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Equity Crowdfunding Research FINAL
- 1. E Q UI T Y C RO W D F U N D I N G B Y A N D R E W S U S A N T O
- 2. 2 MOSSADAMSCAPITALLLC Introduction What isCrowdfunding? CrowdfundingInsider Project Initiator Supporters Moderating Platform Launch • The collective effort of individuals who network and pool their resources in order to work towards completing a project or idea
- 3. 3 MOSSADAMSCAPITALLLC Introduction Models ofCrowdfunding Crowdfunding Insider, Entrepreneur.com Rewards-Based Donation-Based Lending-Based Equity-Based Donation Investment “Contributions are exchanged for current or future of goods or services.” “When an individual, company or organization accepts charitable donations. “When a crowd lends money to an individual or company with the understanding that the loan will be repaid with interest.” “Where the exchange is company equity, or ownership, and not goods or services.”
- 4. 4 MOSSADAMSCAPITALLLC Equity-based Crowdfunding Exampleof a typical crowdfunded campaign • Assume in this example campaign, the company desires to raise $100,000 • “Crowd” investors decide to invest in the campaign and deposit funds into the crowdfunding portal • The company uses the funds for various purposes, similar to a traditional equity raise • In return for the investment, each crowd investor will receive a percentage ownership interest in the company • Traditional ways to raise capital: • Borrowing money and taking on debt • Giving up equity to other investors • Having private equity firms or other institutional investors finance your current round of capital raising • Going public Company Investor Investor Investor Investor Investor Crowdfunding Portal$20,000 %Equity Interest $100,000
- 5. 5 MOSSADAMSCAPITALLLC JOBS Act ABrief History and Overview CrowdCrux “The Jumpstart Our Business Startups (JOBS) Act passed congressed with bipartisan support and was signed into Law by President Obama in April 2012. The measure is designed to encourage small business and startup funding by easing various vederal regulations. It allows businesses to accept small contributions from private individuals – also known as “crowdfunding” – without making an initial public offering. But unlike most crowdfunding options, the JOBS Act gives regular people a chance to become investors.” –Fundable September 23rd, 2014 marked a historic day for entrepreneurship as Title II of the JOBS Act went into effect – allowing business startups to raise investment funding publicly March 25th, 2015 marks another historic day for entrepreneurship, as Title IV goes into effect, allowing non-accredited investors to participate in investing activities What remains left in the JOBS Act is Title III, the crowdfunding element to the JOBS Act. The regulations for Title III was supposed to be passed in 2013, but the SEC kept postponing the finalization. However the SEC plans to implement Title III in October 2015 Now the nation waits as the final details of the last crowdfunding element is put into effect April 5th, 2012: President Obama signs the JOBS Act into law November 3rd, 2011: the Jumpstart Our Business Startups (JOBS) Act was passed by the House of Representatives with Bipartisan support March 22nd, 2012: the Senate passes the JOBS Act amended with the Crowdfund Act March 27th, 2012: the House passes The Crowdfund Act September 23rd, 2014: SEC implements Title II of JOBS Act March 25th, 2015: SEC passes Title IV
- 6. 6 MOSSADAMSCAPITALLLC JOBS Act TheJOBS Act is designed to spur IPO activity PwC Friends and Family Crowd Funding Angel Investor Early Stage VC Venture Capital M&A/ IPO Capital Raise Company Stage • Primary objective: Increase American job creation and economic growth by improving access to public capital markets for emerging growth companies. • Principal goal is to encourage private companies to raise capital through an initial public offering of their common equity. • The 2 main thrusts of the Act are to: • Create an “IPO on-ramp” which reduces the filing and disclosure burdens associated with undertaking an IPO • Provide for easier and broader access to capital markets
- 7. 7 MOSSADAMSCAPITALLLC JOBS Act Breakingdown the JOBS Act Deloitte Title I – Emerging Growth Companies Creates a transitional “on-ramp” for a new category of issuers, emerging growth companies (EGC), by relaxing registration requirements in order encourage the pursuit of IPOs. Title II – Access to Private Capital Allows for the public solicitation of accredited investors. Section 501, Regulation D defines an accredited investor as having at least one of the following: 1) An individual earning more than $200,000/year or a joint income of $300,000 year in each of the last 2 years and expects the same for the current year 2) Have a net worth exceeding $1 million, either individually or jointly with his or her spouse Title III – Crowdfunding Allows companies to raise funds publicly from both accredited and non-accredited investors. Title IV – Small-Company Capital Formation Modifies the existing Regulation A to provide for an expansion of the exemption to cover offerings of securities from $5 million to $50 million in any 12-month period.
