1. E Q U I T Y C RO W D F U N D I N G
B Y A N D R E W S U S A N T O
2. 2 MOSSADAMSCAPITALLLC
Introduction
What is Crowdfunding?
CrowdfundingInsider
Project Initiator
Supporters
Moderating
Platform
Launch
• The collective effort of individuals who network and pool their resources in order to work towards completing a project or idea
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Introduction
Models of Crowdfunding
Crowdfunding Insider, Entrepreneur.com
Rewards-Based Donation-Based
Lending-Based Equity-Based
Donation
Investment
“Contributions are exchanged for current or future
of goods or services.”
“When an individual, company or organization accepts
charitable donations.
“When a crowd lends money to an individual or
company with the understanding that the loan will
be repaid with interest.”
“Where the exchange is company equity, or ownership,
and not goods or services.”
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Equity-based Crowdfunding
Example of a typical crowdfunded campaign
• Assume in this example campaign, the company desires to raise $100,000
• “Crowd” investors decide to invest in the campaign and deposit funds into the crowdfunding portal
• The company uses the funds for various purposes, similar to a traditional equity raise
• In return for the investment, each crowd investor will receive a percentage ownership interest in the company
• Traditional ways to raise capital:
• Borrowing money and taking on debt
• Giving up equity to other investors
• Having private equity firms or other institutional investors finance your current round of capital raising
• Going public
Company
Investor Investor Investor Investor Investor
Crowdfunding Portal$20,000
%Equity
Interest
$100,000
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JOBS Act
A Brief History and Overview
CrowdCrux
“The Jumpstart Our Business Startups (JOBS) Act passed congressed with bipartisan support and was signed into Law by President Obama in April
2012. The measure is designed to encourage small business and startup funding by easing various vederal regulations. It allows businesses to
accept small contributions from private individuals – also known as “crowdfunding” – without making an initial public offering. But unlike most
crowdfunding options, the JOBS Act gives regular people a chance to become investors.” –Fundable
September 23rd, 2014 marked a historic day for entrepreneurship as Title II of the JOBS Act went into effect – allowing business startups to raise
investment funding publicly
March 25th, 2015 marks another historic day for entrepreneurship, as Title IV goes into effect, allowing non-accredited investors to participate in
investing activities
What remains left in the JOBS Act is Title III, the crowdfunding element to the JOBS Act. The regulations for Title III was supposed to be passed in
2013, but the SEC kept postponing the finalization. However the SEC plans to implement Title III in October 2015
Now the nation waits as the final details of the last crowdfunding element is put into effect
April 5th, 2012: President Obama
signs the JOBS Act into law
November 3rd, 2011: the Jumpstart Our
Business Startups (JOBS) Act was passed by
the House of Representatives with Bipartisan
support
March 22nd, 2012: the Senate passes
the JOBS Act amended with the
Crowdfund Act
March 27th, 2012: the House passes
The Crowdfund Act
September 23rd, 2014: SEC
implements Title II of JOBS Act
March 25th, 2015: SEC
passes Title IV
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JOBS Act
The JOBS Act is designed to spur IPO activity
PwC
Friends
and
Family
Crowd
Funding
Angel
Investor
Early
Stage
VC
Venture
Capital
M&A/
IPO
Capital Raise
Company Stage
• Primary objective: Increase American job creation and economic growth by improving access to public capital markets for
emerging growth companies.
• Principal goal is to encourage private companies to raise capital through an initial public offering of their common equity.
• The 2 main thrusts of the Act are to:
• Create an “IPO on-ramp” which reduces the filing and disclosure burdens associated with undertaking an IPO
• Provide for easier and broader access to capital markets
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JOBS Act
Breaking down the JOBS Act
Deloitte
Title I – Emerging Growth Companies
Creates a transitional “on-ramp” for a new category of issuers, emerging growth companies (EGC), by relaxing registration
requirements in order encourage the pursuit of IPOs.
Title II – Access to Private Capital
Allows for the public solicitation of accredited investors. Section 501, Regulation D defines an accredited investor as having at least one of
the following:
1) An individual earning more than $200,000/year or a joint income of $300,000 year in each of the last 2 years and expects the
same for the current year
2) Have a net worth exceeding $1 million, either individually or jointly with his or her spouse
Title III – Crowdfunding
Allows companies to raise funds publicly from both accredited and non-accredited investors.
Title IV – Small-Company Capital Formation
Modifies the existing Regulation A to provide for an expansion of the exemption to cover offerings of securities from $5
million to $50 million in any 12-month period.
