.com 
 leading provider of research, data and analysis on the global crowdinvesting industry localinvestors.org 
 live, think, invest local Jonathan Sandlund
 j@thecrowdcafe.com
 @jsandlund !2
  3. 3. Thank you! TheCrowdCafe.com Sponsors Leading law firm serving the crowdfunding industry !3
  4. 4. rewards vs. investment Reward-Based ‣ Receive no financial return ‣ Rewards / Perks ‣ Legal today Investment-Based ‣ Securities offered in return for crowds’ investment ‣ Equity ‣ Debt ‣ Revenue share / Royalty ‣ Blended ‣ The JOBS Act ‣ Title II vs Title III !4
  5. 5. The Legalities of Investment Crowdfunding Title II & Title III of the JOBS Act Jonathan Sandlund | @jsandlund !5
  6. 6. The JOBS Act Title II Title III ‣ Lifts ban on general solicitation and advertising on security offerings to accredited investors ‣ Businesses Raise up to $1mm in 12-month period ‣ Amended Form D (Proposed changes only—currently NOT in effect) ‣ Rule-making includes SEC and FINRA ‣ Effectuated September 24th, 2013 ‣ Proposed rules released. Commenting period open through January 2014 Crowdfunding for Accredited Investors ‣ Investors tiered limits on investment amount Crowdfunding for Everyone !6
  7. 7. Title II In Action Demo Days !7
  8. 8. Title II In Action Startup Investing “You can pick your own winners, and invest as little as $1000— or invest $5000 in a fund with all 25.” !8
  9. 9. Title II In Action Real Estate Investing !9
  10. 10. Title II In Action Global Deal Flow “As a result of the new SEC regulations, effective today, all of OurCrowd’s deals will be posted publicly for US investors on OurCrowd’s website as well as on social networks, email, and through online and offline advertising and public meetings.” !10
  11. 11. Title II Impact ‣ Brings dramatic efficiencies to private capital markets ‣ Geographically indiscriminate
 ‣ Creates frictionless access to deal flow for investors ‣ Creates frictionless access to investors for businesses Jonathan Sandlund | @jsandlund !11
  12. 12. Investment Crowdfunding The Mechanism Jonathan Sandlund | @jsandlund !12
  13. 13. the mechanism Rewards-Based CUSTOMERS FAMILY AFFINITIES FRIENDS $ $ X = Funded $ $ $ !13
  14. 14. the mechanism INVESTORS CUSTOMERS AFFINITIES FAMILY FRIENDS $ $ X = Funded $ $ $ !14
  15. 15. the mechanism INVESTORS CUSTOMERS AFFINITIES FAMILY FRIENDS X $ $ $ $ = Funded $ !15
  16. 16. the mechanism INVESTORS CUSTOMERS AFFINITIES FAMILY FRIENDS $ $ X $ $ = Funded $ !16
  17. 17. the mechanism INVESTORS CUSTOMERS AFFINITIES FAMILY FRIENDS X $ $ $ $ $ = Funded !17
  18. 18. the mechanism INVESTORS CUSTOMERS AFFINITIES FAMILY FRIENDS $ $ X $ $ = Funded $ !18
  19. 19. the mechanism INVESTORS CUSTOMERS AFFINITIES FAMILY FRIENDS X $ $ $ $ $ = Not Funded !19
  20. 20. So… why is investment-based crowdfunding such a big deal? !20
  21. 21. rewards vs. equity Median Fundraise ~$5,000 ~$160,000 ~$775,000 !21
  22. 22. SmallKnot !22
  23. 23. ! The U.S. Market Jonathan Sandlund | @jsandlund !23
  24. 24. Platforms market segmentation Investment Crowdfunding Platforms Startups SMBs Niche/Affinity !24
