Investors Are Wont To Follow

It’s said that investors are wont to follow. Once a startup has persuaded the first angel or VC to invest, it’s significantly easier to get others to join the round. A similar mentality at scale can be seen in crowdfunding. Campaigns that garner enough backers...

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Crowdfunding Critique

It’s about one year since President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”), designed to help new companies raise capital and go public. For individual investors the most troublesome provisions of the law relate to crowdfunding–a term not defined in the law, but popularly usedto mean raising money online for a variety of purposes. Since the JOBS Act passed, crowdfunding has been on a roll. But don’t believe the hype; it is far from a start-up fundraising panacea. In the guest post below, Brian Korn, a securities lawyer with Pepper Hamilton, explains why crowdfunding is not all it’s cracked up to be.

The SEC has not yet released crowdfunding rules for public comment, but many folks aren’t waiting for that. At last count there were nearly 200 public comment letters and staff meetings about the subject on record with the Securities and Exchange Commission. That’s the highest of any provision of JOBS Act.

Meanwhile, the LinkedIn group “CrowdSourcing and CrowdFunding” has over 19,000 members and is brimming with minute-by-minute activity, eclipsing the roughly 1,400 members of the “IPO” group. It is impressive that a concept barely in the investor lexicon two years ago has captured the imagination and attention of so many.

Unfortunately, crowdfunding perception does not align with crowdfunding reality. Crowdfunding will not be able to deliver the grassroots fundraising ease for which so many seem to be hoping. After reviewing the enthusiastic postings of entrepreneurs and discussing the concepts in detail with financial and venture industry insiders, many observers believe there is a fundamental disconnect between the promise of crowdfunding, and the system that the SEC will put in place exercising its authority under the JOBS Act. Put another way, the risks, burdens and limitations of crowdfunding render it almost completely useless. And since crowdfunding targets individual investors, maybe that’s a good thing.

Social Media Meets Corporate Finance

The promise of social media has made it possible for unknown people and ideas to become viral sensations overnight without spending money on traditional media or promotion. We’ve all seen the Facebook posting of some puppy or kitten video that has managed to garner over 1 million “Likes.” We have become a society of direct engagement through social media, including Facebook, Twitter, Instagram, LinkedIn, Spotify and Pinterest. In early April, the staff of the SEC’s Division of Corporation Finance endorsed social media as a bona fide corporate disclosure tool under certain conditions. But until the JOBS Act, social media could not be used as an effective capital-raising tool without violating securities laws.

Crowdfunding Gains Political Traction

Crowdfunding began with the concept of small enterprises engaging in online capital-raising through social media and raising funds from people they did not previously know (and were not likely to meet). The notion that small individual investors could have the same access to early-stage investment as large venture capital funds, combined with the enhanced ability of start-up companies to raise money beyond their “friends and family” group was a compelling reason for Congress to add crowdfunding to the JOBS Act. Congress even cleverly fashioned Title III of the JOBS Act as the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012.”

Despite its detractors, including then-SEC Chairwoman Mary Schapiro, Title III added a new exemption from the registration provisions of the Securities Act of 1933 for crowdfunding transactions. The JOBS Act was signed into law by President Obama on April 5, 2012, following a 73-26 Senate vote. Unlike some of the other provisions of the JOBS Act, before crowdfunding is lawful the SEC must proposed and finalize additional rules. Despite a December 31, 2012 deadline, no rules have been proposed.

Here’s The Problem

As a result of significant amendments on the Senate floor, crowdfunding emerged in the final version of the JOBS Act with a much heavier set of regulatory, legal and procedural burdens than what had been originally proposed. Regardless of the SEC’s upcoming rulemaking process, these statutory requirements effectively weigh it down to the point of making the crowdfunding exemption under the JOBS Act utterly useless. When compared to other forms of private placements, crowdfunding is not a feasible option. Here are ten reasons why:

1. Crowdfunding caps an amount an issuer can raise to $1 million in any 12-month period.

2. Shares issued in crowdfunding transactions are subject to a one-year restricted period.

3. Non-U.S. companies, public-reporting companies (other than “voluntary filers”) and investment companies (mutual funds, for example) are not eligible to crowdfund.

