equity crowdfunding
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Will new SEC equity crowdfunding rules encourage more founders to pass the hat?
The flow of venture capital in 2020 has been surprisingly strong given the year’s general uncertainty, but while investors have showered plenty of dough on growth-stage companies, seed-stage startups are down 32% last quarter compared to the year before.
There have been plenty of recent conversations about alternative funding routes for founders, and one of those oft-overlooked paths has been equity crowdfunding. While crowdfunding platforms like Kickstarter push consumers to back unrealized projects in exchange for products or other services, equity crowdfunding allows consumers to actually invest cash and receive a piece of the company. It’s not a conventional path, but it can be a viable option for companies that have a close relationship with an engaged customer base.
The Security and Exchange Commission’s Regulation Crowdfunding guidelines were adopted under Title III of the JOBS Act back in 2016, but because many entrepreneurs were unfamiliar with how to participate, many of the startups that have taken advantage of it haven’t been the highest quality. The tide could be turning: This week, the SEC updated some of its guidance on crowdfunding, eliminating some ambiguities and increasing the amount of capital companies can raise from both accredited and nonaccredited investors. Additionally, companies can now raise $5 million per year using equity crowdfunding, compared to the previous limit of $1.07 million.
But life has gotten easier in other ways as well for founders pursuing this fundraising type and the platforms that seek to simplify it.
Wefunder is one of a handful of equity crowdfunding platforms that have popped up in the last few years. Before a company can raise on its platform, Wefunder vets them before allowing them to tap into their network of amateur investors who can invest as little as $100 with the median investment sitting at $250. Last month, 40 companies launched on Wefunder and collectively raised $12 million, according to Wefunder CEO Nicholas Tommarello.
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In pandemic era, entrepreneurs turn to SPACs, crowdfunding and direct listings
If necessity is the mother of invention, then new business owners are getting very inventive in the ways in which they access cash. Relying on some long-tested and some new avenues to raise money, entrepreneurs are finding more ways to get public market cash faster than they would have in the past.
Whether it’s from Reg A crowdfunding dollars, Special Purpose Acquisition Companies (SPACs) or direct listings, these somewhat arcane and specialized financing vehicles are making a comeback alongside a rise in new funding mechanisms to get to market quickly and avoid the dilution that comes from private market rounds (especially since those rounds are likely to come at a reduced valuation given market conditions).
Some of these tools have existed for a while and are newly popular in an era where retail investors are driving much of the daily fluctuations of the public markets. Wall Street institutions are largely maintaining their conservative postures with regard to new offerings, so secondary market retail volume growth is outpacing institutional. Retail investors want into these new issues and are pouring into the markets, contributing to huge pops to new public offerings for companies like Lemonade this Thursday and creating an environment where SPACs and crowdfunding campaigns can flourish.
The rise of zero-commission brokerages and the popularization of fractional trading led by the startup Robinhood and adopted by every one of the major online brokers including Charles Schwab, TD Ameritrade, E-Trade and Interactive Brokers has created a stock market boom that defies the underlying market conditions in the U.S. and globally. For instance, daily trades on Robinhood are up 300% year-over-year as of March 2020.
According to data from the BATS exchange, the total trade count in the U.S. was up 71% and May trading was up more than 43% over 2019. Meanwhile, E-Trade daily average revenue trades posted a 244% increase in May over last year’s numbers.
Don’t call it a comeback
The appetite for new issues is growing and if many of the largest venture-backed companies are holding off on going public, smaller names are using SPACs to access public capital and reach these new investors.
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5 resources Black entrepreneurs can leverage to build and grow
Delali Dzirasa is CEO and founder of Fearless, a full-stack digital services firm in Baltimore, MD with a mission to create software with a soul — tools that empower communities and make a difference.
Building a business is hard; about 50% of businesses fail in the first five years. The early years of an entrepreneur’s journey can be difficult and lonely. When starting my digital services firm Fearless, I convinced my wife to rent out our home and move in with my mother so we could have an extra income while I built Fearless in my mother’s basement.