  25. 25. Platforms market segmentation Startups ! 1. Angellist48! 2. Gust20! 3. Seedups28! 4. MicroVentures21! 5. Seedinvest13! 6. FundersClub10! 7. RockThePost7! 8. WeFunder12! 9. Fundroom! 10. FundersClub! * Accredited Platforms SMBs 1. SoMoLend13! 2. Bolstr5! 3. Fundable7! 4. Localstake14! 5. Dealstruck10! 6. LendingClub6! 7. P2BInvestor11! 8. Raiseworks9! 9. Relayfund1! 10. Prosper2! Niche 1. HealthFundr29! 2. VentureHealth16! 3. Poliwogg13! 4. HealthiosXchange15! 5. ExplorationFunder11! 6. Agfunder17! 7. Fquare8! 8. RealtyShares12! 9. RealtyMogul9! 10.RealCrowd9! 11.Groundbreaker12! 12.Crowdmason15! 13.Collaperty8! 14.CircleUp10! 15.ReturnOnChange13! 16.WeSparkt6! 17.Slated7! 18.Pave5! 19.Upstart7! 20.Alumnifunder11! Generalist 1. EarlyShares10! 2. EquityNet10! 3. ExemptCapitalNetwork2! 4. FlashFunders2! 5. Ibankersdirect13! 6. ConfidentCrowd4! 7. 99funding6! 8. IRAvest7! 9. Crowdfunder8! 10.FundAmerica93! 11.Axial Markets! !25
  26. 26. Platforms market structures The Curation Spectrum Very High Curation High Moderate 5% 25% 50% No Curation 100% acceptance rate <5% 100%
  27. 27. Platforms business models 20% Carry 10% Success Fee + 10% Carry $19 - $69 / month * selected samples
  28. 28. The U.S. Market Concluding thoughts… ‣ Investors Productization ‣ Investors Secondary markets ‣ Investors Portfolio management ‣ Businesses Ecosystem: one-stop shop for fundraising ‣ Businesses Optimization of the Cap Table (pre-funding) ‣ Businesses Optimization of Execution (post-funding)
  29. 29. ! Global Snapshot What’s the data say? Jonathan Sandlund | @jsandlund !29
  30. 30. !30
  31. 31. Macro-Data: Selected Sample Equity 180 Deals $132 Million 
 Equity 11 Deals $954k
 * Selected sample of platforms; as of 12/4/13 Debt 3,142 Deals $294 Million 
 Equity 83 Deals ~$26 Million 
 Equity 32 Deals $3.3 Million
 Equity 23 Deals ~$25 Million
 !31
  32. 32. $300+ Million in Crowdfunded Security Transactions... 300+ Equity Placements 2,900+ Loans !32
  33. 33. The Disruption — Not If, But When Jonathan Sandlund | @jsandlund !33
  34. 34. Investment Crowdfunding Two mega-trends colliding Technical Disruption Entrance of the internet into private capital formation process. Crowd funding Cultural Disruption A desire to connect more meaningfully with the things we buy, the things we do, and the things we invest in. !34
  35. 35. Internet-driven Disruption Before Technical After Music Travel Retailing !35
  36. 36. Nearly all service industries re-imagined by the internet... Source: Quora Technical But not fundraising... yet !36
  37. 37. A fundamentally more efficient capital formation process Technical A Big UK Bank Source: http://www-core.nesta.org.uk/library/images/NestaBanks.jpg !37
  38. 38. A fundamentally more efficient capital formation process Technical !38
  39. 39. Technical Disruption Summed up... ✓ ✓ The first major change in security law in 70+ years; Invites the internet into the capital formation process. Technical What it means... ✓ Processes moved online ✓ Efficiencies realized ✓ Incumbents with traditional cost structures obseleted ✓ New markets served
  40. 40. Cultural But it’s not just structural change driving the disruption. It’s also cultural. !40
  41. 41. Chicago Booth: 13% of Americans trust the stock market Cultural Chicago Booth Financial Trust Index Distrust is pervasive !41
  42. 42. Cultural Today little alternative to public markets Tomorrow 
 individuals empowered to invest in the the companies, people and causes they believe in !42
  43. 43. Where are we? Market Adoption: S-Curve Penetration Time !43
  44. 44. Thank You! Jonathan Sandlund @jsandlund Jonathan Sandlund j@thecrowdcafe.com !44
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