4. Crowdfunding caps the amount a person can invest in all crowdfundings over a 12-month period at 10% of annual income or net worth (incomes of $100,000 or more) or the greater of $2,000 or 5% of annual income or net worth (incomes of less than $100,000).

5. Crowdfunding must be done through a registered broker-dealer or registered “funding portal.” Broker-dealers and funding portals may not solicit investments, offer investment advice or compensate employees based on sales. Traditional investment banks have not yet registered for crowdfunding, leading to speculation that crowdfunding will be facilitated by lesser-known financial institutions with little or no retail investment track record.

6. Crowdfunding requires a disclosure document to be filed with the SEC at least 21 days prior to first sale, and requires scaled financial disclosure, including audited financial statements for raises of over $500,000.

7. Unlike Regulation D Rule 506 private placements to accredited investors following the JOBS Act, crowdfunding does not allow advertising except solely to direct investors to the appropriate broker/funding portal.

8. Annual reports and possibly more frequent reports (depending on SEC rulemaking) must be filed with the SEC by a company which completes a crowdfunding round.

9. Legal prospectus liability will apply to disclosures, with a “knowledge” exception for misstatements or omissions.

10. Extensive due diligence is required, including background checks on management and large stockholders.

Better Ways To Raise Money

Despite the sound and fury, the crowdfunding exemption will do little to help small start-ups raise capital. That’s because it will not be economically feasible for most companies to comply with the filing and disclosure requirements; take on the risk of legal liability; and undertake annual reporting obligations to raise a maximum of $1 million in a 12-month period. A company might as easily consider filing for an IPO and raise enough to cover its offering costs. As demonstrated by the chart below, it is difficult to imagine why a company would opt for crowdfunding instead of other, less burdensome, forms of private placements – for example, a Regulation D Rule 506 raise or a Regulation A+ raise (another creation of the JOBS Act).

The reason many firms may not be able to complete a traditional private placement is that they cannot find enough accredited investors. Many fear that crowdfunding will push the least desirable and riskiest investments that cannot attract mainstream investor support out to the retail investor base, essentially passing on the riskiest slice of investments to those who can least afford the risk.

Whether you’re a company or an investor, don’t try this without legal advice either. The myth of easy capital raising through crowdfunding has overtaken the social media start-up marketplace. Compliance with the crowdfunding rules is harder than it may look.

Source: Forbes

Equity Crowdfunding from Down Under

In an interview with the Daily Telegraph last week Jeff Lynn from Seedrs gave an excellent overview of the equity crowd funding landscape and introduced some great success stories.  The suggestion that the UK can lead the world in equity crowd funding is based on the premise that the UK have granted regulated approval for Crowd Cube and Seedrs while the US grapple with the Jobs ACT.   I would however suggest they all take a look at the Australian Small Scale Offerings Board (ASSOB).  They have helped Australian business crowd fund $133,813,078 since 2005.

The Australian Small Scale Offerings Board (ASSOB), is Australia’s leading equity crowd funding platform.  They have taken a wide range of businesses, from seed and start-up stage, to award-winning and government granted companies, as well as more established growth and expanding companies and given them access to growth capital and an easy way to connect with stakeholders

Businesses can promote capital raising campaigns of up to $5 million through the ASSOB Platform and they offer a marketing and distribution channel to inform potential investors of capital raising offers.

ASSOB offers a facility for “secondary” sales of unlisted issued securities.  This makes ASSOB investments much more liquid than the UK equity platforms that don’t have this facility.  It can be assumed they would if FCA would allow it.  The benefit to a platform is that when a “secondary” sale takes place the likelihood is that the money is reinvested in other businesses, therefore continuing the growth of the platform.

