Raising Capital

Through Equity

Crowdfunding

James Hoffmire, Ivon Yeap, Erica Flemming, Liu Yifei

The Funding Gap

Equity-Based

Crowdfunding is

Playing an

Increasingly Large

Roll in Closing That

Funding Gap

Overview

Intro to Crowdfunding

Legislative Changes in the US

Equity Crowdfunding Platforms

How to Crowdfund Successfully

What is Crowdfunding?

Four Types of Crowdfunding

(Source: Massolution)

EQUITY-BASED (includes revenue and profit-sharing

models)

REWARD-BASED

LENDING-BASED DONATION-BASED

REWARD-BASED

Equity-Based Crowdfunding

High growth and large fund per project

Selling equity in a

company using one of

the crowdfunding websites

In return for investing in the

company, the investors receive a share of

the profits (dividends or distribution)

Source: wsj.com

Project Funds Paid for Donation

and Reward Crowdfunding

Source: Massolution

Project Funds Paid in Equity-Based

Crowdfunding

Source: Massolution

Crowdfunding by selling equity brings in BIGGER dollar amounts

Growth in Crowdfunding Internationally

Source: Massolution

2.8 Billion Dollars raised in 2012 and this number is expected to grow even more

Growth in the Amount of

Crowdfunding Platforms by Category

Based on a sample of 143 CFPs

Source: Massolution

Equity-based Crowdfunding is rapidly

growing

Crowdfunding vs. Traditional

Methods of Funding

Bank Loans Angel

Investors Venture

Capitalists Crowdfunding

● Traditional

source of capital

for small

businesses

● However, banks

are not lending

as much as they

use to

● Need collateral,

previous

business

financials, and a

relationship with

a bank

● It is often hard for

small businesses

to meet

qualifications

● A wealthy

individual or

small group of

individuals

providing capital

in exchange for

partial ownership

● Typically they

make bets on

companies in

their earliest

stages (seed

funding)

● Investments

usually range

from $25,000 to

$100,000 or

more

● Investors (usually

firms, not

individuals)

invest in the early

stage of startup

companies with

high potential

and high risk in

exchange for

owning equity

● Have significant

control over

company

● Investments

range from $1

million to $10

million

● Raising small

amounts from

many individuals

through the

Internet and

other social

media

● Projects can

vary greatly

● Lending is less

costly than

traditional

methods

● Investors may

be connected

and involved

Crowdfunding vs. Traditional

Methods of Funding

Bank Loans Venture

Capitalists Crowdfunding

Collateral

Time

Required

Relationship

Success

Rate

Management

Control

Needed Not needed Not needed

Long Long Relatively Fast

8.2 Weeks

Previous relationship

with the bank helpful

Have to know the right

person Can gain support from

many people

Varies, unlikely to

secure a large loan

0.07%

No Large Influence No

Varies by platform

Ourcrowd accepts 7-8%,

followed by a success rate

of at least 33%

Legislative Changes in The US

In April 2012, Congress passed the JOBS

(Jumpstart Our Business Startups) Act. ● The JOBS Act makes it easier for startup companies to find

investors, and makes many changes in the financing process

for private companies.

● The JOBS Act instructs the SEC to revise their rules

concerning the sale of private company equity. Some of

these rule changes have not yet been implemented.

● We encourage you to read about the details of this act, if you

have not already.

The JOBS Act

aimed to end the

legislative chaos

surrounding

equity

crowdfunding.

federal legislators

presented at least

five conflicting

pieces of

legislation

that would have

regulated equity

crowdfunding.

JOBS combined

pieces from these

and other bills.

Summary of JOBS Act in Relation

to Equity Crowdfunding

● A private company may have up to 2,000 shareholders.

● Soliciting and advertising private equity publically is

allowed (This allows for solicitation on Facebook,

Twitter, Linkedin, Television, etc.) In effect this week

● Some public offerings may be exempt from SEC

restrictions that face public companies. Through these

exemptions, equity may be exchanged through

crowdfunding portals. Companies looking to sell equity

through crowdfunding must request an exemption from

the SEC

● Private companies are allowed to raise up to

$1,000,000 of equity annually through an SEC exempt

public offering (crowdfunding).

