Our latest crowdfunding client success made us realize that it’s been a while since we’ve written about Equity Crowdfunding; so I think we’re well overdue for an update! As we have written before, prior to the 2021 SEC rule changes (the “2021 Rule Changes”), crowdfunding was limited to offerings of up to only $1.07 million, and investment by the “crowd” through “special purpose vehicles” (which has the practical effect of listing potentially hundreds of “crowd” investors as a single shareholder on your cap table) was not permitted. As a result, crowdfunding at that time did not present a very attractive capital-raising mechanism for most entrepreneurs; few such offerings had been initiated and most of them had not been unsuccessful. The 2021 Rule Changes, among other things, increased the maximum raise to $5 million, and permitted the use of a special purpose vehicle, organized and operating for the sole purpose of acquiring, holding and disposing of securities issued pursuant to a crowdfunding offering, and into which all “crowd” members made their investment. Three years on, how have the 2021 Rule Changes affected the use of crowdfunding as a productive means of raising capital?
Let’s roll the tape! *
The SEC’s initial crowdfunding statistics for 2016, the first year the crowdfunding exemption was available, reported a low number of offerings (less than 200), and limited success (see our summary here). By 2020, offerings had increased to 1,148 (an increase of 62% over 2019), with approximately $282.8 million raised, compared to $128.1 million raised in 2019 (an increase of 120%). This was the year preceding the 2021 Rule Changes, so clearly crowdfunding was already accelerating. In 2021, the number of campaigns jumped to approximately 1,563 (an increase of 36%), with crowd investors investing over $478.9 million (an increase of over 69%). Although more crowdfunding offerings were initiated in 2022, the increase was slight, with approximately 1,577 campaigns (an increase of less than 1%) raising approximately $417.2 million (a decrease of 12%). 2023 saw a decrease in both the number of campaigns offered (1,466), and in amounts raised ($253.2 million).
Despite what appear to be some flagging numbers for crowdfunding campaigns, analysts generally appear pretty bullish on the future of crowdfunding, and predict growth over the next several years. In particular, analysts point to the ubiquity of social media platforms, which make it much easier for entrepreneurs to bring eyeballs to their businesses and the crowdfunding investments being offered. At the risk of sounding like a securities lawyer, I note that the 2021 Rule Changes also loosened the crowdfunding advertising restrictions a bit. In addition, AI may play an increasingly significant role, as the crowdfunding platforms, as well as crowdfunding issuers, can use AI tools to analyze and predict investor behavior, target ads and communications, and create content.
Because entreVIEW authors are lawyers, however, we always have to include a word of caution, which may also serve as an explanation for the decrease in both number of campaigns and amounts raised in 2022 and 2023—many crowdfunding offerings are not successful. Less than 25% of campaigns meet their initial funding goal on average. Our experience leads us to conclude that success is highly dependent on the presence of a relatively ready-made audience (the business needs to bring its own “crowd” to the offering), a consumer-facing type of product, and potential viral campaign popularity that can help a business to reach its crowdfunding goals.
On that note, I’ll close with some interesting facts from the recent crowdfunding statistics:
- Technology companies tend to raise the most funds.
- Comics and graphic novels have the highest success rates (61%!!).
- Gaming projects attract the most individuals to invest.
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