The ASSOB help businesses get visibility and the right investing audience.  It could be argued that this is the inevitable next step for GUST and the Angel List.  They are growing databases of both investors and businesses and an ASSOB style platform is the logical next step.

However, ASSOB is more than just a capital raising platform they are a training ground designed to enable great people to launch great ideas with the right support. They offer value-added input through due diligence, guidance, expertise and other active involvement, as required, to ensure that companies gain momentum and achieve their maximum potential during their time on the ASSOB Platform.  The UK equity crowd funding sites in their infancy are more focused on the fund raise rather than the mentoring side, however the recent announcement that esynergy’s Investingzone are launching, expect them to capture this space.

The UK equity crowd funding platforms are working with the FCA and are being brought under existing investment promotion and management rules.  ASSOB operates its Platform and compliance tools pursuant to the prescriptive requirements of ASIC Class Order 02/273 (Business Introduction or Matching Services) and section 708 of the Corporations Act (Cth) 2001.  This provides for (in certain circumstances) an issue of securities being made to certain types of investors without a disclosure statement and regulated promotion securities offers.  This matches the UK position however ASSOB do have some investment opportunities for non sophisticated investors.

The Australian Small Securities Offerings Board have been in place since 2005 and the 7 years experience is a valuable case study for Seedrs and the other UK and US platforms.  It also provides a blue print for the regulatory bodies around the world. It looks like they are leading the and we should follow.


Source: Sapphire Capital Partners

Crowdfunding Cinema

Ok, that’s a ridiculous oversimplification, but not completely untrue. I’m currently in the midst of a crowdfunding campaign to raise post-production funds for my first feature film, Sidewalk Traffic (a comedy/drama about a struggling filmmaker and new father in post-Great Recession NYC), which I wrote, co-produced and directed...

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Community Hydro Power Plant – Crowdfunded

Harlaw Hydro Ltd., located outside of Edinburgh, Scotland, has hit their crowdfunding goal of £313,000 to finance a hydro electric energy plant in a unique twist in community crowdfunding.  The goal was reached via community participation in just 12 weeks. Back in the Spring of this...

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Crowdfunding's Added Value

Modern crowdfunding has received many plaudits for how it has taken an age old way of raising funds online and made it easier and more cost-effective to reach large numbers of potential backers. However, crowdfunding can add value in other ways too. This the first in two blogs on this topic.

Putting money towards the development of an innovative product or service is always going to be risky. Will people buy a product? Will users engage with a service? Predicting demand is essential to ensure that the right ideas are backed but it is often difficult to do.


A recent industry report indicates that crowdfunding, as a whole, helped raise more than $2.7B last year, a number expected to exceed $5.1B in 2013 (Massolution 2013). With hundreds of platforms now operating globally, local legislators and policymakers have focused their attention on crowdfunding, which culminated in President Obama’s signing of the Jumpstart Our Business Startups (JOBS) Act, in April of last year. However, while policy and practice are clearly progressing at a rapid pace, academia’s (and, in turn, practitioner’s) understanding of crowdfunder behavior lags behind. This is surprising, given that crowdfunding presents a novel twist on many long-standing phenomena of interest to academics, in numerous fields of study. The dearth of research in this space is likely attributable to a number of factors, a prime candidate being the complexity and messiness of the crowdfunding phenomenon. Consider that a number of prominent crowdfunding platforms are now global in nature, entertain myriad types of campaigns, each with its own particular incentives for contribution, and draw contributions from an extremely heterogeneous user-base. Theorization and empirical evaluation are thus extremely difficult to conduct in anything approaching a generalizable manner, unless one takes a holistic perspective. There is, however, a light at the end of the tunnel.