That was 10 years ago — Fearless now has over 115 employees.
That story of struggling to build a tech company and working out of a basement or garage until you “make it” is pretty common, but the barriers facing Black entrepreneurs make it harder to find success and support.
Research by the University of California, Santa Cruz states that minority-owned startups have access to less capital than their white counterparts. The right investors can offer more than just funding to early-stage companies; the connections those in the venture capitalist world have can bring an entrepreneur the new business, mentorship and employees needed to grow.
Venture capital firms like Harlem Capital and Black Angel Tech Fund are focused on changing the faces of entrepreneurship by diversifying their portfolio, but traditional venture capitalist funding is not the only way to grow your business.
There are other avenues and opportunities to get the support, financial and otherwise, to help build a successful company:
Equity crowdfunding: Similar to crowdfunding campaigns like GoFundMe or Kickstarter, equity crowdfunding allows nontraditional investors to support businesses and receive equity. Enabled through Title III of the 2012 JOBS Act’s Regulation CF, equity crowdfunding allows all companies to sell securities, whether in the form of equity in the company, debt, revenue shares, convertible notes and more. Equity crowdfunding platforms include WeFunder and LocalStake.
Mentor programs: Fearless was lucky enough to be accepted into the DoD Mentor-Protégé program early in our growth. As the oldest continuously operating federal mentor-protégé program in existence, the DoD program helped us establish and expand our footprint in the federal government contracting space. NewMe and Black Girl Ventures are two programs that specialize in mentorship for early-stage companies.
Become 8(a) certified: The federal government has a goal of awarding at least 5% of all federal contracting dollars to small, disadvantaged businesses each year. These businesses fall under the 8(a) classification. To qualify for the program, you must be a small business with 51% of ownership and control from U.S. citizens who are economically and socially disadvantaged and the owner’s adjusted gross income for three years is $250,000 or less.
The full definition of what counts as being economically and socially disadvantaged can be found in Title 13 Part 124 of the Code of Federal Regulations. Fearless has been classified as an 8(a) company for several years and we have been able to secure several contracts through the certification.
Tap into Small Business Administration resources: More than a million users visit SBA.gov to utilize tools like the SBA Business Guide and Lender Match site. By using the SBA website and reaching out to your local SBA office, you can make full use of the programs available and connect with business owners who can offer advice and mentorship.
Identify supportive bankers: Your business is your top priority and the people you engage with should view your company as a priority too. You need someone vested in your success who will advocate for you when you need them. If you meet with a banker and get a sense that you would be an account number instead of a person, then find another one. If you don’t have your banker’s personal cell phone number, and they aren’t willing to visit you at your business, then take a pass and find a true partner who supports you.
A call to action for business owners
I am putting the call out to business owners and entrepreneurs who are further along in their journey to mentor and invest in Black-owned businesses. Think back on the support you received, and be that model for someone else. Or be the mentor that you wished you had when you were starting out. Take time to invest in other Black-owned tech companies or fund the programs that do. Share your knowledge and experience with Black tech leaders.
If there isn’t a resource hub for Black entrepreneurs in your city, create one. Fearless is a small company and we have still managed to help 13 new companies get off the ground through our accelerator program, Hutch.
Hutch is an intensive 12-month program that gives entrepreneurs a blueprint for building successful digital service firms, by empowering them with the tools, mentorship and peer support they need to have a lasting impact. We think of this program kind of like a home base for our entrepreneurs, providing them with a foundation of support so they can grow without getting lost amongst bigger companies in the industry.
Help create the spaces in your community that will foster innovation and business growth.
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HyperSciences raises an untraditional $9.6M for its hypersonic drilling vision
We profiled HyperSciences in February, when the team had just successfully completed a launch milestone for a small business grant with NASA. The last time we checked in, the hypersonic drilling company had raised about $5 million as part of an untraditional Reg A offering. By the end of March, HyperSciences rounded out its first major round with $9.6 million from 3,552 individual investors on SeedInvest in the equity crowdfunding platform’s second largest raise to date.
