Equity-Based Crowdfunding

= The form Crowdfunding associated with profit sharing which allows distributed funders to obtain equity or shares

Caution: Legislation in most developed countries prevents privately held companies from selling equity or debt to the public, but there are efforts to change this.

See also: Crowdfund Invest

Description

Ross Dawson:

"Unlisted companies can sell their shares to one of two groups:

Friends, family, or others who have a pre-existing relationship to the business owners;

Highly qualified investors who meet either minimum asset holding or minimum income requirements." (http://p2pfoundation.net/Getting_Results_from_Crowds)

Typology

Ross Dawson [1]:

"There are currently three ways in which crowdfunding platforms enable the public sale of debt or equity in privately held companies:

Selling debt or equity to a private network

"In many countries, business owners and entrepreneurs can approach an unlimited number of people within their personal network for funding. They can do this as long as the person being offered shares has a pre-existing relationship with the business owner. Some crowdfunding platforms have been launched to manage the process of making investment offers to the business owner’s personal network.

Example: 40Billion.com [2]

(named after the estimated $40 billion funding gap for startup entrepreneurs in the U.S.)

"Launched in July 2008 to allow entrepreneurs to raise money more easily from their friends and family. 40Billion.com provides a set of online tools to create and manage a fund raising within the owners’ private networks. The business owners state how much capital they require, select the type of funding they need, list their potential investors, and outline their business plan on the 40Billion.com portal. 40Billion.com then invites the potential funders to join the private investment community and manages the process of building the investment.

To date, 40Billion.com has helped U.S. businesses request $45m in funding from their private networks."

Similar models

1. CapAngel (France): www.capangel.com
2. Crowdcube (United Kingdom): www.crowdcube.com
3. ProFounder (International): www.profounder.com

Selling debt or equity to highly qualified investors

"Selling debt or equity to qualified investors is also possible in many countries. In the U.S., qualified investors are those with either $1 million in assets or personal annual income of $200,000. Business angel networks already match entrepreneurs with potential investors. In many ways a crowd of highly qualified investors is effectively a virtual business angel network.

Example: SeedUps [3]

SeedUps is a matching engine for entrepreneurs who wish to raise up to £250,000 from high net worth investors. SeedUps was launched in November 2010 and serves British, American, and Irish startups by matching them with potential investors. Entrepreneurs submit a single page opportunity snapshot to the investment portal, which the SeedUps matching engine uses to match entrepreneurs with appropriate investors. SeedUps’ all-or- nothing funding model means that the target investment goal must be achieved within 180 days for the investment to go ahead.

To date, over 800 companies have raised over £21 million from over 340 investors through SeedUps."

Similar models:

1. Innovestment (Germany): www.innovestment.de
2. ASSOB (Australia): www.assob.com.au

Indirect investment in the business

"This model of funding involves creating a separate vehicle (an investment company) that invests in the underlying business. The investment vehicle could be a pre-existing fund or a specially created company for the investment opportunity that achieves the highest level of interest from the crowd. In this model the funding will often come from the crowd, in a similar way to a managed fund, however the wisdom of the crowd determines which investments to make.

Example: WiSEED [4]

WiSEED is a platform that lists startup businesses looking for funding. WiSEED investors select the companies that interest them and state how much they are willing to invest in each one (upwards of €100). When a business gets the required commitments from investors, WiSEED creates a dedicated investment vehicle with each investor owning a fraction of this investment vehicle. In effect, the investor becomes a shareholder in the investment vehicle that becomes a shareholder in the target company.

To date, 16 startups have achieved a total of €5.1m in investment through WiSEED." (http://p2pfoundation.net/Getting_Results_from_Crowds)

Similar models:

1. VenCorps (Global): www.vencorps.com
2. Grow VC (Global): www.growvc.com

Discussion

Legal update

Ross Dawson:

"Startup Exemption (www.startupexemption.com), an online advocacy group, has petitioned for a limit to individual investments from unaccredited investors of either $10,000 or 10% of their gross income. They have also requested an allowance of up to $5 million in total investments and elimination of the 500 shareholders or less rule for private companies.

(see: Startup Exemption for Crowdfunding

The two ways in which U.S. companies can sell debt or equity without having to be a public company and register with the SEC are raising less than $1 million over a 12 month period from people with whom the business has a “substantial, pre-existing relationship”, and raising only from “sophisticated” investors.

The European Union’s Prospectus Directive means that any offer of shares or bonds to the public in Europe must be made in a prospectus. Start-ups looking to crowdfund need to draft an expensive prospectus, unless they ask for less than €2.5 million within 12 months in amounts over €50,000. Any request without a prospectus must be directed at less than 100 people in each country in Europe or only made to qualified investors." (http://p2pfoundation.net/Getting_Results_from_Crowds)

Update - May 7th, 2012 SEC FAQ on Equity CrowdFunding See: [5]

Examples

• Enviu, a company that used crowdfunding to attract capital., raised €100,000 – making it the largest crowdfunding campaign in the Netherlands. [6]

1. Cameesa‎: crowdfunding T-shirt design [7]/
2. Catwalk Genius‎: Crowdfunding for fashion [8]
3. Slice the Pie: ‎invest from $1 to $15,000 in albums the company helps produce
4. MyBandStock‎: a “social web community that allows fans the opportunity to ‘buy stock’ in a band,” [9]
5. Equite for Punks: craft beer
6. [Crowdfunding a CrowdFund website [10]/

CrowdCube

"Other firms are trying to reinvent small-business financing by providing virtual marketplaces where investors and SMEs can come together. In the world of equity capital the pacesetter is a British firm called Crowdcube, which uses the idea of “crowdfunding” to enable lots of investors to buy up small stakes in start-up firms.

Picking winners among entrepreneurs is notoriously difficult. Venture capitalists’ answer is intensive screening by a small team of dedicated investors, followed by hands-on involvement in the business. The Crowdcube model, which is due to come to America if crowdfunding legislation passes, depends on the ability of thousands of members to ferret out the best ideas. The general public cannot match the expertise and commitment of dedicated “angel” investors if a firm gets funded, admits Darren Westlake, Crowdcube’s founder. But it helps to have lots of investors acting as advocates for a start-up firm." (http://www.economist.com/node/21547994?fsrc=scn/tw/te/ar/onthesideoftheangels)

Status

"In 2011 we witnessed the start of equity based crowdfunding. To get insight into the market for equity based crowdfunding, we analysed the market size in 2011, being a modest €10 million. The coming years, we expect equity based crowdfunding to grow exponentially." (http://www.douwenkoren.nl/en/infographic-equity-based-crowdfunding-in-2011/)

"the Entrepreneur Access to Capital Act (HR 2930) aims to achieve. The bill, which Forbes contributor Scott Edward Walker explained in detail here last month, has the support of President Obama and was passed by an overwhelming majority in the House in November, but has been hung up in the Senate ever since. Portfolio.com and Reuters reported on Tuesday that Senate majority leader Harry Reid announced plans to push the legislation forward." 29/2/12 (http://www.forbes.com/sites/techonomy/2012/02/29/crowdfunding-set-to-explode-with-passage-of-entrepreneur-access-to-capital-act/)

More Information

1. 2011 overview graphic, http://www.crowdsourcing.org/blog/infographic-equity-based-crowdfunding-in-2011--douwkoren/10047
2. Crowdfund Invest ; Startup Exemption for Crowdfunding
3. Equity Crowdfunding Platform Reviews http://www.Crowdfunding-website-reviews.com