Category Archives: Equity Crowdfunding, Alternative Funding

Why Financial Firms are Joining the Crowd

Flaster Greenberg | CrowdfundAttny.com - Mark Roderick | Nov 11, 2014

Financial firms join the crowdArticle by Joy Schoffler, principal of Leverage PR:

Crowdfunding is a marketing vehicle. Sure, it’s a great way for entrepreneurs to raise money and a great way for investors to find institutional-quality deals. But above all Crowdfunding is about marketing. And that’s why financial firms – venture capital firms, investment banks, private equity firms, and others – are moving into the space.

When I was the director of a private equity firm, we spent our time doing what all investment firms do, working to broaden the firm’s investor base and find more and better deals. Because of the legal constraints that have been in place since the early 1930s, we (and everyone else) had to rely on private networks. While we developed a large private network, the process of manual network development is slow by design.

View:  Investments in Crowdfunding Platforms have already Doubled this year

With the passage of the JOBS Act, everything has changed. Now, investment firms can take what was essentially a marketing function and move it online, using tools and marketing best practices to build their networks.

Today I run a public relations firm, Leverage PR, which works at the intersection of technology and finance. With my background Fin-Tech I’ve naturally gravitated to Crowdfunding and serve in leadership roles in the industry, including serving on the board of CFIRA, the leading trade association. From that vantage point I can see the trends in both technology and finance. Without doubt, one of the most pronounced trends is that financial firms are moving into Crowdfunding, with established players launching their own portals or partnering with others.

Here are the six leading factors encouraging financial firms to join the Crowd:

Reason #1: Adding to the Capital Stack – Raising money is hard. Even established firms with a base of institutional money need smaller investors to augment the capital stack or fill holes. If done properly, with the right public relations, launching a Crowdfunding platform is a wonderful way to get in front of new bases of potential investors and prove expertise in an industry.

Reason #2: Marketing Automation – Private equity has, by and large, stayed in the marketing Stone Age. Some of the biggest firms still use spreadsheets to track current investors and monitor prospective investors. In contrast, the best Crowdfunding platforms have embraced the power of marketing automation. They set up investors on drip marketing campaigns from the minute they sign up. They learn what each investor likes and doesn’t like using data from the site. They convert small investors into larger investors. They use technology to create the economies of scale that make dealing with smaller investors possible and profitable.

Reason #3: Improve and Automate Investor Relations – When many of us in private equity first heard of Crowdfunding we imagined a nightmare of dealing with hundreds of investors. The opposite is true. A Crowdfunding platform provides a better customer platform. In fact, we’re seeing established private equity firms launch portals solely for investor relations post close.

Reason #4: More and Better Deals – Early entrants into the space who are marketing their Crowdfunding portal are not only seeing a deeper and wider investor pool but are also seeing increased deal flow. Even if firms are launching only to do their own deals they are generating interest and traffic from other in their space who are bringing them deals.

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Joy Schoffler picJoy Schoffler, principal of Leverage PR, is a nationally recognized author and speaker on financial services communications. An active member of the Crowdfunding community Joy sits on the board of CFIRA.org a leading Crowdfunding advocacy association. Before launching Leverage, Joy served as director of acquisitions for the Inc. award-winning private equity firm The PPA Group. Joy has written for a number of publications including Entrepreneur.com, Social Media Monthly and MarketingProfs. She is also a contributing author for the Wiley-published Bloomberg Media book “Crowdfunding: The Ultimate Guide to Raising Capital on the Internet.”

Equity Crowdfunding: Noise or Music to Your Ears

Venture Law Corp | Alixe Cormick (blog) | Nov 6, 2014

Crowdfunding music or noiseThere seems to be a perception in Canada that equity crowdfunding is “noise” or a “flavor of the month” fad that will quickly disappear. It is the  opinion of some, the traditional ways of raising capital, using brokers, finders, angel network events, and venture capital pitch meetings, works and will never be replaced.

Certain regulators and market professionals  involved in the capital markets even believe there is no legitimate role for equity crowdfunding. Some even believe that equity crowdfunding will increase fraud, reduce the ability of companies to raise capital, and end in tears for all involved.

On October 30, 2014, I participated on a panel at the annual Vancouver Island Economic Alliance Summit titled “The Buzz Around Business Crowdfunding – Noise or Music to Your Ears?” Daryl Hatton, the CEO of FundRazr, one of the top donation and perk crowdfunding portals in the world, and Peter Elkin, an active angel investors and the Founder and CEO of Capital Investment Network, rounded out the panel participants. Stephanie Andrew, an Associate Partner at Espresso Capital, acted as moderator. Dirk Heydemann, of Heydemann Art of Photography in Nanaimo, introduced the panel and sponsored the panel session.

