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Crowdfunding: major trends research notes

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Crowdfunding: major trends research notes

  1. 1. Equity-Based Crowdfunding 2012 Jumpstart Our Business Startups (JOBS) Act 1OmniPresent Media 2013
  2. 2. CrowdFunding Is A Major Disruption 2 "If crowdfunding sites start offering equity shares, it will make a few dozen VC firms disappear." ~Paul Kedrosky, venture capitalist, entrepreneur and senior fellow at the Ewing Marion Kauffman Foundation ~Source: MIT Technology Review, May/June 2012: 10 Emerging Technologies 2012 May/June 2012 OmniPresent Media 2013
  3. 3. What is CrowdFunding? 3 The basic idea behind crowd funding is that many individuals contribute (generally fairly small amounts) to fund a company or a project in return for the possibility of some reward. This is not a new idea but the internet has now considerably increased the size of the potential investment crowd and made managing individual investors’ pledges more manageable. OmniPresent Media 2013
  4. 4. CrowdFunding Fills A Needed Niche CrowdFunding is an emerging funding niche for great ideas, nascent technologies and seed-stage startups 4OmniPresent Media 2013
  5. 5. CrowdFunding Is Going Mainstream 5 ~Source: Kickstarter Blog: 2011 Statistics Statistics for 2011: Launched Projects: 27,086 Successful Projects: 11,836 Dollars Pledged: $99,344,382 Rewards Selected: 1,150,461 Total Visitors: 30,590,342 Project Success Rate: 46% Approximately 1,000 projects were successfully funded each month. In fact, more projects succeeded in 2011 than launched in 2010. Kickstarter Project Funding Growth From Inception, April 2009 Funding –Sept 2011 OmniPresent Media 2013
  6. 6. CrowdFunding’s Tipping Point 6 When Silicon Valley’s venture capitalists didn’t show much interest in the watch, Eric Migicovsky and his team went to Kickstarter with a goal of raising $100,000 to get the project off the ground and into production. • 40,799 people have ponied up $115 for a free watch when they come out (retailing at $150 apparently) • 31 people shelled out $10,000 for a Mega Distributor pack with 100 watches. Pebble Smart Watch Sells Out on Kickstarter “The record-setting project has raised more than $10 million and took preorders for 85,000 watches, which is apparently the limit for the tiny company.” ~Source: Pebble Smart Watch Sells Out On Kickstarter by Eric Mack CNET, May 10, 2012 OmniPresent Media 2013
  7. 7. CrowdFunding Social Causes Microfinance Total loans made to date is $284,995,000 Kiva users from 217 countries who have given loans to 729,182 people in developing nations. 7 ~Source: Center For Global Development March 19, 2012 OmniPresent Media 2013
  8. 8. 4 Types of CrowdFunding 8 • Donation-Based CrowdFunding: Funders provide money to an entity / project either for no return or in return for some form of non-financial reward. For example a credit or recognition in the product or a meeting with the creators. example: Starters Fund • Reward-Based CrowdFunding: Funders provide money to a company in exchange for some sort of reward, such as an early prototype, a signed CD or the ability to interact with the people behind a project. example: KickStarter • Lending-Based CrowdFunding: Funders provide money by way of a loan with a requirement that the loan is repaid with interest. example: Kiva • Equity-Based CrowdFunding: A funder invests money in a company and receives shares in that company. example: CrowdCube OmniPresent Media 2013
  9. 9. Growth of Crowd Funding Platforms (CFP) 9 ~Source: Massolution, Crowd-Funding Industry Report May 2012 REWARD-BASED IS THE LARGEST CROWDFUNDING CATEGORY, WHILE EQUITY-BASED IS THE FASTEST GROWING The reward-based category is the largest crowdfunding in terms of the number of CFPs, and also grew at the higher rate of 79% CAGR The Equity-based category shows the fastest growth rate at 114%, and is mostly driven by growth in the number of European platforms OmniPresent Media 2013
  10. 10. Over 1 Million Projects Funded In 2011 10 More Than 1 Million Successful Fundraising Campaigns Were Completed In 2011 ~Source: Massolution, Crowd-Funding Industry Report May 2012 OmniPresent Media 2013
  11. 11. $1.5 Billion Funded 1 Million Campaigns in 2011 11 ~Source: Massolution, Crowd-Funding Industry Report May 2012 CFPs raised almost $1.5 billion and successfully funded more than one million campaigns in 2011. The majority of these campaigns were in the donation- based category totaling 1,067 campaigns, and North America was the largest market for fundraising at $837 million. OmniPresent Media 2013
  12. 12. Number Of CFPs Worldwide 12 As of April 2012, there were 452 crowdfunding platforms active worldwide. Projections are that there will be more than 530 by the end of 2012. ~Source: Massolution, Crowd-Funding Industry Report May 2012 OmniPresent Media 2013
  13. 13. 13 ~Source: Massolution, Crowd-Funding Industry Report May 2012 OmniPresent Media 2013
