Equity Crowdfunding is becoming one of the hottest trends in investing and could be ready to explode higher!
Just one year after passage of Title II of the JOBS Act, a total of 534 companies successfully met their crowdfunding goal for equity participation. More than $200 million in equity capital was raised, averaging a little over $400k per company. The industry is developing quickly and crowdfunding platforms for equity investing are popping up everywhere.
The crowdfunding revolution is happening across all 50 states, the District of Colombia and Puerto Rico. Even in states where equity crowdfunding just opened up to regular investors, intrastate crowdfunding has been developing as an alternative for small business funding and crowdfunding investing.
Among crowdfunding sites, you have those focused exclusively on donation-based funding and those crowdfunding platforms for equity investing that offer an ownership right to the company. After years of waiting on rules from the Securities & Exchange Commission to allow regular investors the opportunity to invest in equity crowdfunding projects, the government finally enacted Regulation A+ this year.
We’ve yet to see many equity crowdfunding platforms take advantage of the new rules to bring in regular investors but that could change very soon.
So just how big could crowdfunding for businesses get? The chart below, from census data, presents U.S. households by income in 2013. Even if we assume a market of households with $50,000 annual income and above, allowing regular investors into equity crowdfunding investing will increase the market’s size by more than ten-fold. What’s waiting for crowdfunding in 2015?
How big could equity crowdfunding investing get?
The U.S. market for angel investing and startup financing reached nearly $50 billion in 2012. On top of this, lenders granted 20.3 million small business loans worth $159.3 billion bringing the total to nearly $210 billion from just three avenues of small business funding.
With the passage of Regulation A+, the potential pool of investors to equity crowdfunding could grow more than ten-fold. If just 10% of small business funding goes through crowdfunding, the market would total $21 billion.
I’m not sure anyone can predict the affect Regulation A+ will have on the economy or the disruption to the capital markets. At no other time in our history has investment opened up to so many so quickly. Final passage of the JOBS Act will be a true democratization of capital with investors and entrepreneurs both set to reap the rewards.
The number of crowdfunding platforms for equity investing, and similar sites that offer different models of investment, seem to increase by the day but a few stand out with some institutional knowledge and a strong platform. Success in crowdfunding and investing will depend on the market’s knowledge of the resources.
One of the biggest beneficiaries to the crowdfunding boom has been real estate investing. Real estate crowdfunding platforms have benefited from the lack of lending by traditional banks and investors that need higher returns.
Still not sure how crowdfunding can help your business? Check out this free crowd funding webinar about how to use equity crowdfunding for marketing and fundraising.
Equity Crowdfunding Platforms for Equity Investing
RealtyShares is my favorite equity crowdfunding portal for real estate crowdfunding. The real estate portal has funded more than $200 million in properties which have returned 10.75% annually, easily beating the return on the S&P 500. What I like about real estate crowdfunding is that, unlike investing in REITs where you only get an ownership in the fund, you get direct ownership in the properties.
RealtyShares underwrites investments through a strict process and only about 5% of submitted deals are approved so a lot of the analysis work and due diligence is done for you. After an application is submitted, deals are screened for the management team, their track record and finances. The property project is then analyzed on a set of due diligence checks including financial, legal and location.
Investors pay a max fee of 2% on their account and get instant diversification by investing in different property types across the country. Returns are distributed on a monthly or quarterly schedule depending on the property.
The site reports 75,811 investors and 15,805 companies for $130.5 million in investments. The average size of equity projects is $1.6 million, mostly through seed funding and initial rounds of financing. The company has been operating in the U.K. for quite some time and has a good archive of articles and media from which to learn. Crowdfunder is probably the largest and most established crowdfunding platform for equity investing.
Crowdfunder is an all-or-nothing platform and campaigns are recommended to set multiple rounds of financing. This increases the likelihood that you will get funded through earlier rounds with smaller amounts but it also increases the risk to investors. Companies looking for seed funding or proof-of-concept may still be years and multiple financing rounds away from any sales or profits. Campaigns are able to set their own deadline up to the 60-day maximum.