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JOBS Act
Title I – Emerging Growth Companies (EGC)
Ipoguidebook.com, SEC
Defined as “an issuer with ‘total annual gross revenues’ of less than $1 billion during its most recently completed fiscal
year. The phrase ‘total annual gross revenues’ means total revenues as presented on the income statement presentation under
U.S. GAAP (or IFRS as issued by the IASB, if used as the basis of reporting by a foreign private issuer).” - SEC
An issuer no longer qualifies as an EGC upon the earliest
of…
• the last day of its fiscal year following the fifth
anniversary of the first sale of its common equity
securities in a public offering;
• the last day of a fiscal year during which it had total
annual gross revenues of $1 billion (adjusted for
inflation every five years);
• the date on which it has, during the previous three-
year period, issued more than $1 billion in non-
convertible debt; or
• the date on which it is deemed to be a “large
accelerated filer” (a company that has been public
for at least twelve months, has filed one Form 10-K,
and has a public float of at least $700 million).
Relief Benefits:
• Reduced Financial Statement and MD&A Disclosure
• Delayed Application of New Accounting Standards
• Exemption from New PCAOB Audit Requirements
• Reduced Executive Compensation Disclosures
• Expansion of Permitted Investor Communications
• Confidential Submission of Registration Statements
• Relaxation of Research Analyst Restrictions
Post-IPO Benefits
• Exemption from Internal Controls Audit Attestation
• Exemption from Say-on-Pay, Say-on-Frequency, and
Say-on-Parachute Requirements
• Exemption from Additional Compensation
Disclosures
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JOBS Act
Title II – Access to Capital in Private Offerings
Allows for general solicitation – small businesses and private startups can raise investment funding publicly from only accredited
investors
Breaking it down…
Deloitte
Businesses can now generally solicit and advertise publicly
Only accredited investors are allowed to invest in generally
solicited companies
File Form D with the SEC announcing that you will be
soliciting
Disclose details about general solicitation to the SEC within
15 days from first solicitation
For Businesses
Only accredited investors can invest in companies who
generally solicit
Qualifying as accredited means having $1 million in net
worth, or making over $200,000 a year for the past 3 years
Investors will need to prove accredited investors status,
which can be done through written confirmation by a CPA,
attorney, investment advisor, or Broker-Dealer, or income-
related IRS forms
For Investors
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JOBS Act
Title III – Crowdfunding
• Title III permits businesses to raise money from non-accredited investors using crowdfunding
• As of September 2015, Title III is pending approval by the SEC
• On October 23, 2013, the SEC voted unanimously to issue a proposed rule to implement requirements in Title III of the JOBS
Act that would permit eligible companies to use crowdfunding to offer and sell securities
• An individual would be allowed to use crowdfunding to invest in eligible companies, subject to certain thresholds, on the basis
of the individual's annual income or net worth (with an overall cap of $100,000 per individual)
• The amount of money a company can raise through crowdfunding offerings would be limited to $1 million in a 12-month
period
• Companies that offered their securities in crowdfunding transactions would
(1) need to transact through SEC-registered intermediaries – crowdfunding sites
(2) file certain information (including their reviewed or audited financial statements, depending on the amounts offered
and sold during a 12-month period)
(3) file certain information (including their reviewed or audited financial statements, depending on the amounts offered
and sold during a 12-month period)
Deloitte
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JOBS Act
Regulation A+/Title IV, Small-Company Capital Formation
• Title IV allows startups and later stage pre IPO companies to use equity crowdfunding platforms to raise as much as $50M
from both accredited and non-accredited investors
• Regulation A+ implements Title IV of the JOBS act and provides for two tier offerings:
Deloitte
Tier I Tier II
Maximum Offering Size
Investor Types
General Solicitation
Financial Disclosures
State Preemption/Blue Sky Laws
$20 million $50 million
Accredited and Non-
Accredited
Accredited and Non-
Accredited
None
10% of annual income or
net worth
None None
Accountant-reviewed
financials
Audited financials; compliance with
regulations S - X
Individual Investment Limits
State-Coordinated Review
with SEC
Yes
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Conclusion
Importance of JOBS Act
• Allows for new sources of capital for new ventures, which in turn create jobs which are significant to our economy
• Often times new ventures need external capital, but it is often difficult to raise due to federal compliance fees
• The JOBS act aims to ease regulation, giving companies more room for growth
• Without the exemption, unaccredited investors are limited in their ability to participate in exempt offerings and new ventures
cannot raise capital efficiently
• The JOBS Act is critical to providing new ventures with access to a large and currently under-tapped source of capital
JOBS Act
Defines
“EGC”
Eases
Regulation
Grow
Businesses
Grow
Economy
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The Small Business Economy
Small businesses and startups play an integral role in the American economy
According to the U.S. Small Business Administration, small businesses are defined by the following characteristics:
• Independently owned and operated
• Not dominant in its field
• Have up to 100 to 1,500 employees
• Has receipts up to $500,000 to $21.5 million
Fundable
Small businesses in the U.S. by the numbers:
Make up more than
99.7%
Of all employers
Create more than
50%
of non-farm private
GDP
Employ about
50%
Of all private sector
workers
Makes up
97%
Of exporters
Produces
29%
of all export value
565,000
New Businesses
launched per month
75%
Net new jobs created in
the U.S.