- 8. 8 MOSSADAMSCAPITALLLC JOBS Act TitleI – Emerging Growth Companies (EGC) Ipoguidebook.com, SEC Defined as “an issuer with ‘total annual gross revenues’ of less than $1 billion during its most recently completed fiscal year. The phrase ‘total annual gross revenues’ means total revenues as presented on the income statement presentation under U.S. GAAP (or IFRS as issued by the IASB, if used as the basis of reporting by a foreign private issuer).” - SEC An issuer no longer qualifies as an EGC upon the earliest of… • the last day of its fiscal year following the fifth anniversary of the first sale of its common equity securities in a public offering; • the last day of a fiscal year during which it had total annual gross revenues of $1 billion (adjusted for inflation every five years); • the date on which it has, during the previous three- year period, issued more than $1 billion in non- convertible debt; or • the date on which it is deemed to be a “large accelerated filer” (a company that has been public for at least twelve months, has filed one Form 10-K, and has a public float of at least $700 million). Relief Benefits: • Reduced Financial Statement and MD&A Disclosure • Delayed Application of New Accounting Standards • Exemption from New PCAOB Audit Requirements • Reduced Executive Compensation Disclosures • Expansion of Permitted Investor Communications • Confidential Submission of Registration Statements • Relaxation of Research Analyst Restrictions Post-IPO Benefits • Exemption from Internal Controls Audit Attestation • Exemption from Say-on-Pay, Say-on-Frequency, and Say-on-Parachute Requirements • Exemption from Additional Compensation Disclosures
- 9. 9 MOSSADAMSCAPITALLLC JOBS Act TitleII – Access to Capital in Private Offerings Allows for general solicitation – small businesses and private startups can raise investment funding publicly from only accredited investors Breaking it down… Deloitte Businesses can now generally solicit and advertise publicly Only accredited investors are allowed to invest in generally solicited companies File Form D with the SEC announcing that you will be soliciting Disclose details about general solicitation to the SEC within 15 days from first solicitation For Businesses Only accredited investors can invest in companies who generally solicit Qualifying as accredited means having $1 million in net worth, or making over $200,000 a year for the past 3 years Investors will need to prove accredited investors status, which can be done through written confirmation by a CPA, attorney, investment advisor, or Broker-Dealer, or income- related IRS forms For Investors
- 10. 10 MOSSADAMSCAPITALLLC JOBS Act TitleIII – Crowdfunding • Title III permits businesses to raise money from non-accredited investors using crowdfunding • As of September 2015, Title III is pending approval by the SEC • On October 23, 2013, the SEC voted unanimously to issue a proposed rule to implement requirements in Title III of the JOBS Act that would permit eligible companies to use crowdfunding to offer and sell securities • An individual would be allowed to use crowdfunding to invest in eligible companies, subject to certain thresholds, on the basis of the individual's annual income or net worth (with an overall cap of $100,000 per individual) • The amount of money a company can raise through crowdfunding offerings would be limited to $1 million in a 12-month period • Companies that offered their securities in crowdfunding transactions would (1) need to transact through SEC-registered intermediaries – crowdfunding sites (2) file certain information (including their reviewed or audited financial statements, depending on the amounts offered and sold during a 12-month period) (3) file certain information (including their reviewed or audited financial statements, depending on the amounts offered and sold during a 12-month period) Deloitte
- 11. 11 MOSSADAMSCAPITALLLC JOBS Act RegulationA+/Title IV, Small-Company Capital Formation • Title IV allows startups and later stage pre IPO companies to use equity crowdfunding platforms to raise as much as $50M from both accredited and non-accredited investors • Regulation A+ implements Title IV of the JOBS act and provides for two tier offerings: Deloitte Tier I Tier II Maximum Offering Size Investor Types General Solicitation Financial Disclosures State Preemption/Blue Sky Laws $20 million $50 million Accredited and Non- Accredited Accredited and Non- Accredited None 10% of annual income or net worth None None Accountant-reviewed financials Audited financials; compliance with regulations S - X Individual Investment Limits State-Coordinated Review with SEC Yes
