Thursday, August 3, 2017

SEC Publishes Initial Crowdfunding Statistics

A couple of months ago, I posted about crowdfunding in Minnesota under the “intra-state” legislation commonly referred to as MNVest, along with some general tips for crowdfunding success. Since then, I came across an article published by the SEC that provides some statistical analysis regarding crowdfunding that occurred in 2016 under Title III of the JOBS Act.  

As background for those who haven’t been paying attention to the myriad of entreVIEW posts on crowdfunding, the JOBS Act, short for Jumpstart our Business Startups, was enacted on April 5, 2012.  Title III of the JOBS Act created a new exemption from registration for Internet-based securities offerings of up to $1 million over a 12-month period. The SEC adopted final crowdfunding rules on October 30, 2015.

The SEC’s article focuses on offerings initiated under the exemption from May 16, 2016 (when the final rules became effective and available to issuers) through December 31, 2016. The article provides a wealth of statistics and may be an interesting read for entrepreneurs and, by SEC standards, it is relatively brief at only 27 pages. Here are a few highlights:

  • During the period studied, there were a total of 163 different offerings initiated by 156 issuers that sought a total of $18 million, based on target amount. However, because nearly all of the offerings accepted oversubscriptions, the maximum amount actually sought in the offerings was $101 million. 
  • Of the 163 different offerings, only 28 reported offering success on Forms C-U as of December 31, 2016.* This means that, of the 163 different offerings, 135 had failed to reach even 50% of their target offering amount as of the end of 2016.  
  • Most of the offerings solicited in all states, with the most popular state of incorporation of the issuers being (not surprisingly) Delaware and the most popular state of location of the issuers being California.  
  • Of the securities offered, most were equity, followed by SAFEs (simple agreements for future equity), and debt.  
  • The median issuer had under $50,000 in assets, under $5,000 in cash, approximately $10,000 in debt, no revenues, and three employees.  

The article analyzes in great detail the SEC’s data relating to crowdfunding offering activity, issuer characteristics, intermediaries, security design, and data regarding funds raised in crowdfunding transactions.

These statistics suggest that crowdfunding under Title III of the JOBS Act has not accelerated at the pace many thought it would. This is representative of what we have seen here at GPM, which is that most successful capital raised by emerging companies is completed through a private placement via the exemptions offered by Regulation D under the Securities Act of 1933. That being said, there are certain types of businesses (likely those that are consumer facing or have large groups of “followers”) for which crowdfunding may a good alternative, and we can be sure that the market for crowdfunding will continue to evolve.  

* A Form C-U is an SEC form that an issuer must file after it has reached 50% and 100% of its target offering amount so it is likely that others are yet to be filed.

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