Crowdfunding: major trends research notes

Equity-Based Crowdfunding
2012 Jumpstart Our Business Startups (JOBS) Act
1OmniPresent Media 2013

CrowdFunding Is A Major Disruption
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"If crowdfunding sites start offering equity shares,
it will make a few dozen VC firms disappear."
~Paul Kedrosky, venture capitalist, entrepreneur and senior fellow at the Ewing
Marion Kauffman Foundation
~Source: MIT Technology Review, May/June 2012: 10 Emerging Technologies 2012 May/June 2012
OmniPresent Media 2013

What is CrowdFunding?
3
The basic idea behind crowd funding is that many individuals contribute (generally fairly
small amounts) to fund a company or a project in return for the possibility of some
reward.
http://www.youtube.com/watch?v=-38uPkyH9vI
This is not a new idea but the internet has now considerably increased the size
of the potential investment crowd and made managing individual investors’
pledges more manageable.

CrowdFunding Fills A Needed Niche
CrowdFunding is an emerging
funding niche for great ideas,
nascent technologies and
seed-stage startups

CrowdFunding Is Going Mainstream
5
~Source: Kickstarter Blog: 2011 Statistics
Statistics for 2011:
Launched Projects: 27,086
Successful Projects: 11,836
Dollars Pledged: $99,344,382
Rewards Selected: 1,150,461
Total Visitors: 30,590,342
Project Success Rate: 46%
Approximately 1,000
projects were successfully
funded each month. In fact,
more projects succeeded in
2011 than launched in 2010.
Kickstarter Project Funding Growth From Inception, April 2009 Funding –Sept 2011

CrowdFunding’s Tipping Point
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When Silicon Valley’s venture capitalists didn’t
show much interest in the watch, Eric
Migicovsky and his team went to Kickstarter
with a goal of raising $100,000 to get the
project off the ground and into production.
• 40,799 people have ponied up $115 for a
free watch when they come out (retailing
at $150 apparently)
• 31 people shelled out $10,000 for a Mega
Distributor pack with 100 watches.
Pebble Smart Watch Sells Out on Kickstarter
“The record-setting project has raised more
than $10 million and took preorders for 85,000
watches, which is apparently the limit for the
tiny company.”
~Source: Pebble Smart Watch Sells Out On Kickstarter by Eric Mack CNET, May 10, 2012

CrowdFunding Social Causes
Microfinance
Total loans made to date
is $284,995,000
Kiva users from 217
countries who have given
loans to 729,182 people
in developing nations.
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~Source: Center For Global Development March 19, 2012

4 Types of CrowdFunding
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• Donation-Based CrowdFunding: Funders provide money to an entity / project either
for no return or in return for some form of non-financial reward. For example a credit
or recognition in the product or a meeting with the creators.
example: Starters Fund
• Reward-Based CrowdFunding: Funders provide money to a company in exchange for
some sort of reward, such as an early prototype, a signed CD or the ability to interact
with the people behind a project.
example: KickStarter
• Lending-Based CrowdFunding: Funders provide money by way of a loan with a
requirement that the loan is repaid with interest.
example: Kiva
• Equity-Based CrowdFunding: A funder invests money in a company and receives
shares in that company.
example: CrowdCube

Growth of Crowd Funding Platforms (CFP)
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~Source: Massolution, Crowd-Funding Industry Report May 2012
REWARD-BASED IS THE LARGEST
CROWDFUNDING CATEGORY, WHILE
EQUITY-BASED IS THE FASTEST
GROWING
The reward-based category is the
largest crowdfunding in terms of
the number of CFPs, and also grew
at the higher rate of 79% CAGR
The Equity-based category shows
the fastest growth rate at 114%,
and is mostly driven by growth in
the number of European platforms

Over 1 Million Projects Funded In 2011
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More Than 1 Million Successful Fundraising Campaigns Were Completed In 2011

$1.5 Billion Funded 1 Million Campaigns in
2011
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CFPs raised almost $1.5 billion and successfully funded more than one million
campaigns in 2011. The majority of these campaigns were in the donation-
based category totaling 1,067 campaigns, and North America was the largest
market for fundraising at $837 million.