- 12. 12 MOSSADAMSCAPITALLLC Conclusion Importance ofJOBS Act • Allows for new sources of capital for new ventures, which in turn create jobs which are significant to our economy • Often times new ventures need external capital, but it is often difficult to raise due to federal compliance fees • The JOBS act aims to ease regulation, giving companies more room for growth • Without the exemption, unaccredited investors are limited in their ability to participate in exempt offerings and new ventures cannot raise capital efficiently • The JOBS Act is critical to providing new ventures with access to a large and currently under-tapped source of capital JOBS Act Defines “EGC” Eases Regulation Grow Businesses Grow Economy
- 13. 13 MOSSADAMSCAPITALLLC The SmallBusiness Economy Small businesses and startups play an integral role in the American economy According to the U.S. Small Business Administration, small businesses are defined by the following characteristics: • Independently owned and operated • Not dominant in its field • Have up to 100 to 1,500 employees • Has receipts up to $500,000 to $21.5 million Fundable Small businesses in the U.S. by the numbers: Make up more than 99.7% Of all employers Create more than 50% of non-farm private GDP Employ about 50% Of all private sector workers Makes up 97% Of exporters Produces 29% of all export value 565,000 New Businesses launched per month 75% Net new jobs created in the U.S. $78,406 Average initial financing per startup
- 14. 14 MOSSADAMSCAPITALLLC Impact ofJOBS Act The JOBS Act has played a crucial role in re-shaping the landscape of American finance OneVest • The JOBS Act moves to democratize equity crowdfunding allowing non-accredited investors to participate in crowdfunding and investments in private startups and small businesses • Out of 318.9 million people in the U.S., 233.7 million are non-accredited investors, and roughly 3.5 million are accredited investors • The JOBS Act will allow businesses access to a larger pool of capital Onevest, U.S. Census Bureau, Fundable Net Worth of American Public: $57.4 trillion 1.48% 98.52% Accredited Investors Unaccredited Investor
- 15. 15 MOSSADAMSCAPITALLLC Impact &Benefits of Equity Crowdfunding Equity Crowdfunding has spurred growth Crowdfund Capital Advisors From Crowdfund Capital Advisors’ 2014 report, crowdfunding provided the following benefits: • Crowdfunding has a marketing benefit that translates into better sales • Equity-based crowdfunded companies increased revenues by 351% • Crowdfunding creates jobs • 39% of companies hired an average of 2.2 employees per company after a round of crowdfunding • 48% of companies said they intended to use crowdfunded capital to hire new staff • 87% of firms either had, or intended, to hire new employees from crowdfunding proceeds • Larger companies were most likely to reinvest crowdfunding proceedings to hire new employees • Crowdfunding encourages follow-on investment • Within 3 months of a crowdfunding campaign, 28% of companies had closed an angel investor or VC round • 43% were in discussions with institutional investors after closing a crowdfunding campaign • Crowdfunding provides a track of credibility, opening the door to traditional forms of investing
- 16. 16 MOSSADAMSCAPITALLLC Equity Crowdfundingby the Numbers Crowdfunding becoming the new angel investor Crowdfund Capital Advisors, EquityNet • The average fundraising goal for business startups is over $500,000 across all industries • Energy & Utilities and Financial Services & Real Estate have the highest average fundraising goals, while consumer products and services have the lowest • On average, business startups gave up nearly a 1/4th of their equity to crowd investors • According to Crowdfund Capital Advisors, every hour invest in a successful crowdfunding campaign returned $813 1,612,499 807,185 1,657,615 1,074,991 697,915 1,080,417 2,218,354 2,032,514 1,613,550 1,020,569 1,059,402 1,347,458 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 Average Funding Goal by Industry (2007 - 2015) 26.81% 30.85% 34.58% 25.38% 35.08% 29.54% 31.30% 43.11% 30.99% 32.18% 24.47% 36.68% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Average Investor Equity by Industry (2007 - 2015)
- 17. 17 MOSSADAMSCAPITALLLC Equity Crowdfundingby the Numbers The equity crowdfunding market from 2007 - 2015 across all industries Crowdfund Capital Advisors, EquityNet West $253,392,985 Midwest $175,661,509 Southwest $215,974,513 Southeast $211,594,798 Northeast $214,832,086 Average Market Size by Region West 18.25% Midwest 18.11% Southwest 16.33% Southeast 18.86% Northeast 17.95% Average Market Growth Rate by Region • The West continues to be the dominant market in equity crowdfunding, largely driven by activity in California • Growth has been relatively similar across all regions, except in the South where it is slightly slower • California, New York, Florida, Texas, and Illinois are the most popular states to crowdfund
