ImpactAlpha, March 15 – The SPAC craze is one reaction to the costly and fraught process of taking a company public. A less flashy capital-raising innovation quietly gaining traction: investment crowdfunding.
New U.S. Securities and Exchange Commission rules that go into effect today increase the amount that entrepreneurs can raise from customers, supporters and the broader public from $1.07 million to $5 million.
Since the advent of “regulation crowdfunding” under the Jumpstart Our Business Startups, or JOBS, Act, four years ago, some 800,000 investors have committed more than $800 million across 3,600 offerings (campaigns only collect the funds when they meet their minimum goals). The average raise, according to Crowdfund Capital Advisors: $350,000.
Deals have accelerated despite (or because) of the COVID crisis over the past year. The new higher limits will “massively accelerate that growth,” says Jonny Price of crowdfunding portal Wefunder. He predicts $1 billion could flow to crowdfunded offerings in 2021, a four-fold increase over the past 12 months.
Crowdfunding has benefited diverse founders who struggle to raise money from conventional sources. Before it could attract institutional investors, for example, Native American Natural Foods raised $120,000 from 200+ investors.
Even when other sources of funding are available, some companies are opting for crowdfunding as a way to engage customers and share wealth more broadly. BlocPower Energy Services 3, a wholly-owned subsidiary of BlocPower LLC that owns and operates energy projects, is offering “climate notes” on RaiseGreen, which specializes in sustainable project finance. BlocPower recently raised $68 million from American Family Insurance Institute for Corporate and Social Impact, Goldman Sachs and others.
Savers Village, a work-force housing project led by a Black developer, is raising money on real estate crowdfunding platform SmallChange. The project envisions creating a savings account for tenants and depositing a portion of their rent each month in it to build wealth.
“The ability for socially-minded entrepreneurs to raise capital from ordinary people (not just millionaires and billionaires) who are passionate about the problem they’re tackling,” Price says, “is invaluable.”
The new capital thresholds will let companies that capped out at $1.07 million re-open their campaigns to take advantage of the higher limits. Arlan Hamilton’s Backstage Capital campaign on Republic hit the maximum in less than 10 hours with 3,000 investors.
The new rules also permit companies to pool investors into special purpose vehicles, allow them to get an early gauge of investor interest before they file paperwork with the S.E.C., and remove limits on investments by accredited investors.
Although it’s often called “equity crowdfunding,” that’s a misnomer. Regulation Crowdfunding enables entrepreneurs to set the terms that are right for them, whether that is interest-bearing notes, revenue-sharing agreements, or equity.
Wefunder’s recently published Impact Report gives a glimpse of crowdfunding’s potential impact. More than 20% of founders raising on Wefunder have been female, compared to the 3% backed by venture capital firms. Black representation (4.4%) is more than quadruple the share of VC funding. And 87% of the founders are located outside of Silicon Valley, compared to 58% for VC firms. Companies with successful Wefunder campaigns have gone on to raise over $5 billion an created 15,721 jobs.
“Regulation Crowdfunding is delivering more capital to under-represented founders – be they founders of color, female founders, or founders outside of California, New York and Massachusetts, which currently account for 77% of VC funding,” writes Price in a guest post on ImpactAlpha.
Crowdfunding has attracted companies in realms as diverse as electric vehicles and cleantech ventures to brewpubs and sports clubs. More than 60 U.S. crowdfunding portals cater to Main Street businesses, sustainable solutions and even space-based ventures.
The phenomenon is global. In Europe, where investment crowdfunding first took hold, early stage VC firm Passion Capital is carving out £350,000 out of a £45 million fund for individual investors via crowdfunding platform Seedrs. Kenyan crowdfunding platform Raise is looking to bring African-led crowdfunding to the continent. It has already helped 200 companies raise some $150 million.