Number Of CFPs Worldwide
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As of April 2012, there were
452 crowdfunding platforms
active worldwide.
Projections are that there will
be more than 530 by the end of
2012.

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Growth In Worldwide Funding Volume
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GROWTH IN WORLDWIDE FUNDING VOLUME
(millions of dollars)
Crowdfunding market is growing at the rate
of 63% CAGR in terms of total amount of
funds raised.
$2.806 billion Estimated total funding
volume for 2012.
300% Growth in equity-based and reward-
based crowdfunding
75% Growth in loan-based crowdfunding
50% Growth in donation-based crowdfunding

Funds Paid Out Per Equity-Based Project
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A full 21% of the funds raised by
equity-based platforms achieved
more than $250,000 or more in
funding.
In Europe and elsewhere,
CrowdFunding is now a viable
alternative to traditional means of
raising capital.
26% of projects listed on
equity-based platforms raised
between $50,000-$100,000.
21% of equity-based funding
raised $50, 001- $100,000
Ex-US 68% of Equity-Based Projects Raised $50,000 or More

Commissions Earned By CFPs
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Over 40% of CFPs Charge a Transaction
Fee Based on A Percentage
Commission of Funds Paid Out
CFPs generate revenue by charging a
transaction fee, determined as a percentage
commissions range from 2% on the lower
end to a maximum of 25% on the upper end.
A commission is calculated from the total
funds raised, and/or based on achieving a
“fully-funded” goal.
An additional source of income with some
CFPs (12% of survey respondents) is to
charge funders a fixed fee, in the region of
$15 (median), per campaign.

Average Campaign Time Frames
17
Statistics suggest that on average,
campaigns do not accelerate after
certain milestones are met.
On average it takes 2.84 weeks
across all categories, to raise the first
25% of the funding goal and 3.18
weeks on average to raise the last
25% of the funding goal.
Approximately 45% of all CFPs
require investors to deposit
money in escrow accounts. 63%
use PayPal as a payment method.

The JOBS Act Sparks Crowdfunding
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“As large sums can be raised via crowdfunding, it has become a viable alternative for
capital formation for new commercial ventures, projects and both social and
community-based initiatives,” said Carl Esposti, CEO of massolution and founder of
Crowdsourcing.org.
“Driven by equity-based and reward-based crowdfunding, our forecasts indicate
total funds raised will nearly double this year. Additionally, the passing of the JOBS
ACT will have a profound effect on the growth of crowdfunding in the U.S. In 2013,
we expect securities-based crowdfunding to bring new sources of funding to many
startups and early stage businesses.”

CrowdFunding Projected to Surpass $6.2 B
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Gartner Research, a private analytics company, projects
CrowdFunding to top $6.2 billion in 2013.
2011 $1.5 Billion 2013 Estimated $6.2 Billion
2012 Projected $3 Billion
~Source: TechCrunch, May 12, 2012 “Crowdfunding: $1.5B Raised, 1M Campaigns Funded In 2011; Figures Set To Double In 2012”

JOBS Act History
• A bipartisan effort to permit more small businesses access the capital
markets by decreasing the regulatory burden.
• A combination of six House bills, with significant investor safeguards
added by the Senate.
• Signed by President Obama on April 5, 2012.
• Final regulations on crowdfunding to be published by the U.S.
Securities and exchange Commission by January 1, 2013.

