Crowdfunding for Start-Ups: The Path to Raising Millions.
Since 2012, it has never been easier for small and medium enterprises to tap into the world of finance and raise millions to grow their businesses. It is all because of the enactment of the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). The idea of directly soliciting the public (both accredited and unaccredited investors) is a grassroots movement that has become popular all over the world.
In the U.S. alone, it was reported that in 2015 portals attracted $2.1 billion in investment capital for start-ups and that number was expected to almost double to $4 billion in 2016. Furthermore, the World Bank is predicting that globally crowdinvesting will exceed $96 billion in 10 years in developing countries alone. According to research company Statistica, the amount of money individuals are investing is increasing each year. In fact, many start-ups have campaigns that are targeting Millennials (ages 18-35) as they have disposable income and are generally more willing to invest. With its every-growing popularity, it is important for lawyers to be aware of the changing securities regulations governing crowdfunding.
Crowdfunding for B2B, P2B, P2P
Crowdfunding has proven to be a successful means of obtaining alternative funding to traditional venture capital. It is popular not only for capital raises from business to business (B2B) but also for people raising money from businesses (P2B) and people raising money from people (P2P). One of the latest crowdfunding success stories includes a Scottish company called BrewDog beer- the self-proclaimed “hardcore beer for punks.” They began crowdfunding in 2010 and now have a San Francisco investment firm willing to invest in them based on a £1 billion valuation for their company. The shareholders of this 10 year old company will stand to make 2,800% return on their investment. Other success stories include Pavengen, a company that makes flooring which generates electricity from the kinetic energy of people walking on the tiles, which raised £2 million on a £750,000 goal. In the U.S., we have had even bigger success stories with companies like the Pebble E-Paper watch which raised approximately $10.3 million in 37 days. The Dash is the world’s first wireless in-ear smart headphone that raised approximately $3.4 million within 50 days of campaigning.
With such success, it is not surprising that platforms want to join the movement and
make money. “Platforms” act as intermediaries between the businesses launching their campaigns and potential investors. Such platforms include Kickstarter, Crowdcube, Indiegogo, Fundable, to name a few. Perhaps one of the most well-known platforms is Alibaba- the China-based platform founded by Jack Ma that made history in 2014 when it raised a staggering $21.8 billion at it’s initial public offering. Alibaba’s IPO surpassed VISA’s IPO in 2008 which raised $19 billion.
However, there are rules and regulations to starting and running a funding portal. In the U.S., Title III of the JOBS Act regulates intermediaries (which includes funding portals). Each funding portal has its own rules with regards to payment for using its platform to crowdfund but all of them have to abide by due diligence rules, advertising rules and communications between the businesses on their websites and the potential investors. Securities lawyers should be aware of these rules and the SEC’s Funding Portal guide is especially helpful in these matters. It is equally important for anyone seeking to create a funding portal to consult an experienced securities attorney to ensure compliance with the JOBS Act, the SEC and FINRA requirements.
(Published in the New York City Bar Association Journal).
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