The room was filled with community economic officers, community leaders, small business owners and others interested in learning more about crowdfunding. Daryl Hatton provided the audience with an overview about crowdfunding and highlighted a few recent equity crowdfunding campaigns to help illustrate the diversity in who is using crowdfunding and for what purposes on platforms such as Fundrazr and others.

My formal presentation as part of the panel focused on equity crowdfunding.  I wanted to drive home that equity crowdfunding is happening now.  Operating portals exist in Europe, United States and in Canada.  Average successful equity crowdfunding campaign sizes vary across funding portals with some portals average campaign size ($1.6 million) coming close to the average private placement size on the TSX Venture Exchange ($1.9 million).

Although Canada is looking at two crowdfunding specific securities law exemptions from registration, Canadian securities laws already have private placement exemptions that can be used to crowdfund a business venture.  There are benefits and drawbacks associated with all forms of crowdfunding, but it is definitely not just “noise”.

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Support NCFA

The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry. NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place. Join our growing network of industry stakeholders, fundraisers and investors. Learn more About Us | Support Canadian Crowdfunding.

Convertible Debt vs. Equity: Which Is Right for Your Startup?

Mashable | Bill Clark

Debt versus equity for your startupBill Clark is the CEO of MicroAngel Capital Partners, a venture firm that gives more investors access to alternative investments. He also gives investors the ability to invest in startups online through crowdfunding. You can follow him on Twitter @austinbillc.

Whether you are an entrepreneur or an angel investor, the topic of convertible note vs. equity impacts you. For the most part, startups favor convertible notes and angels prefer equity, but which one is the right choice for your startup?

Here, we review the benefits of each.

Convertible Debt

Convertible debt was most commonly used as a bridge loan between two rounds of financing. For example, if you raised $1,000,000 in series A funding and you were going to raise $5,000,000 in a series B round, you might use a bridge loan if you needed $250,000 until the funding was completed. However, convertible debt has recently become a popular seed round financing instrument.

Here is a basic overview of how convertible notes work:

  • An angel investor invests $200,000 in a startup as a convertible note.
  • The terms of the note are a 20% discount and automatic conversion after a qualified financing of $1,000,000.
  • When the next round of funding occurs at $2,000,000, the investor's note will automatically convert to equity.

In this scenario, let’s assume the shares were priced at $1.00. Since there is a 20% discount, the investor can use that $200,000 investment to purchase shares at the discount rate of $.80 each, instead of the $1.00 price that other participants in the current funding round will have to pay. That gives the initial investor 250,000 shares for the price of 200,000, which is a 25% return — not bad.

View:  Six Rules for Investment Crowdfunding Success

Caps can also be added to convertible debt. A cap sets a limit for how much the startup can raise before your shares stop getting diluted. It doesn’t value the convertible note, but it sets an upper limit. So in the example above, if the pre-money cap was $5,000,000, you would still get a discount of 20% up to that amount. If the startup raised at a valuation over $5,000,000, then the discount would increase to offset the additional dilution that was occurring. When you add a cap, the math gets a little trickier, as it can change with different funding scenarios.

Equity

While a convertible note might be a little confusing to calculate, equity is a breeze. The startup is assigned a pre-money valuation and a share price is determined. When you invest, you know exactly what the terms are and how many shares you will own in that round.

Here's how it works:

  • The startup has a pre-money valuation of $1,000,000 with 1,000,000 shares outstanding. This puts the share price at $1 per share.
  • An angel investor makes an investment of $200,000 and receives 200,000 shares.
  • The post-money valuation is $1,200,000 and the new investor owns 16.6% of the company.

Why Convertible Debt?

If equity is so much easier to understand, why are convertible notes becoming more common in the startup community? Here are four reasons why:

1. Valuation: Determining the valuation of a startup is hard, especially if the startup is pre-revenue and only in the idea phase. How do you put a value on the potential of the team/idea? It is easier for a startup to put off that question until they have some traction and social proof. Convertible notes are attractive for a startup because it delays this issue. While adding a cap essentially prices the round, it does leave a range of options, so it is more attractive to the startup.

2. Cost: Convertible note term sheets are less expensive than term sheets for equity, although with new standard term sheets that cost difference is starting to diminish. Sometimes it doesn’t make sense to pay the additional legal costs for closing the equity round if the funding increase is less than $250,000.

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Support NCFA

The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry. NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place.  Join our growing network of industry stakeholders, fundraisers and investors. Learn more About Us | Support Canadian Crowdfunding.