CrowdFunding Flow Chart
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Funding
Platform
Escrow
Agent
Issuer
Investor
Investor Deposits
Funds With Escrow
Agent
Escrow Agent Delivers Funds To Issuer
Investor Connects On The Internet
With Funding Platform
Funding Platform
Presents Issuer To Public
#1
#2
#3
#4
#5

How Does CrowdFunding Work?
• Issuer engages Funding Platform to act as an intermediary and to post
Issuer’s offering on the Platform’s website. Issuer provides Platform with its
disclosure about the company and the offering.
• Funding Platform hires the Escrow Agent to process subscription payments
and stock issuances.
• Investor accesses the Platform website to obtain information about the
Issuer and the offering.
• Investor decides to subscribe for Issuer’s securities over the Platform;
executes and delivers subscription documents to Platform and delivers $’s to
Escrow Agent for the shares subscribed.

How Does CrowdFunding Work? (Cont)
• Investor may rescind his/her subscription under certain circumstances and
get a refund.
• If the targeted amount of the offering is raised by the deadline, Escrow Agent
releases subscription funds to Issuer and provides stock certificates (paper or
electronic) to Investor.
• If targeted amount is not raised by the deadline, Escrow Agent returns funds
to Investor.

Potential Revenue Streams
24
1. Listing Fees: The portal could charge a monthly subscription fee to have the
company listed on the site (e.g. similar to how companies are listed on AngelList now).
2. Fees to Open a Funding Round: The portal could charge a flat fee to open a round
up for funding. This would open up the ability to propose investment terms, hold
investments in escrow until the threshold is hit, and otherwise manage the process of
the investment round.
3. Fees upon Closing of Investment: The portal could take a percentage of any
investment that is actually closed, similar to how broker-dealers operate today.

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4. Fees for Ongoing Management Services: Managing hundreds or thousands of
shareholders will require ongoing management services. If these portals can
manage these issues, they could charge an ongoing fee.
5. Referral Fees: Portals could charge fees to other vendors in connection with the
funding round or vendors interested in providing ongoing services to these
companies (e.g. background checking firms, escrow services, law firms, accounting
firms, marketing firms, banks, etc.)
Potential Revenue Streams (Cont)

Requirements of Intermediaries
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The U.S. Securities and Exchange Commission has warned that the JOBS Act requires
intermediaries to follow specific obligations and rules that the SEC has been given
the power to determine. The SEC has stated on its website that intermediaries are
required to do the following.
*Adequate disclosures
*Inform investors
*Protect privacy
*Minimize risk of fraud
*Pass along issuer information
*Track the funds
*Enforce investor / issuer maximum limits
*Other rules. Any other future requirements that the SEC determines are
appropriate

What Is A “Funding Platform”?
Any person acting as an intermediary in a transaction involving the offer or
sale of securities for others solely in a crowdfunding transaction that does
NOT:
•Offer investment advice or recommendations;
•Solicit purchases or sales offered on its website;
•Compensate employees, agents or others for such solicitation or based
upon the sale of securities;
•Hold, manage or handle investor funds or securities; or
•Engage in other SEC-prohibited activities

Funding Platform Qualifications
To be exempt from having to register with the SEC as a broker-dealer, a
Funding Platform must:
•Remain subject to the examination, enforcement and rulemaking authority
of the SEC;
•Become a member of a national securities association and register with the
SEC and a self-regulatory organization (SRO);
•Remain subject to further SEC regulation; and
•Comply with the other provisions of the JOBS Act

Funding Platform Rules
• Can be a broker or funding platform;
• Must register with SEC and SRO (FINRA, other?);
• Provide disclosures (risk) and education materials to investors;
• Obtain investor certifications;
• Perform background checks on issuer principals;
• File disclosure materials with the SEC and provide to investors;
• No distribution of proceeds to issuer unless target funding is reached and
must permit investors to rescind their subscriptions;

Funding Platform Rules (Cont)
• Protect investor privacy;
• Not pay finders fees;
• No financial interest in the issuer;
• Limit investors’ maximum annual investment in all issuers

Investor Rules
• Cannot buy more than $2,000 or 5% of annual income or net
worth, if annual income or net worth <$100,000;
• Cannot buy more than 10% of annual income or net worth, up to
$100,000, if annual income or net worth >$100,000;
• Must buy through a Funding Platform that complies with the
JOBS Act; and,
• Issuer must comply with the JOBS Act and cannot sell more than
$1 Million per year under this Rule.