  14. 14. Growth In Worldwide Funding Volume 14 GROWTH IN WORLDWIDE FUNDING VOLUME (millions of dollars) Crowdfunding market is growing at the rate of 63% CAGR in terms of total amount of funds raised. $2.806 billion Estimated total funding volume for 2012. 300% Growth in equity-based and reward- based crowdfunding 75% Growth in loan-based crowdfunding 50% Growth in donation-based crowdfunding ~Source: Massolution, Crowd-Funding Industry Report May 2012 OmniPresent Media 2013
  15. 15. Funds Paid Out Per Equity-Based Project 15 ~Source: Massolution, Crowd-Funding Industry Report May 2012 A full 21% of the funds raised by equity-based platforms achieved more than $250,000 or more in funding. In Europe and elsewhere, CrowdFunding is now a viable alternative to traditional means of raising capital. 26% of projects listed on equity-based platforms raised between $50,000-$100,000. OmniPresent Media 2013 21% of equity-based funding raised $50, 001- $100,000 Ex-US 68% of Equity-Based Projects Raised $50,000 or More
  16. 16. Commissions Earned By CFPs 16 Over 40% of CFPs Charge a Transaction Fee Based on A Percentage Commission of Funds Paid Out CFPs generate revenue by charging a transaction fee, determined as a percentage commissions range from 2% on the lower end to a maximum of 25% on the upper end. A commission is calculated from the total funds raised, and/or based on achieving a “fully-funded” goal. An additional source of income with some CFPs (12% of survey respondents) is to charge funders a fixed fee, in the region of $15 (median), per campaign. ~Source: Massolution, Crowd-Funding Industry Report May 2012 OmniPresent Media 2013
  17. 17. Average Campaign Time Frames 17 Statistics suggest that on average, campaigns do not accelerate after certain milestones are met. On average it takes 2.84 weeks across all categories, to raise the first 25% of the funding goal and 3.18 weeks on average to raise the last 25% of the funding goal. Approximately 45% of all CFPs require investors to deposit money in escrow accounts. 63% use PayPal as a payment method. ~Source: Massolution, Crowd-Funding Industry Report May 2012 OmniPresent Media 2013
  18. 18. The JOBS Act Sparks Crowdfunding 18 “As large sums can be raised via crowdfunding, it has become a viable alternative for capital formation for new commercial ventures, projects and both social and community-based initiatives,” said Carl Esposti, CEO of massolution and founder of “Driven by equity-based and reward-based crowdfunding, our forecasts indicate total funds raised will nearly double this year. Additionally, the passing of the JOBS ACT will have a profound effect on the growth of crowdfunding in the U.S. In 2013, we expect securities-based crowdfunding to bring new sources of funding to many startups and early stage businesses.” ~Source: Massolution, Crowd-Funding Industry Report May 2012 OmniPresent Media 2013
  19. 19. CrowdFunding Projected to Surpass $6.2 B 19 Gartner Research, a private analytics company, projects CrowdFunding to top $6.2 billion in 2013. 2011 $1.5 Billion 2013 Estimated $6.2 Billion OmniPresent Media 2013 2012 Projected $3 Billion ~Source: TechCrunch, May 12, 2012 “Crowdfunding: $1.5B Raised, 1M Campaigns Funded In 2011; Figures Set To Double In 2012”
  20. 20. JOBS Act History • A bipartisan effort to permit more small businesses access the capital markets by decreasing the regulatory burden. • A combination of six House bills, with significant investor safeguards added by the Senate. • Signed by President Obama on April 5, 2012. • Final regulations on crowdfunding to be published by the U.S. Securities and exchange Commission by January 1, 2013. 20OmniPresent Media 2013
  21. 21. CrowdFunding Flow Chart 21 Funding Platform Escrow Agent Issuer Investor Investor Deposits Funds With Escrow Agent Escrow Agent Delivers Funds To Issuer Investor Connects On The Internet With Funding Platform Funding Platform Presents Issuer To Public #1 #2 #3 #4 #5 OmniPresent Media 2013
  22. 22. How Does CrowdFunding Work? • Issuer engages Funding Platform to act as an intermediary and to post Issuer’s offering on the Platform’s website. Issuer provides Platform with its disclosure about the company and the offering. • Funding Platform hires the Escrow Agent to process subscription payments and stock issuances. • Investor accesses the Platform website to obtain information about the Issuer and the offering. • Investor decides to subscribe for Issuer’s securities over the Platform; executes and delivers subscription documents to Platform and delivers $’s to Escrow Agent for the shares subscribed. 22OmniPresent Media 2013
  23. 23. How Does CrowdFunding Work? (Cont) • Investor may rescind his/her subscription under certain circumstances and get a refund. • If the targeted amount of the offering is raised by the deadline, Escrow Agent releases subscription funds to Issuer and provides stock certificates (paper or electronic) to Investor. • If targeted amount is not raised by the deadline, Escrow Agent returns funds to Investor. 23OmniPresent Media 2013