The UK’s New Equity Crowdfunding Aggregator Launches

Crowdfund Insider |  | Oct 23, 2014

Business agent aggregatorBy bundling up the best of the world’s crowdfunding opportunities with an equally comprehensive amalgamation of more conventional businesses for sale. BusinessAgent aims to become to investment and crowdfunding as what Rightmove is to houses and estate agents.

While sharing details about the newest equity crowdfunding aggregator in the UK, founder of BusinessAgent.com, Sacha Bright stated, “Equity crowd funding is a ‘highly disruptive’ idea whose time has come and it’s going to change the face of small business finance. So this is an exciting time - not just for crowd funding businesses and their investors but also for the world of equity investment as a whole. In response to the banks’ lending to start-ups dwindling by 8%, there’s been a quiet revolution in the last couple of years - one that we’ve been watching with great interest.

“And I can report that our observations are quite dizzying! There are already more than 500 crowd funding websites globally and the alternative finance sector as a whole has attracted investment worth £1.74 billion over the past two years in the UK , with equity crowdfunding growing by 371% between 2012 and 2013. Could this be the birth of a new stock exchange for small business?

Could small businesses raise capital in a similar vein to listed companies?”

The opportunity for businesses seeking funding is exciting, nevertheless, the size and pace of the sector’s growth, not to mention its novelty, makes it bewildering to the uninitiated. At least, until now. This is where Businessagent.com comes in as the latest portal of its kind for this sector – helping investors and those seeking funding alike by aiming to pull together a large part of the market on one platform .

Sacha added, “Just as Rightmove advertises houses for estate agents, our site aims to list equity crowd funded opportunities from every crowd funding site in the UK - and by earning commission on those listings we aim to emulate in this market the likes of Moneysupermarket, Confused.com et al.”

View:  Crowdfund Fusion, Canadian Aggregator

So what makes the website so unique? Sacha’s points out that almost every other aggregator focuses on general financial news – rather than actually pulling together all the equity investment opportunities out there. Equally importantly, with its combination of crowd funding and peer-to-peer lending with some 10,000 businesses for sale along with the latest website design methods, an affiliate network and – perhaps most telling – a commission-only, pay-by-results advertising model, Business Agent  may be more attractive to advertisers and investors than any other website.

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Support NCFA

The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry. NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place.  Join our growing network of industry stakeholders, fundraisers and investors. Learn more About Us | Support Canadian Crowdfunding.

Cognition co-founder Robsun Ho to join crowd funding start-up

Financial Post | Mitch Kowalski  | October 3, 2014

Rubsun Ho Cognition leaves for CrowdfundingCognition LLP co-founder Rubsun Ho said Wednesday he will be moving out of his day-to-day role with the firm. Joe Milstone, the other co-founder, will continue to serve as Cognition’s chief executive.

In an email sent to Cognition staff, Mr. Ho said:

“Those who know me well know that I have a passion for technology and for start-ups. I also love starting companies – the uncertainty is daunting but the thrill of not knowing the limits of what you are building is unparalleled.  It is with that perspective in mind that I have decided to leave the day to day operations of Cognition LLP and pursue an opportunity that recently arose as CEO of a start-up in the equity crowd funding space. Joe Milstone will continue his duties as ‘CEO’ ….[and] I will still be a partner in Cognition and be involved in strategic decision making and business development…. It is because we have built such a great team that I have confidence that the organization will continue to grow and disrupt the Canadian legal scene.”

Alternative law firm Cognition competes with Bay Street business firms by offering clients with legal counsel who can provide advice in a variety of ways, such as on-site or off-site or on a flexible or as-needed basis. By eliminating the overhead associated with traditional “bricks and mortar” firms, Cognition believes it charge up to 70% less than than its competitors.

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Crowdfunding Must Get Back to Its Roots

Equities blog | | October 20, 2014

Defining crowds and their roleThere have been two articles or reports that have been published since June 2014, which could spell disaster for Crowdfunding unless its leaders get Crowdfunding heading back to its community roots. The first was a June article, “For many startups there is no crowd in equity crowdfunding” by Paul Niederer, the CEO of the ASSOB (Australian Small Scale Offerings Board). The second was a report by Crowdnetic, which covered the total amount that was raised by leading Crowdfunding platforms for the first 12-month period after Regulation 506C of the JOBS Act went into effect in September of 2013.

Mr. Niederer, in his article, discussed the findings from a study that was conducted by the Australian Governments’ CAMAC (Corporations and Markets Advisory Committee), which were published in its 245 page May 2014 report, “Crowd sourced equity funding.” In 2000, Australia became the first country in the world to approve a form of Crowdfunding.