$78,406
Average initial
financing per startup
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Impact of JOBS Act
The JOBS Act has played a crucial role in re-shaping the landscape of American finance
OneVest
• The JOBS Act moves to democratize equity crowdfunding allowing non-accredited investors to participate in crowdfunding and
investments in private startups and small businesses
• Out of 318.9 million people in the U.S., 233.7 million are non-accredited investors, and roughly 3.5 million are accredited
investors
• The JOBS Act will allow businesses access to a larger pool of capital
Onevest, U.S. Census Bureau, Fundable
Net Worth of American Public:
$57.4 trillion
1.48%
98.52%
Accredited Investors Unaccredited Investor
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Impact & Benefits of Equity Crowdfunding
Equity Crowdfunding has spurred growth
Crowdfund Capital Advisors
From Crowdfund Capital Advisors’ 2014 report, crowdfunding provided the following benefits:
• Crowdfunding has a marketing benefit that translates into better sales
• Equity-based crowdfunded companies increased revenues by 351%
• Crowdfunding creates jobs
• 39% of companies hired an average of 2.2 employees per company after a round of crowdfunding
• 48% of companies said they intended to use crowdfunded capital to hire new staff
• 87% of firms either had, or intended, to hire new employees from crowdfunding proceeds
• Larger companies were most likely to reinvest crowdfunding proceedings to hire new employees
• Crowdfunding encourages follow-on investment
• Within 3 months of a crowdfunding campaign, 28% of companies had closed an angel investor or VC round
• 43% were in discussions with institutional investors after closing a crowdfunding campaign
• Crowdfunding provides a track of credibility, opening the door to traditional forms of investing
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Equity Crowdfunding by the Numbers
Crowdfunding becoming the new angel investor
Crowdfund Capital Advisors, EquityNet
• The average fundraising goal for business
startups is over $500,000 across all industries
• Energy & Utilities and Financial Services &
Real Estate have the highest average
fundraising goals, while consumer products
and services have the lowest
• On average, business startups gave up nearly
a 1/4th of their equity to crowd investors
• According to Crowdfund Capital Advisors,
every hour invest in a successful
crowdfunding campaign returned $813
1,612,499
807,185
1,657,615
1,074,991
697,915
1,080,417
2,218,354
2,032,514
1,613,550
1,020,569 1,059,402
1,347,458
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Average Funding Goal by Industry
(2007 - 2015)
26.81%
30.85%
34.58%
25.38%
35.08%
29.54%
31.30%
43.11%
30.99%
32.18%
24.47%
36.68%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Average Investor Equity by Industry
(2007 - 2015)
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Equity Crowdfunding by the Numbers
The equity crowdfunding market from 2007 - 2015 across all industries
Crowdfund Capital Advisors, EquityNet
West
$253,392,985
Midwest
$175,661,509
Southwest
$215,974,513
Southeast
$211,594,798
Northeast
$214,832,086
Average Market Size by Region
West
18.25%
Midwest
18.11%
Southwest
16.33%
Southeast
18.86%
Northeast
17.95%
Average Market Growth Rate by Region
• The West continues to be the dominant market in equity crowdfunding, largely driven by activity in California
• Growth has been relatively similar across all regions, except in the South where it is slightly slower
• California, New York, Florida, Texas, and Illinois are the most popular states to crowdfund
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Marketwatch
Crowdfunding Activity in Q2 2015 by Sector
Crowdnetic, CNBC
278
543
136
557
258
65
2,272
1,769
-
500
1,000
1,500
2,000
2,500
Total Number of Offerings
$31,780,069
$58,908,145
$70,510,600
$221,705,182
$57,731,424
$25,045,000
$174,758,278
$124,712,093
$-
$50,000,000
$100,000,000
$150,000,000
$200,000,000
$250,000,000
Total Recorded Capital Commitements
• According to Crowdnetics, compared to Q1 2015:
• The number of new offerings has increased by 4.8%, a rate slower than previously seen
• The amount of capital committed to these offerings increased by 17.8%