A number of empirical studies we have undertaken to date provide evidence of the value and opportunities of big data, econometrics and analyticsfor the study of crowdfunding, and crowdfunder contribution behavior in particular. Leveraging large-scale data, our work has explored a number of factors that influence crowdfunder contribution decisions, including social information (i.e., details of prior others’ contributions) in the crowdfunding process (Burtch et al. 2013a), cultural differences (Burtch et al. 2013b) and privacy features (Burtch et al. 2013c). We propose to present on the results of these various studies(summarized below), to obtain feedback from the academic community with an interest in crowdfunding, and to offer our own suggestions for new research directions.
Study A—Social Information: A key factor that can influence the behaviour of crowdfunders is information on prior contribution behaviour, including the amount and timing of others’ contributions, which is published for general consumption. We empirically examine social influence in a crowdfunded market for online journalism projects, employing a unique data set that incorporates contribution events and Web traffic statistics for approximately 100 story pitches, a data set that allows us to examine both the antecedents and consequences of the contribution process. We evaluate the applicability of two competing classes of economic models that explain private contribution toward public goods in the presence of social information: substitution models and reinforcement models. We also propose a new measure that captures both the amount and timing of prior others’ contribution behavior: contribution frequency (dollars per unit time). We find evidence in support of a substitution model—a partial crowding-out effect, where contributors experience a decrease in their marginal utility from making a contribution as it becomes less important to the recipient. We further find that the degree of exposure a pitch receives over the course of the funding process is positively associated with readership upon the story’s publication. This finding validates the widely held belief that a key component of crowdfunding is the potential it offers for awareness and attention building around causes and ventures.

Study B—Cultural Differences: We analyze crowdfunder contributions using data drawn from, a global platform that facilitates pro-social (peer-to-peer) lending. Our analysis considers a gravity model of international transaction (lending) volumes, based on more than three million individual lending actions. We consider the dual roles of geographic and cultural distance on lenders’ decisions about which borrowers to support. Although cultural differences have seen extensive study in the IS literature as sources of friction in extended interactions, here we argue and demonstrate their role in individuals’ selection of an online transaction partner. We demonstrate that crowdfunders prefer culturally similar, local fundraisers and, further, that contributors view these two dimensions of distance as substitutes. We also demonstrate the potential of IT-based trust mechanisms to overcome culture’s effects, focusing on Kiva’s built-in reputation system. We discuss the implications of our work for crowdfunding and electronic markets more broadly.

Study C—Privacy Controls: The demand for online privacy remains an ongoing source of debate. Sensitive to this fact, many online platforms now offer users greater, more granular control over how and when their information is revealed. However, recent research suggests i) that users often fail to apply privacy controls as they reportedly intend and ii) that the provision and use of information hiding mechanisms is not necessarily of economic benefit to the various parties involved. In this study, we examine users’ endogenous application of information hiding mechanisms and the economic consequences of users’ doing so. We leverage transaction-level data from one of the world’s largest online crowdfunding platforms, where campaign contributors are given the option of concealing their identity and contribution amounts from public display. First, we find that individuals are more likely to conceal information when they are i) privacy sensitive, ii) when a campaign has received a greater deal of public exposure and iii) when their contribution amount is relatively “extreme.” Second, we find evidence of an anchoring effect, where contributors refer to the amounts supplied by prior others, as a point of reference when deciding upon their own contribution. However, when prior others conceal their contribution amount, the anchoring effect is eliminated. Considering the marginal effects, we find that concealing the prior contribution amount can be beneficial or detrimental for the purveyor or campaign organizer, depending on the contribution size. If prior contributions are small, concealing the amount is likely to be preferred, in order to prevent a downward influence on subsequent contributions. In contrast, when prior contributions are large, it is to the purveyor and campaign organizer’s benefit if the amount is revealed, as this can create an upward influence on subsequent contributions. This finding implies that a nuanced approach to the provision of information hiding mechanisms can help promote larger crowdfunder contribution. We discuss the implications for the design and provision of online information hiding mechanisms.

Source: Crowdfund Conference

Green & Pleasant’s Guide to Crowdfunding

Fleur Emery from Green & Pleasant, who raised £122,950 through Crowdcube earlier this year, was asked to talk about her experience of crowdfunding by AXA Business Insurance as part of a series of video interviews to provide help, advice and insight for other early stage...

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