The CEO of the ASSOB, which is considered to be the world’s oldest and most well-established Crowdfunding platform, explained in his article that there are three levels of investors, which an issuer can tap for capital. He pointed out that only 6% of issuers had been successful in obtaining capital from the third level of investors. This was why he included the phrase, “no crowd in equity crowdfunding” in the title of his article.

Level One: Friends, Family, Fans and Followers

Level Two: Friends of “Friends, Family, Fans and Followers”

Level Three: People or the crowd that have no connection to the issuer

On Oct. 8, Forbes.com published an article “Equity Crowdfunding at Year One, What’s The Impact?” The article provided a breakdown of the aggregate $217.7 million of equity capital that was raised for the 12 months ended September 30, 2014 by the leading Crowdfunding portals for their issuers according to a report released by Crowdnetic. September marked the first anniversary of the enactment of Title II of the JOBS Act or the SEC’s lifting of its 80-year-old advertising and non-solicitation ban.

That an aggregate amount of just over $217 million was raised by the 10 leading U.S. Crowdfunding portals was quite a shock to me. I would have guessed that the amount would have been in the billions. Only 534 of the 3,361 companies attempting to capitalize from the lifting of the ban were successful. The average amount of $407,685 being raised per company was also disappointing. Kay Koplovitz from Forbes.com, who authored the article, stated that she believed that the first 12 months after the provisioning of Title II of the JOBS Act had been a success. However, she qualified that by stating, “Perhaps this is because of my rose colored entrepreneurial glasses.”

After reading Paul Niederer’s June article, I had already come to the realization that the entire equity Crowdfunding initiative was heading in the wrong direction. It was especially apparent after I read the sentence penned by Paul, in his article that contained the phrase, “little or no curation by the platform is a tough gig.” After reading the phrase and with my 37 years of experience in the capital markets, including my dealing with individual investors, it became rather obvious to me that the government-regulated funding portals would not be the catalyst to ignite Crowdfunding. The recent article by Forbes.com only confirmed what I should have never forgotten:  “Individual investors are followers and since the portals are prohibited from curating or recommending deals, they cannot lead them.”

Barriers to Equity Crowdfunding Growth

The cold hard truth is that since the 1850s, when individuals in the U.S. first started to make investments, the majority of all non-professional investors have relied on or utilized recommendations made by someone else in order to make their own investments. Most of the speakers, including myself, at the Crowdfunding conferences that I have attended since 2012 had prognosticated that the government-regulated funding portals would be the catalyst to make Crowdfunding ubiquitous. The theory that most of the leaders are espousing to this day is, “build the portals and they (the crowd) will come (to invest).” Unfortunately, based on my reading of the two recent articles that is not how it’s going to evolve.

The reason why the ASSOB has raised a total of only $140 million for companies, an average of $10 million per year since it was founded in 2005; is because it’s prohibited by CAMAC from curating or recommending any of the deals that are listed on its platform. Under Title II and under the SEC’s proposed rules for Title III, a US portal cannot curate or recommend the deals that are listed on it. The inability for portal to curate or make a recommendation is the reason why only $217 million has been raised under Title II of the JOBS act to date.

Related:  NCFA Canada's response to the proposed Crowdfunding exemption (multilateral instrument 45-108)

Ironically, the government regulations that were required for the lifting of the Crowdfunding bans have neutered the portals. The regulations have prevented the funding portals from being the catalyst that will ignite global Crowdfunding. The portals are still significant since they are needed to prevent, or at least, reduce fraud.

What needs to be understood is that for equity or finance Crowdfunding to be successful and become ubiquitous, it must revert back to its “community” roots. Whoever put together the language for the JOBS Act should have named it “Community” instead of “Crowd” funding. If Crowdfunding’s leaders redirect their energy towards establishing, fostering and growing communities instead of relying on the funding portals for growth; the growth rate of Crowdfunding could begin to immediately grow exponentially. .

The very first Crowdfundings, or the very first time that US investors transferred their money from their banks to make investments, was in the 1850s. What motivated the pioneers to take the leap was the invention of the steam engine locomotive and the railroad. Merchants and residents of every community back then had no choice but to invest in railroad bonds. The amount of capital needed to build the railroads was enormous. The banks, at the time, refused to loan capital to the railroads. For a community, having a railroad was crucial to its very survival. The laying of railroad track in every community during the 1850s is analogous to the advent of the Internet and everyone gaining access to the web and email in the late 1990s. The railroad transformed the US from an agrarian to an industrial economy. The Internet and the railroad are unquestionably the two single biggest economic developments that occurred in the US during each of the last two centuries.