A monthly fee starting at $299 is charged on all projects. Crowdfunder charges a 5% fee on successfully funded campaigns. Payments are only offered through Amazon Payments which charges a 2.9% fee and a $0.30 transaction fee.
One of the new crowdfunding sites dedicated to real estate investment, Realtymogul reports more than $39 million investments across 98 properties since its launch in 2013. Realtymogul is not necessarily one of the crowdfunding platforms for equity investing but a crowd platform for real estate investing.
Crowdfunding real estate projects carry different levels of risk and return than start-up investing. Returns are not likely to be as high but cash flow will likely be sooner and more regular than with start-up financing. As with equity crowdfunding, only accredited investors are allowed to invest until final passage of the JOBS Act.
The site provides a breakdown of property types for funded projects with residential and retail commercial properties accounting for a large proportion of the total. The site also allows projects to raise debt financing through loans.
The site performs an underwriting check on projects to verify property characteristics and owners. Projects submit investor cash payments to Realtymogul or to a third party payment processor which then remits the payment to investors.
The minimum investment amount is $10,000 with a 3-10 year lockup period on most projects. This lock-up period is common in venture capital and helps management to focus on the business instead of constantly raising money. One important consideration with Realtymogul, understand that you are an investor in Realtymogul and not in the specific properties themselves. Realtymogul manages the fund of investments and charges a 2% annual fee for administration.
Fundrise is another real estate investing platform that reports 34,152 members and 12% to 14% average return based on the projected gross returns for each funded offering on the site.
Minimum investments start as low as $100 per project and less than 5% of offering solicitations from real estate developers are approved by the site. The lock-up period for investments appears to be shorter with the site claiming a 1 – 5 year lockup on most investments.
Unlike Realtymogul, Fundrise offers direct public offerings to investors which means you are investing directly in the real estate project. Since it is a direct offering, Fundrise has to go through a lengthy SEC application process for each project so that may slow the number of offers available. I interviewed the co-founder of Fundrise about a really interesting feature on the site, Guaranteed Funding for Real Estate Crowdfunding campaigns.
The site touts more than 11,000 accredited investors and $22 million invested over 100 companies. After a company submits an application for review, a committee reviews the application for growth metrics and viability. A panel of investor members, composed of angel investors and entrepreneurs, then reviews the documents in a vetting process.
Projects are launched in ‘watchlist’ mode before investing can take place to allow potential investors to perform their own due diligence. The minimum investment is $3,000 and fewer than 3% of reviewed companies are selected to go up on the site.
Fundersclub recently celebrated its two-year anniversary and disclosed a 47.9% unrealized net IRR over the period. It may be a little early to get too excited since the return is unrealized and most venture funding needs at least three to five years to exit and provide a return. The statistic is compelling though and it appears the site offers investors a good opportunity to piggy-back on deals vetted by other players.
EquityNet has helped 20,000 investors fund more than $250 million to nearly 30,000 companies since its launch in 2005. EquityNet owns several patents for its crowdfunding technology, including one for analyzing enterprise risk and one for its marketplace solution. The strong intellectual property could help the site grow rapidly as the JOBS Act is implemented.
EquityNet seems to go a little farther than others in helping business owners develop their plan. The site offers business planning software that is pretty detailed and user-friendly. The software also helps owners develop professional reports and graphics to communicate with investors.
For investors, EquityNet offers a different model from other sites. Investors are able to contact entrepreneurs directly and invest directly in the projects off-line.
It still feels a little like the old west for equity crowdfunding, even for accredited investors with experience in start-up financing. The years ahead are bound to bring changes in regulation, how companies communicate with investors and how platforms connect the two. Never has investment and financial freedom been democratized to so many so quickly.
It’s an exciting time for everyone. I hope you’ll spend it with us.
Didn’t find the right equity crowdfunding platform for your needs? Check out this Ultimate List of Crowdfunding and Fundraising Websites.