Issuer Rules
• Provide basic disclosure about business to SEC and investors;
• Financial statements: if raising up to $100,000, tax returns and
financials must be certified by CEO;
• $100,000 -$500,000, unaudited financials reviewed by
independent accountant;
• Over $500,000 audited financials
• Disclose: risks, use of proceeds, targeted amount, deadline, price,
portal payment, current ownership, capital structure, rights of
existing holders, and updates;
• No advertising; only directions to funding platform;

Issuer Rules (Cont)
• Issuer Disclose: risks, use of proceeds, targeted amount,
deadline, price, portal payment, current ownership, capital
structure, rights of existing holders, and updates;
• No advertising; only directions to funding platform;
• Provide annual reports with financials to investors and SEC;
• Comply with other SEC rules (when in effect).

Restrictions on Transfer
Securities purchased in a crowdfunded transaction may NOT be transferred for
1 year after purchase, unless they are transferred:
• To the issuer;
• To an accredited investor;
• As a part of a registered offering;
• To a member of the purchaser’s family in the event of his death or divorce;
• Subject to other limitations to be imposed by the SEC.

CrowdFunding Cannot be Used by:
• Foreign companies;
• Companies that already report under the Securities
Exchange Act of 1934;
• Investment companies; or
• Other companies as the SEC determines by regulation; and
• Issuers or portals that are “disqualified” under SEC
regulations (i.e, “bad boys”).

Potential Liability To Investors
• Purchaser in a crowdfunded transaction may sue an “issuer” to
recover the amount paid for the security plus interest, less any
income received on the security, or for damages if investor does
not then own the security.
• Issuer is liable if it made an untrue statement of material fact or
omitted to state a material fact required to make the statements,
in light of the circumstances under which they were made, not
misleading, provided purchaser did not know of the untruth or
omission, and issuer did not know, and in the exercise of
reasonable care, could not have known of such untruth or
omission.
• “Issuer” includes directors, partners, principal executive, principal
financial, controller and principal accounting officers of issuer
AND any person who offers or sells the security in such offering.

State Oversight
• Crowdfunded sales are exempt from State registration,
documentation and offering requirements as “covered securities”
and States may not charge filing fees, except for the State where
the issuer has its principal place of business or any State where
50% or more of the purchasers reside.
• However, States may examine and take enforcement action
against any Funding Platform that has its principal place of
business in that State.
• States may also take enforcement action against an issuer,
Funding Platform or other person with respect to fraud or deceit
or unlawful conduct.

Disqualifiers
Issuers and Funding Platforms will generally be disqualified from using
the crowdfunding rules if:
• The issuer has filed any registration statement that is/was subject to
an SEC stop or refusal order, the issuer is subject to an order ofa
State securities, banking or insurance commission, or a Postal
Service false representation order, has had a Reg. A offering
suspended, has been convicted in the last 5 years of a false filing, of
a crime involving the purchase or sale of a security, or of an
injunction for the purchase or sale of a security; or,

Disqualifiers (Cont)
Issuers and Funding Platforms will generally be disqualified from using
the crowd funding rules if:
• Its directors, officers or 10% beneficial owners, in the last 10 years,
have been convicted of a crime relating to the purchase or sale of a
security or false filing, a violation of any law prohibiting fraudulent,
manipulative or deceptive conduct, or arising out of its business as
an underwriter, broker, dealer or investment adviser, or in the last 5
years is subject to a court, SEC or U.S. Postal Service order enjoining
certain practices relating the purchase or sale of securities, has been
suspended/expelled from a national securities exchange or barred
from a State regulated entity or from engaging in the banking,
insurance or securities business.

For More Information
These slides are intended only to provide basic information about the JOBS
Act of 2012, and are not intended to provide legal advice.

Crowdfunding: major trends research notes

Crowdfunding: major trends research notes

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Crowdfunding: major trends research notes