SEC Releases White Paper On Regulation Crowdfunding
The SEC last month released a white paper entitled “U.S. securities-based crowdfunding under Title III of the JOBS Act,” which examined Regulation Crowdfunding offerings between May 16, 2016 (when businesses started using Regulation Crowdfunding) and December 31, 2016. Some highlights include:
- There were 163 unique offerings by 156 issuers, seeking a total of $18 million based on the target amount.
- The median amount requested was just $53,000, while the median amount raised approximately $171,000.
- The most popular type of securities was equity, followed by simple agreements for future equity (SAFEs) and debt.
- The most popular state of incorporation was Delaware and the most popular location of the business was California. Most offerings solicited in all states.
- The median issuer had under $50,000 in assets, under $5,000 in cash, $10,000 in debt, no revenues, and 3 employees.
- To date, crowdfunding has been attracting issuers that have not extensively used the Regulation D safe harbor, which remains the most popular private offering method.
- Funding portals have accounted for most of the offering activity, and the median intermediary percentage fee was 5%. Intermediaries took a financial interest in the issuer in approximately 16% of offerings.
What is Regulation Crowdfunding?
Regulation Crowdfunding allows accredited and unaccredited investors alike the opportunity to invest in startups. It requires the issuer to conduct its offering through an online platform operated by an intermediary that is registered with the SEC either as a broker-dealer or as a funding portal. The intermediaries are also required to register with the Financial Industry Regulatory Authority.
In November, a company called UFP LLC became the first crowdfunding portal to be expelled as a FINRA members. UFP, which operated the website uFundingPortal.com, was accused of not complying with the rules for crowdfunding portals under Regulation Crowdfunding.
While Regulation Crowdfunding has started slowly, the initial results may not be representative of future activity. The SEC white paper notes the market is still evolving and participants are still learning the ins and outs of securities crowdfunding. Their behaviors could change with more experience.
“Moreover,” the study says, “potential future changes in the crowdfunding market, such as the entry of new intermediaries, adoption of alternative funding methods by issuers (e.g., intrastate and regional crowdfunding), industry shocks, or changes in aggregate market conditions may cause crowdfunding activity to vary significantly in future periods.”
Lawmakers are also considering updating Regulation Crowdfunding with the “Fix Crowdfunding Act,” which is currently making its way through Congress. If passed, the legislation could spur increased utilization of securities crowdfunding.