  24. 24. Potential Revenue Streams 24 1. Listing Fees: The portal could charge a monthly subscription fee to have the company listed on the site (e.g. similar to how companies are listed on AngelList now). 2. Fees to Open a Funding Round: The portal could charge a flat fee to open a round up for funding. This would open up the ability to propose investment terms, hold investments in escrow until the threshold is hit, and otherwise manage the process of the investment round. 3. Fees upon Closing of Investment: The portal could take a percentage of any investment that is actually closed, similar to how broker-dealers operate today. OmniPresent Media 2013
  25. 25. 25 4. Fees for Ongoing Management Services: Managing hundreds or thousands of shareholders will require ongoing management services. If these portals can manage these issues, they could charge an ongoing fee. 5. Referral Fees: Portals could charge fees to other vendors in connection with the funding round or vendors interested in providing ongoing services to these companies (e.g. background checking firms, escrow services, law firms, accounting firms, marketing firms, banks, etc.) Potential Revenue Streams (Cont) OmniPresent Media 2013
  26. 26. Requirements of Intermediaries 26 The U.S. Securities and Exchange Commission has warned that the JOBS Act requires intermediaries to follow specific obligations and rules that the SEC has been given the power to determine. The SEC has stated on its website that intermediaries are required to do the following. *Adequate disclosures *Inform investors *Protect privacy *Minimize risk of fraud *Pass along issuer information *Track the funds *Enforce investor / issuer maximum limits *Other rules. Any other future requirements that the SEC determines are appropriate OmniPresent Media 2013
  27. 27. What Is A “Funding Platform”? Any person acting as an intermediary in a transaction involving the offer or sale of securities for others solely in a crowdfunding transaction that does NOT: •Offer investment advice or recommendations; •Solicit purchases or sales offered on its website; •Compensate employees, agents or others for such solicitation or based upon the sale of securities; •Hold, manage or handle investor funds or securities; or •Engage in other SEC-prohibited activities 27OmniPresent Media 2013
  28. 28. Funding Platform Qualifications To be exempt from having to register with the SEC as a broker-dealer, a Funding Platform must: •Remain subject to the examination, enforcement and rulemaking authority of the SEC; •Become a member of a national securities association and register with the SEC and a self-regulatory organization (SRO); •Remain subject to further SEC regulation; and •Comply with the other provisions of the JOBS Act 28OmniPresent Media 2013
  29. 29. Funding Platform Rules • Can be a broker or funding platform; • Must register with SEC and SRO (FINRA, other?); • Provide disclosures (risk) and education materials to investors; • Obtain investor certifications; • Perform background checks on issuer principals; • File disclosure materials with the SEC and provide to investors; • No distribution of proceeds to issuer unless target funding is reached and must permit investors to rescind their subscriptions; 29OmniPresent Media 2013
  30. 30. Funding Platform Rules (Cont) • Protect investor privacy; • Not pay finders fees; • No financial interest in the issuer; • Limit investors’ maximum annual investment in all issuers 30OmniPresent Media 2013
  31. 31. Investor Rules • Cannot buy more than $2,000 or 5% of annual income or net worth, if annual income or net worth <$100,000; • Cannot buy more than 10% of annual income or net worth, up to $100,000, if annual income or net worth >$100,000; • Must buy through a Funding Platform that complies with the JOBS Act; and, • Issuer must comply with the JOBS Act and cannot sell more than $1 Million per year under this Rule. 31OmniPresent Media 2013
  32. 32. Issuer Rules • Provide basic disclosure about business to SEC and investors; • Financial statements: if raising up to $100,000, tax returns and financials must be certified by CEO; • $100,000 -$500,000, unaudited financials reviewed by independent accountant; • Over $500,000 audited financials • Disclose: risks, use of proceeds, targeted amount, deadline, price, portal payment, current ownership, capital structure, rights of existing holders, and updates; • No advertising; only directions to funding platform; 32OmniPresent Media 2013
  33. 33. Issuer Rules (Cont) • Issuer Disclose: risks, use of proceeds, targeted amount, deadline, price, portal payment, current ownership, capital structure, rights of existing holders, and updates; 33OmniPresent Media 2013 • No advertising; only directions to funding platform; • Provide annual reports with financials to investors and SEC; • Comply with other SEC rules (when in effect).
