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Crowdfunding: Challenges and Opportunities for Indies
David B. HoppeGamma Law, San Francisco
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Estimated $5.1 billion to be raised worldwide through crowdfunding in 2013 – massolution, http://research.crowdsourcing.org/2013cf-crowdfunding-industry-report.
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Source: http://www.kickstarter.com/help/stats?ref=footer
Kickstarter Successful Projects (Selected)
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Source: http://www.kickstarter.com/help/stats?ref=footer
Kickstarter Unsuccessful Project Statistics (Selected)
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67,266backers$3,845,170pledged of $900,000 goal
Mighty No. 9, Kickstarter, August-September 2013
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Introduction
Source: Kickstarter; statistics through June 12, 2014.
Games on Kickstarter • 10,371 campaigns.• 35.6% success rate.• 72% raise $10,000 or less.
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Introduction
Source: Kickstarter; statistics through June 12, 2014.
Other Projects on Kickstarter
Music •30,106 campaigns.•55.1% success rate.•84.6% raise $10,000 or less.
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Introduction
Source: Kickstarter; statistics through June 12, 2014.
Other Projects on Kickstarter
Film & Video
• 36,446 campaigns.• 40.3% success rate.• 69.7% raise $10,000 or less.
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Introduction
The Banner Saga, StoicKickstarterSource: http://www.kickstarter.com/projects/stoic/the-banner-saga
Reward Crowdfunding vs. Equity Crowdfunding
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Introduction
Reward Crowdfunding • Tax implications.• No requirement of US entity.*• Segregate funds; preferably establish separate company.• Basically unregulated.
* - (But may not be able to run campaigns on some crowdfunding sites from all countries.)
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Introduction
Equity Crowdfunding • Contributors become investors.• Stockholders in your company?• Or holders of equity interest in particular projects?
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Equity Crowdfunding in Europe
Europe: Rapid Growth of Equity Crowdfunding
European securities regulation has traditionally been lighter than the US.
But:
• Fragmented regulatory regimes.• Uncertainty about what’s permissible.• Currently largely limited to national markets.
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US Regulation of Crowdfunding
The CROWDFUND Act:“Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012,” signed April 5, 2012
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US Regulationof Crowdfunding
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US Regulation of Crowdfunding
The New Crowdfunding Exemption “For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”
– President Obama, April 2012 signing ceremony. “The thing about crowdfunding is that it brings together unsophisticated issuers with unsophisticated investors … what could possibly go wrong?” – Barbara Roper, Consumer Federation of America.
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US Regulation of Crowdfunding
The New US Crowdfunding Exemption • Annual dollar limit on sales by companies.• Annual dollar limit on purchases by investors.• Must be through crowdfunding website registered with SEC.• Required disclosure by company.• Audited financials required for offerings >$500,000.• Limited ongoing reporting.• Must be US company.
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US Regulation of Crowdfunding
Size Limitations • Annual limit per company: $1 million.*• Annual limit per investor:
o Annual income or net worth less than $100K:5% of income / net worth or $2000, whichever greater.
o Annual income or net worth $100K or more: 10% of income / net worth, with cap of $100K.
Burden on crowdfunding websites to verify.
* - 66 Kickstarter campaigns have raised $1 million or more.
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US Regulation of Crowdfunding
Financials Requirement is based on company’s total campaign targets for year: • If less than $100K, must provide tax returns and financials certified
by CEO.• If $100K to $500K, audited financials not required; but financials
must be “reviewed” by CPA.• If over $500K, financials must be audited.
Indiegogo: “a massive dealbreaker”.
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US Regulation of Crowdfunding
Exception: Private Placements Amount of capital raised in US private markets compared to IPOs:
4x Estimated annual size:
$1.2 trillion.
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US Regulation of Crowdfunding
Exception: Private Placements • Accredited investors: net worth of $1 million; or income of $200K
($300K with spouse).*• Up to 35 non-accredited investors.• Annual limit of $5 million; unless any non-accredited investors are
“sophisticated.”• Private placement memorandum for non-accredited investors.• Audited financials.
* - Compare to UK: “complete a short survey that assesses whether you fully understand the high-risk nature of investing….”
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US Regulation of Crowdfunding
Crowdfunding Portals for Accredited Investors
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US Regulation of Crowdfunding
Crowdfunding Portals for Accredited Investors No:
•Limits on offering size (in most cases).•Limits on per-investor purchases.•All-or-nothing campaign requirement.•Ongoing reporting requirements.•Requirement of US entity.
Also, reduced risk of civil/criminal liability.
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Will the amount of new money generated by equity crowdfunding and accessible to small/medium-sized companies be enough to make all this worthwhile?