New SEC White Paper Provides More Clarity on Regulation Crowdfunding A new white paper from the Securities and Exchange Commission (SEC) provides long-awaited insight into Regulation Crowdfunding activities spanning May 16, 2016 until the end of 2016, and it serves as an early benchmark on the practice of raising funds for projects and investments through pooled donations from online crowdfunding platforms. By the end of 2016, a total of 21 funding portals have registered with the SEC and Financial Investment Regulatory Authority (FINRA). In its 32-week review, the SEC acknowledges that current activities – marked by 163 offerings seeking a total of $18 million – are not necessarily indicative of what the crowdfunding market will resemble as it matures. Over time, companies, investors and intermediaries involved in crowdfunding will gain from experience, learn from mistakes and possibly evolve toward industry-specific or demographicspecific initiatives, according to the white paper. For the past five years, crowdfunding’s growth has been marked by legislative and administrative stops and starts. The first online crowdfunding platform emerged in 2000, while the first legislation governing the practice was passed in 2012 with Jumpstart Our Business Startup Acts (JOBS) Act. Initial rules for the JOBS Act were published in October 2013, with final rules following two years later in 2015. Those rules, however, have faced criticism on several fronts, including crowdfunding supporters who viewed a $1 million cap as too low for small investors, the inability of companies to “test the waters” through communications with potential investors to gauge interest in early-funding stages, and lack of access to a Special Purchase Vehicle (SPV) for a crowdfunded offering. A July 2016 “Fix Crowdfunding Act” addresses those criticisms, but has been passed only by the U.S. House of Representatives. For observers interested in the progress of Regulation Crowdfunding activities, the SEC white paper provides key metrics around activities, amounts raised, average investments, types of investments and profiles of involved companies. Among key data points from the SEC during the May-December time period: ·
163 offerings by 156 companies sought to raise $18 million
· Average offering sought $110,000 but allowed oversubscriptions, generally up to the current $1 million statutory limit ·
Average offering closed in 4-5 months
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33 issuers raised about $10 million
· Average amount raised was $290,000 (a number that could increase, as some offerings remained opened on Dec. 31, 2016) The SEC also noted that 24 offerings initiated in 2016 were withdrawn by companies or were associated with an intermediary whose FINRA terminated. Those offerings sought a total of $2.3 million.
Offerings encompassed three types of securities, led by equity funding (common and preferred), and simple agreements for future equity (SAFE) and debt. The most popular state for incorporation was Delaware, while the California, Texas and New York – in that order – were the most popular locations for businesses involved in offerings. The SEC also noted that most issuers were pre-revenue start-ups or development-stage companies. The median company had less than $50,000 in assets, less than $5,000 in cash, $10,000 in debt, no revenues and three employees. The average issuer had assets of $327,000, cash of $64,00 and five employees. Median company growth from the prior fiscal year was 15%, and median sales growth was 80%. For more information, contact attorney Laura Anthony, founding partner of Legal & Compliance, LLC, a national corporate and securities law firm, at 1-800-341-2684 or visit www.LegalandCompliance.com and www.LawCast.com.