JOBS Act Summary (Continued)

● Accredited investors are allowed to invest up to

$100,000 (per company) annually through equity

crowdfunding

● (Not yet in effect) Non-accredited investors (average

people) may purchase equity through crowdfunding, up

to $2,000 per company . Private companies may only

have 500 non-accredited shareholders

○ If 500 average people can invest up to $2,000, that

means that Crowdfunding can raise up to

$1,000,000 from non-accredited investors

What is an Accredited Investor?

The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

1. a bank, insurance company, registered investment company, business development company, or

small business investment company;

2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if

a bank, insurance company, or registered investment adviser makes the investment decisions, or

if the plan has total assets in excess of $5 million;

3. a charitable organization, corporation, or partnership with assets exceeding $5 million;

4. a director, executive officer, or general partner of the company selling the securities;

5. a business in which all the equity owners are accredited investors;

6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that

exceeds $1 million at the time of the purchase, excluding the value of the primary residence of

such person;

7. a natural person with income exceeding $200,000 in each of the two most recent years or joint

income with a spouse exceeding $300,000 for those years and a reasonable expectation of the

same income level in the current year; or

8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose

purchases a sophisticated person makes.

(Taken from SEC website)

JOBS Act is Slowly Kicking In

● Some provisions of The Jobs Act took effect immediately

● Most provisions of the JOBS act to the were deferred to

the SEC to draft the final rules. On July 10th, SEC

amended their rules to allow for public solicitation. These

rule changes took effect on September 23rd.

● SEC has proposed filing requirements that are generally

opposed by the crowdfunding community. One

requirement is that companies must inform the SEC 15

days before they begin selling equity.

● A private company that fails to meet SEC filing

requirements will be banned from selling equity for one

year

● SEC has not amended all of their rules to comply with the

JOBS act. More rule changes are expected this year

State Legislation

● Under the belief that the Jobs Act does not loosen

crowdfunding restrictions enough, or that it is taking

effect too slowly, some states are passing their own

crowdfunding legislation.

● Kansas and Georgia have passed legislation that allow

unaccredited investors to more easily participate.

● Washington, North Carolina, and Wisconsin are

currently debating similar legislation. Equity

crowdfunding legislation has passed on a state and

federal level by large margins, so it is likely that these

states will also successfully pass their legislation.

● State legislation encourages interstate investing.

(Unaccredited investors in Kansas may invest in a

Georgia startup company).

Successful Example Lucid Energy (US based company):

-Objective: To expand its in-conduit hydro turbine

operation to foreign shores

-Market:

-6% of all energy in the US is used to move water

-Over 2/3 of the states in the US have renewable portfolio

standards (RPS) requiring the use of renewable energy

-Industry: Hydro turbine/ Renewable energy

-Platform: OurCrowd

(Israel’s hybrid venture capital/crowdfunding platform)

-Capital raised: $1,632,000

Key Financials:

Annual Sales (Estimated): $210,000

Prescreen Score:

High Risk

Location Type:

Single Location

(Portland, OR)

Plant/Facility Size (sq. ft.) (modeled): 2,570

Employees (All Sites) 3

Primary Industry

Electrical Contractors

Source: Hoovers

OurCrowd

Lucid Energy

Cost to do an Equity Crowdfunding Project

Fees to the platform (fees are generally 5% to 10%) ● E.g. CrowdCube keeps 5%

Time and energy to set up the Crowdfunding project ● 10 hours to potentially thousands of hours of time and energy to set up project

● Hire or delegate someone to manage the project along with anyone else needed

Promoting the crowdfunding initiative ● Advertising: Varies by website, if any

Bank commission ● Paypal: 2.4-3.4%

● Credit Card: varies by bank

Taxes ● Depends on whether the money is received by a company or by an individual.

● Depending on the type of crowdfunding used.

Sample Fees Structure - OurCrowd

Top 10 Crowdfunding Platforms -Source:

Forbes

1.

Kickstarter is a site where creative projects raise donation-based funding.

2.

Indiegogo approves donation-based fundraising campaigns for most anything

— music, hobbyists, personal finance needs, charities and whatever else

you could think of.

3.