- 18. 18 MOSSADAMSCAPITALLLC Marketwatch Crowdfunding Activityin Q2 2015 by Sector Crowdnetic, CNBC 278 543 136 557 258 65 2,272 1,769 - 500 1,000 1,500 2,000 2,500 Total Number of Offerings $31,780,069 $58,908,145 $70,510,600 $221,705,182 $57,731,424 $25,045,000 $174,758,278 $124,712,093 $- $50,000,000 $100,000,000 $150,000,000 $200,000,000 $250,000,000 Total Recorded Capital Commitements • According to Crowdnetics, compared to Q1 2015: • The number of new offerings has increased by 4.8%, a rate slower than previously seen • The amount of capital committed to these offerings increased by 17.8% • Despite the decrease in new offerings, investor enthusiasm remains optimistic • The Services and Technology sectors are the two largest, occupying 68.7% of the total number of offerings • The Financial sector has the most capital commitments due to its capital intensive nature and picked-up activity in Real Estate
- 19. 19 MOSSADAMSCAPITALLLC Marketwatch Crowdfunding Activityin Q2 2015 by Industry Crowdnetic, CNBC 86 90 94 97 102 115 116 152 163 304 0 50 100 150 200 250 300 350 Professional Services, Other Entertainment, Other Online & Mobile Gaming Specialty Retail, Other Real Estate Investments, Other Education K-12 Digital Media/New Media Real Estate Development App Software Social Media Top 10 Industries by Number of Offerings $12.42 $14.03 $14.10 $15.42 $15.85 $20.23 $21.16 $37.61 $46.63 $107.85 $- $20.00 $40.00 $60.00 $80.00 $100.00 $120.00 Organic Food & Beverage Alternative Energy, Other Biotechnology Wearables, General Entertainment, Other Green Building Materials Investments, Other Oil & Gas Production & Pipelines Real Estate Investments, Other Real Estate Development Top 10 Industries by Recorded Capital Comitments • Social media continue to lead the space in terms of number of offerings • Real estate has gone up slightly from last quarter and continues to attract new issuers and investors • Professional Services joins the top 10 this quarter – an industry that includes other services such as printing and graphics, professional assistants, and language interprestation • The two Real Estate industries are the most popular among crowd investors – roughly 4x greater than the next highest-ranked industry and exceeds all total commitments from the other industries combined – driving the financial sector
- 20. 20 MOSSADAMSCAPITALLLC IPO Activity Goingpublic with the help of the JOBS Act Latham & Watkins, Renaissance Capital • In 2014, nearly 9 out of 10 IPOs are by emerging growth companies • In the second year of the JOBS Act, 85% of issuers identified themselves as EGCs – a 15% increase from the first year • The Pharmaceutical industry accounted for the largest part of EGC IPO issuers, followed by Technology, Real Estate, Energy, then Healthcare • Companies with less than $250 million in in annual revenue accounted for approximately 85% of EGC IPOs • IPO activity jumps back up to pre-depression time period following the signing of the JOBS Act 69% 17% 9% 3% 3% EGC IPOs by Issuer Revenue Less than $100 million $100 to $250 million $250 too $500 million $500 to $750 million $750 million to $1 billion 226 206 199 213 31 63 154 125 128 222 275 0 50 100 150 200 250 300 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Number of Effective IPOs by Year 0 10 20 30 40 50 60 70 Pharmaceutical Technology Real Estate Energy Financial Services Healthcare Retail Services Manufacturing Hospitality Publicly Filed EGC IPOS by Industry
- 21. 21 MOSSADAMSCAPITALLLC Case Study ZOËSKITCHEN CFO Magazine Zoës Kitchen is a fast-casual restaurant featuring a “distinct menu of Mediterranean-inspired dishes, served with warm Southern Hospitality. The company operates a range of restaurant formats, including in-line, end-cap, and free-standing restaurants. As of July 30, 2015 the company operated in 157 locations in the United States. Investors were eager to be a part of the company’s $87 million offering in April 2014, driving up the stock price 65% on the first day of trading. The IPO allowed Zoës to repay its bank debt, with growth-restricting covenants, leaving the company with about $40 million in cash. The ability to repay its debt in conjunction with cash flow from operations will allow the company to rapidly expand for the next several years. With the EGC benefits to file an S-1 confidentially, Zoës was able to more than 100 restaurants. Jason Morgan, CFO of Zoës Kitchen, remarked that confidentiality, “allowed for only a limited number of our team to be involved in the IPO process,” which in turn, “kept the rest of the company focused on their roles and on growing the company.” In addition to the confidential filing, the company also took advantage of the SOX 404(b) compliance exemption, which would have given them more time to be fully compliant in the first year post-IPO.