Crowdfunding Investors Need Leadership

The U.S.’s early pioneers did not become investors by osmosis. They only invested after they learned about the opportunity from trusted leaders in their communities and because of that trust, followed. There were three brothers who were among the early leaders to emerge in the 1850s. The brothers, whose last name was Lehman, immigrated from Germany to Montgomery Alabama and had become successful merchants. After they started a cotton exchange they came up with the idea to create and sell bonds to finance railroads in communities throughout the south. By 1900, Lehman Brothers was recognized as the premier venture financier for many companies, which emerged to lead the US economy between the late 1800s and the early 1900s.

The online Social Investing Community (SIC) is the vehicle that has evolved to take Crowdfunding back to its roots. There are several SICs, which have emerged; OurCrowd, which is one of them, has raised more capital for its issuer members than any of the top Crowdfunding portals. The $70 million that OurCrowd has raised since February of 2013 is equivalent to half of the $140 million raised by the ASSOB over 10 years.

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Support NCFA

The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry. NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place.  Join our growing network of industry stakeholders, fundraisers and investors. Learn more About Us | Support Canadian Crowdfunding.

5 Tips For Food Companies Preparing To Equity Crowdfund

LinkedIn Post |Gil Michel-Garcia | October 20, 2014

Wafu Gil Michel-GarciaI have been asked by many of my colleagues for a simple checklist on how to prepare a food company to do an equity crowdfunding raise. Here are five tips specifically tailored for consumer packaged goods’ companies.

1. Prepare your Company to Offer Shares and Gain Outside Shareholders:

The first step is to hire an outside accounting firm and prepare financial statements for the last couple of years of operations. The second step is to hire a securities lawyer to draft a proper shareholders agreement, which will contemplate how to operate the company after the offering, and what rights new shareholders will have in the Company. Your attorney should also help in preparing some form of offering document, as well as a subscription agreement through which investors will purchase their shares in the company. If you expect to gain many new shareholders, you should also consider engaging the services of a company to manage your investor communications, and information sharing pre-and post-offering, as well as a transfer agent to handle the shareholder registry in book-entry form rather than having the Company issue and manage physical share certificates itself (see Canadian Crowdfunding Directory).

2. Make sure that your Company really owns all of its food recipes and trademarks

Before you launch your offering you need to make sure that all of your product recipes are actually owned by your company. This means that all of your products need to have been developed by employees under an employment contract that states that all of the products that they develop for the company, belong to the company, or you need to sign an assignment agreement with all employees and/or consultants who developed products for you under which they assign all of their rights to such products to the Company. You also need to verify that you have registered all of your brand names and other word marks and logos with the US Patent and Trademark Office and that those trademarks are registered in the name of the company and not in the name of a shareholder or employee of the company (in which case they need to be assigned back to the company).

3. Prepare the Company’s Social Media to Publicize the Offering and Hire a PR Company:

The third step is to prepare all of your Company’s social media properties: Website, Brand Blog, Facebook, Twitter, LinkedIn, Instagram for the offering of the securities. In our case we, we decided to continue to use our Blog, Facebook, and Instagram pages exclusively for our brand, and to only use Twitter and LinkedIn as the platforms for the offering. On our website we decided to only add an Invest in WAFU Link, which would link to the equity crowdfunding sites managing our offering in the US and Canada. In addition to preparing our social media properties for the offering, we also retained the services of a financial PR firm (Leverage PR in our case) to help us to draft and distribute our press releases and help us to come up with and execute a PR strategy for the duration of the equity crowdfunding round. You should also consider engaging in supported Twitter and/or LinkedIn campaign (i.e. paid campaigns) to further magnify the reach of your posts on Twitter and LinkedIn.

4. List your offering on a proven equity crowdfunding site and produce a very good equity crowdfunding video:

Gil Michel-GarciaThe fourth step is to list your offering on a reputable equity crowdfunding site with a proven track-record of successfully raising money. In the United States we chose CircleUp which is the premier accredited investor equity crowdfunding portal for consumer goods in the United States. CircleUp has helped companies to raise more than $40 million from accredited investors in the United States. It also has a growing list of big name companies including Virgin America, Johnson & Johnson and Proctor Gamble that invest on companies on their platform. Then you need to produce a very good video, which is probably the most important part of any crowdfunding campaign. Your video really has to be really good. For WAFU’s crowdfunding video, we engaged the services of one our designers in London, who also had experience in film and advertising. The key is to tell the story of your brand and your founders in a way that normal people can relate to and that allows potential investors to develop an emotional bond with your brand and your company.

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Support NCFA

The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry. NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place.  Join our growing network of industry stakeholders, fundraisers and investors. Learn more About Us | Support Canadian Crowdfunding.