  34. 34. Restrictions on Transfer Securities purchased in a crowdfunded transaction may NOT be transferred for 1 year after purchase, unless they are transferred: • To the issuer; • To an accredited investor; • As a part of a registered offering; • To a member of the purchaser’s family in the event of his death or divorce; • Subject to other limitations to be imposed by the SEC. 34OmniPresent Media 2013
  35. 35. CrowdFunding Cannot be Used by: • Foreign companies; • Companies that already report under the Securities Exchange Act of 1934; • Investment companies; or • Other companies as the SEC determines by regulation; and • Issuers or portals that are “disqualified” under SEC regulations (i.e, “bad boys”). 35OmniPresent Media 2013
  36. 36. Potential Liability To Investors • Purchaser in a crowdfunded transaction may sue an “issuer” to recover the amount paid for the security plus interest, less any income received on the security, or for damages if investor does not then own the security. • Issuer is liable if it made an untrue statement of material fact or omitted to state a material fact required to make the statements, in light of the circumstances under which they were made, not misleading, provided purchaser did not know of the untruth or omission, and issuer did not know, and in the exercise of reasonable care, could not have known of such untruth or omission. • “Issuer” includes directors, partners, principal executive, principal financial, controller and principal accounting officers of issuer AND any person who offers or sells the security in such offering. 36OmniPresent Media 2013
  37. 37. State Oversight • Crowdfunded sales are exempt from State registration, documentation and offering requirements as “covered securities” and States may not charge filing fees, except for the State where the issuer has its principal place of business or any State where 50% or more of the purchasers reside. • However, States may examine and take enforcement action against any Funding Platform that has its principal place of business in that State. • States may also take enforcement action against an issuer, Funding Platform or other person with respect to fraud or deceit or unlawful conduct. 37OmniPresent Media 2013
  38. 38. Disqualifiers Issuers and Funding Platforms will generally be disqualified from using the crowdfunding rules if: • The issuer has filed any registration statement that is/was subject to an SEC stop or refusal order, the issuer is subject to an order ofa State securities, banking or insurance commission, or a Postal Service false representation order, has had a Reg. A offering suspended, has been convicted in the last 5 years of a false filing, of a crime involving the purchase or sale of a security, or of an injunction for the purchase or sale of a security; or, 38OmniPresent Media 2013
  39. 39. Disqualifiers (Cont) Issuers and Funding Platforms will generally be disqualified from using the crowd funding rules if: • Its directors, officers or 10% beneficial owners, in the last 10 years, have been convicted of a crime relating to the purchase or sale of a security or false filing, a violation of any law prohibiting fraudulent, manipulative or deceptive conduct, or arising out of its business as an underwriter, broker, dealer or investment adviser, or in the last 5 years is subject to a court, SEC or U.S. Postal Service order enjoining certain practices relating the purchase or sale of securities, has been suspended/expelled from a national securities exchange or barred from a State regulated entity or from engaging in the banking, insurance or securities business. 39OmniPresent Media 2013
  40. 40. For More Information These slides are intended only to provide basic information about the JOBS Act of 2012, and are not intended to provide legal advice. 40OmniPresent Media 2013