The heart of HyperSciences’ work is its hypersonic propulsion system that can fire a projectile at five times the speed of sound. At its most simplistic, HyperSciences’ hypersonic engine can fire upward to power suborbital space launches (HyperDrone) and point downward to penetrate deep pockets of geothermal energy, for example (HyperDrill).
Rather than going the normal venture capital route, HyperSciences decided to raise from regular people who believed in its vision. The way the company sees it, traditional VC would have likely forced HyperSciences to narrow its mission.
“Reg A lets everyone who cares about our planned hypersonic future vote with their checkbook,” HyperSciences founder and CEO Mark Russell told TechCrunch. “I think that’s important.” Russell comes from a family-run mining business and is no stranger to the challenges of a public company.
“I’ve learned a lot from running ops in the back offices,” Russell said. “Based on our public company experiences, we do like that the SEC Reg A process has a clear path to taking your company to the public markets as the next step in the process.”
With infusions of $125,000 from NASA’s Small Business Innovation Research grant and $1 million from Shell’s Global’s GameChanger program, HyperSciences is happy to bounce between research grants with a boost from the Reg A’s special form of “mini-IPO” in order to maintain its autonomy for the time being.
Russell explained that the Reg A’s intensive SEC process requires a fair level of maturity from a company — and enough capital to jump through all the hoops. “You’re not typically a seller of t-shirts in Reg A crowd financing,” Russell said.
HyperSciences’ next milestone will come in May when the company will demo its drilling tech in a field test for Shell. The company plans to leverage its new funding for additional future field testing, pushing its existing business plan forward and moving toward sustainability.
“Our investors are more like smart ‘crowd VCs.’ They’re generally are pretty savvy and see that we went through a stringent process to get here,” Russell said. “We’ve provided them with enough information to make a great decision.”
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Dubuc Motors gets SEC approval for equity crowdfunding
Dubuc Motors, makers of the Tomahawk all-electric supercar prototype, recently announced that the Securities and Exchange Commission (SEC) had approved its filing for equity crowdfunding under the US JOBS Act Regulation A+. The company began a Testing the Waters campaign in 2016, when it revealed the Tomahawk prototype, and raised $6.1 million in initial funding reservations. Now that the… Read More
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What regulation crowdfunding in the JOBS Act means to entrepreneurs and startups
The JOBS Act was signed into law by President Obama in 2012, allowing companies to acquire funding through online portals from non-accredited investors, which roughly accounts for 97 percent of the population in the United States. On May 16, 2016, Title III of the JOBS Act, also known as regulation crowdfunding, or equity crowdfunding, was the last section to be implemented by the SEC. Read More
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Tilt dives into one-to-one payments
Here’s a sentence you might not have expected to read: a service built around crowdfunding is building in a one-to-one payments option in what might be one of the most increasingly crowded spaces in the U.S. That’s what Tilt, an app geared toward crowdfunding events like parties or travel plans, is hoping will make its service even more sticky and a one-stop destination for… Read More
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Games company Paradox Interactive raises $11.8M from the crowd
Paradox Interactive, best known for developing and publishing a series of popular games including Hearts of Iron, Stellaris and Europa Universalis, today announced it raised more than $11.8m from the crowd on the new Swedish equity crowdfunding platform Pepins. Invesdor raises another $1.4m to expand equity crowdfunding in Europe
Equity crowdfunding continues to be a hot topic around the world, with a number of players new and old re-doubling their efforts to capture the wallets of investors everywhere. The most recent example is Invesdor, a platform focusing on Scandinavia, who used its own platform to raise its fourth round of funding. This time, the company raised €1.2m ($1.36) to expand growth, especially in the UK. Read More
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Legislation allowing ordinary American investors to invest in the shares of startups and small businesses was first introduced in the U.S. Congress in 2011. Despite bipartisan support and the approval of President Obama, it is only now becoming a reality.