Exploding growth in crowdfunding

Demystifying Valuation, Economic Damages + Forensic Accounting

Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the internet. Crowdfunding has grown dramatically over the last few years. As shown in the chart below, crowdfunding websites helped companies and individuals worldwide raise $89 million from members of the public in 2010, growing to $5.1 billion in 2013. The overall crowdfunding industry is estimated to grow to nearly $10.9 billion in 2015.

The growth in crowdfunding is due in part to the Jumpstart Our Business Startups Act (JOBS Act) which was passed with bipartisan support by Congress and signed into law by President Obama in April 2012. Following on the success of donation-based crowdfunding, the JOBS Act now enables businesses to solicit securities-based funding from the general public – also known as Business Crowdfunding.

Unlike the Donation Model of crowdfunding on sites like Kickstarter, where people donate to creative projects and do not receive any return on funds invested, securities-based crowdfunding allows investors to receive a financial return through the purchase of equity, debt or revenue-based securities.

The JOBS Act also expands investment opportunities to “non-accredited” investors (those with a net worth of less than $1 million or an annual income lower than $200,000), who have been historically excluded from this process. Although the JOBS Act was passed in 2012, the Securities and Exchange Commission did not have rules and regulations in place in order to implement the new legislation.

It wasn’t until September 2013 that Title II of the JOBS Act was implemented by the SEC. This allowed companies to publicly advertise that they were looking to raise money. However, only the wealthy, accredited investors could participate in the offerings. Shortly after issuing Title II, the SEC came out with a proposal for Title III which would allow non-accredited investors to participate. The final rules for Title III have still not been issued. However, on March 25, 2015 the SEC issued final rules for Title IV which allows non-accredited investors to invest up to 10% of their annual income or net worth in each deal by way of Regulation A+ offerings. Regulation A is an existing exemption from registration for small issuers of securities. The updated exemption will enable smaller companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure and reporting requirements.

As crowdfunding becomes mainstream it will be interesting to follow new rules and regulations adopted by the SEC and keep an eye on potential fraud that could occur in such a fast growing investment environment.

By Cindy Andresen, ASA

Sources:
SEC Adopts Rules to Facilitate Smaller Companies’ Access to Capital: New Rules Provide Investors with More Investment Choices”, Washington D.C., March 25, 2015, www.sec.gov

Crowdfunding Investors Rejoice!”, by Louis Basenese, April 8, 2015, Wall St. Daily

Global Crowdfunding Volumes Rise 81% in 2012”, by Kylie MacLellan, April 8, 2013, The Huffington Post

SEC Democratizes Equity Crowdfunding with JOBS Act Title IV”, by Chance Barnett, March 26, 2015 & “10 Top Equity Crowdfunding Campaigns from 2014”, by Chance Barnett, December 17, 2014, Forbes