• Despite the decrease in new offerings, investor enthusiasm remains optimistic
• The Services and Technology sectors are the two largest, occupying 68.7% of the total number of offerings
• The Financial sector has the most capital commitments due to its capital intensive nature and picked-up activity in Real Estate
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Marketwatch
Crowdfunding Activity in Q2 2015 by Industry
Crowdnetic, CNBC
86
90
94
97
102
115
116
152
163
304
0 50 100 150 200 250 300 350
Professional Services, Other
Entertainment, Other
Online & Mobile Gaming
Specialty Retail, Other
Real Estate Investments, Other
Education K-12
Digital Media/New Media
Real Estate Development
App Software
Social Media
Top 10 Industries by Number of Offerings
$12.42
$14.03
$14.10
$15.42
$15.85
$20.23
$21.16
$37.61
$46.63
$107.85
$- $20.00 $40.00 $60.00 $80.00 $100.00 $120.00
Organic Food & Beverage
Alternative Energy, Other
Biotechnology
Wearables, General
Entertainment, Other
Green Building Materials
Investments, Other
Oil & Gas Production & Pipelines
Real Estate Investments, Other
Real Estate Development
Top 10 Industries by Recorded Capital Comitments
• Social media continue to lead the space in terms of number of offerings
• Real estate has gone up slightly from last quarter and continues to attract new issuers and investors
• Professional Services joins the top 10 this quarter – an industry that includes other services such as printing and graphics,
professional assistants, and language interprestation
• The two Real Estate industries are the most popular among crowd investors – roughly 4x greater than the next highest-ranked
industry and exceeds all total commitments from the other industries combined – driving the financial sector
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IPO Activity
Going public with the help of the JOBS Act
Latham & Watkins, Renaissance Capital
• In 2014, nearly 9 out of 10 IPOs are by emerging growth
companies
• In the second year of the JOBS Act, 85% of issuers identified
themselves as EGCs – a 15% increase from the first year
• The Pharmaceutical industry accounted for the largest part of
EGC IPO issuers, followed by Technology, Real Estate, Energy,
then Healthcare
• Companies with less than $250 million in in annual revenue
accounted for approximately 85% of EGC IPOs
• IPO activity jumps back up to pre-depression time period
following the signing of the JOBS Act
69%
17%
9%
3% 3%
EGC IPOs by Issuer Revenue
Less than $100 million
$100 to $250 million
$250 too $500 million
$500 to $750 million
$750 million to $1 billion
226
206 199
213
31
63
154
125 128
222
275
0
50
100
150
200
250
300
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Number of Effective IPOs by Year
0 10 20 30 40 50 60 70
Pharmaceutical
Technology
Real Estate
Energy
Financial Services
Healthcare
Retail
Services
Manufacturing
Hospitality
Publicly Filed EGC IPOS by Industry
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Case Study
ZOËS KITCHEN
CFO Magazine
Zoës Kitchen is a fast-casual restaurant featuring a “distinct menu
of Mediterranean-inspired dishes, served with warm Southern
Hospitality. The company operates a range of restaurant formats,
including in-line, end-cap, and free-standing restaurants. As of July
30, 2015 the company operated in 157 locations in the United
States.
Investors were eager to be a part of the company’s $87 million
offering in April 2014, driving up the stock price 65% on the first
day of trading. The IPO allowed Zoës to repay its bank debt, with
growth-restricting covenants, leaving the company with about $40
million in cash. The ability to repay its debt in conjunction with
cash flow from operations will allow the company to rapidly
expand for the next several years.
With the EGC benefits to file an S-1 confidentially, Zoës was able to
more than 100 restaurants. Jason Morgan, CFO of Zoës Kitchen,
remarked that confidentiality, “allowed for only a limited number of
our team to be involved in the IPO process,” which in turn, “kept
the rest of the company focused on their roles and on growing the
company.”
In addition to the confidential filing, the company also took
advantage of the SOX 404(b) compliance exemption, which would
have given them more time to be fully compliant in the first year
post-IPO.