What Works In Equity Crowdfunding — Insights From Research

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ForbesMy Say | August 14, 2017

As we have recently celebrated the fourth anniversary of the signing of the JOBS Act into law, it is a good time to take stock of the effect that the legislature had on equity crowdfunding in the United States. It is important to note, that equity crowdfunding is distinct from the rewards-based crowdfunding, exemplified by Kickstarter, in which project backers are typically motivated by the rewards (discounts), but receive no equity in the ventures. While the rewards-based crowdfunding has always been legal, public solicitation of equity investments (equity-based crowdfunding) was prohibited by the Securities and Exchange Acts of 1933 and 1934.

The JOBS Act contains several provisions that made it easier for the entrepreneurs to raise funding. Title II of the JOBS Act took effect in September 2013 and it allows entrepreneurs to raise funding via online equity crowdfunding platforms from accredited investors. Title III of the JOBS Act took effect in May 2016 and it expanded equity crowdfunding to include non-accredited investors. I recently completed several research projects focusing on leading Title II equity crowdfunding platforms and I will share a few emergent insights here.

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Since the passage of the JOBS Act, over $1.27 billion had been committed to more than 6,000 entrepreneurial ventures under Title II. Our analysis revealed that real estate investments have done particularly well under Title II. Patch of Land reports having facilitated more than 500 investments totalling over $300 million. In retrospect, it does not seem surprising that real estate investments do well under Title II because real estate loans represent a large commercial opportunity and they also afford investor protection by securing the loans with the underlying real estate assets.

Outside of real estate, Crowdfunder, a Title II platform, has also shown good traction in facilitating fundraising by early stage ventures. We examined 337 projects that attracted over $183 million in funding commitments between September 2013 and December 2016. Our analysis suggests that investors on the Crowdfunder platform are largely relying on a single signal to guide their investment decisions, namely whether a particular venture had secured funding from an established professional venture capital firm prior to running an equity crowdfunding campaign. For example, Revl, a smart action camera, had gone through Y Combinator and received funding from Comcast Ventures prior to launching a campaign on Crowdfunder, which exceeded the funding goal by more than 3X and raised over $9 million. The results imply that investors on Crowdfunder are willing to invest if a startup has been vetted by an established VC firm.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1600+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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