Crowdfunder is a crowdfunding platform that focuses on private businesses. It

originally offered a blend of donation-based and reward-based

crowdfunding. Crowdfunder is transitioning to equity-based crowdfunding

individuals and angel investors for businesses, with a growing social

network of investors, tech startups, small businesses, and social

enterprises.

4.

Rockethub powers donation-based funding for a wide variety of creative

projects. RocketHub has expressed interest in offering equity-based

crowdfunding.

5.

Crowdrise is a place for donation-based funding for causes and charity.

Top 10 Crowdfunding Platforms -cont. 6.

Somolend is a site for lending for small businesses in the US, providing debt-

based investment funding to qualified businesses with existing operations

and revenue.

7.

If you want to build the next new mobile app and are seeking donation-based

funding to get things off the ground or growing, then check out appbackr

and their niche community for mobile app development.

8.

If you’re a tech startup with a shiny lead investor already signed on, or looking

for Silicon Valley momentum, find equity or debt investments through

AngelList.

9.

donation-based fundraising for a specific group or niche in the market.

10.

If you’re an inventor, maker, or tinkerer of some kind then Quirky is a place to

collaborate and crowdfund for donation-based funding with a community of

other like-minded folks.

Equity Crowdfunding Platforms

- Internet platform which connects investors

and entrepreneurs

- Investor provide entrepreneurs with capital in

exchange for equity

- Generally selective, screens applicants and

reject companies that do not seem profitable

OurCrowd (ourcrowd.com)

● Founded in Israel, expanded internationally

● Hybrid venture capital - crowdfunding platform

● Provide mentor for entrepreneur

● High base investment of $10,000 with only

accredited investors

● Intend to be exclusive and will not open up to

general public

● The platform invests 10% in each company they

take on

● Plans to fund 40-50 deals in 2013

● Funded largest equity crowdfunding deal $2.2M for

AE Squared

AngelList (angel.co)

● Exclusively sells equity, mostly for startups

● Oversees startups by providing mentorship and

template business plans

● Currently only accepts accredited investors. Plans

to expand to accept non-accredited investors

● Allows users to apply for employment at selected

companies

● Found investors for pinterest.com

Crowdfunder (crowdfunder.com)

●

● Initially debt and revenue share based, recently has

shifted to equity based

● Mostly serves startups that are tech-based, often

web-based

● Sponsors entrepreneurship contests. Startups are

awarded cash prizes and exposure to investors

● Direct engagement with US House, Senate, and

White House around legislative efforts that became

the JOBS Act

Other Equity Crowdfunding

Platforms

Platform Focus

CircleUp Consumer products and retail

EarlyShares Seed stage businesses

Fundable Seed stage businesses

Seedups Early stage tech-startups

StartupValley Technology startups and businesses

Bolstr Local small business, revenue sharing

Fundable Equity and reward based crowdfunding

SecondMarket Market for all kinds of illiquid asset (equity, debt…)

SeedInvest Platform for angel investor

Wahooly Connect social network for promote startup

Wefunder Seed stage businesses

Keep in Mind

● Selling equity means

giving up a part of

your business.

Selling a lot of equity

means giving up a

large part of your

business.

Keys to a Successful Equity

Crowdfunding Campaign ●

● Pick the right platform

● Set a realistic goal (sometimes all-or-

nothing campaign)

● Build your pitch

○ The problem you’re trying to solve

○ Company, market, competitors, and consumers

○ How money raised helps

● Network + Social Media

● Video

Marketing Your

Crowdfunding Campaign

Leverage Your Network

● Family and friends ○ Have commitments from family

and friends before launch

● Social media ○ Twitter, Facebook, LinkedIn,

email subscribers

● Press

○ Newspapers, magazines, blogs,

anything that will increase

visibility

Most Important Factor for a Successful

Campaign: Friends and Family (Seedrs)

Seedrs has found that all of their campaigns have succeeded once they have

received 35% of the funding

It is important for each company to have commitments from family and

friends

Because independent investors will only invest if there is momentum in

the campaign

Pitch Video

In Kickstarter, campaigns with video are 60%

more likely to succeed!

● Idea (Scalability)

● Credibility (Name-drop)

If your company is interested in equity based

crowdfunding, you can send any questions to

me at jhoffmire@wisc.edu

Note that I am not a lawyer, and I recommend

consulting with one before you venture into

crowd funding.