There has been much discussion and hype about the growth in crowdfunding that we could see this year. One aspect of crowdfunding that we are likely to see becoming much more popular is cross border equity crowdfunding. This offers huge benefits to both companies and investors, as both can start to take advantage of opportunities in new markets.
I have had a good look at WAFU, one of the first companies to complete a cross border equity fundraise last year. Gil Michel Garcia is the CEO of WAFU and is passionate about the benefits of equity crowdfunding; I caught up with him to learn more about what the process has brought to his company.
WAFU is in the middle of its second equity crowdfunding campaign. It is using the Canadian platform Optimize Capital Markets and the American platform CircleUp to raise money. WAFU have utilized the process of equity crowdfunding to raise the profile of the company and advertise to new customers. The fundraise has had the added benefit of bringing new customers to their website and so helped to drive sales. It is estimated that internet sales have increased 200% since conducting the campaign and has bumped up brand recognition. Also, retailers are given the impression that they are an upcoming brand and they have received a lot of press coverage over it. Allowing customers to invest in the company ties them to the brand. They have also publicized this through social media – giving them a level of interaction with the customers. Twitter and LinkedIn were both used as vehicles for advertising the offering. Their latest campaign has been relatively successful and has raised $118,000 with 2 months to go, they are aiming to raise $500,000.
But WAFU would not have been able to create this buzz and publicize their fundraise without Title II of the JOBS Act, which allows general solicitation of an offering. The obvious problem with cross border offerings is that you need to understand and comply with the regulation in all the areas where you are raising money. There are some crucial differences in the regulation between the US and Canada. For example, the definition of what qualifies an accredited investor. Some definitions involve the level of sophistication in regards to assets, i.e. assume that an investor has a certain level of sophistication if you have a certain level of income or net assets. Others require you to have investment experience. In Canada you are required to get investors to sign to say that they are an accredited investor. In the US, under the new Rule 506(c) of Regulation D enacted pursuant to Title II of the JOBS Act, you have to verify investors by asking investors for documentation to ensure that they are accredited.
Currently all focus is on Title III of the JOBS Act and the impact it will have on US crowdfunding. This ruling will allow non-accredited investors to get involved in equity crowdfunding. It is estimated that this will release a huge amount of capital to small and medium sized businesses. It is hoped this will then have a trickle through effect of creating more jobs, giving a boost to the US economy. For example, there is a tier of small businesses in the US that have been started by people who lost their jobs during the recession. These businesses have been restricted by a lack of capital and the opening up of equity crowdfunding could provide them with a much needed boost. One of the main arguments that has been railed against this is that less sophisticated investors will become involved in investments that they don’t fully understand and could be taken advantage of by the platforms.
Gil predicts that it is Title IV of the JOBS Act that will have the biggest impact on the space. This will increase the limit that can be raised in 12 months by one company from $5 million to $50 million. It also requires companies to provide substantial pre-sale information, akin to a mini-registration statement for a public company; as well as gaining pre-sale approval from the SEC.
Title V of the JOBS Act raises the threshold on the number of shareholders a company can have before it has to start publically reporting, increasing the number of beneficial holders from 500 to 2,000. This is very significant; as obviously once a company has raised money via equity crowdfunding it can end up with hundreds of shareholders. In Canada this issue has yet to be addressed, and security regulations continue to cease to treat you as a private company once you have over 50 shareholders. This represents a major barrier to growth for Canadian startup businesses that want to use equity crowdfunding.
One of the biggest challenges that arises after a company has completed an equity crowdfunding campaign is dealing with all the new shareholders. For example, a small company will have to start reporting and communicating with all the shareholders and they might not have the infrastructure or capacity to deal with that.
However, the ecosystem of new companies springing up to support the burgeoning equity crowdfunding market is continually growing. In Canada and the United States, KoreConx.com provides the infrastructure that companies need to communicate with their shareholders; it creates an secure online environment for the shareholders to operate within. The shareholders can all see the due diligence reports, shareholder meetings, quarterly reports and financials and can interact with the company. KoreConx allows firms to comply with applicable regulations and make sure everyone has access to the same information.
Another company that supports firms undergoing equity crowdfunding is swaggable.com. This company sends out samples of products to people, something a firm doing a fundraise might not have the infrastructure or time to do. Shipwire is another e-commerce fulfillment company that sends out products once a firm has undertaken a successful KickStarter campaign. Sharespost.com is another innovator that provides a secondary market for private company shares – similar to Asset Match in the UK.
In order for Crowdfunding to really grow and to take advantage of its potential across the pond, two big things need to happen. One, the legislation and regulation needs to catch up with the capability of the sector. Title III of the JOBS Act need to be passed. The second requirement is slightly more complex. Effective exit routes out of equity crowdfunding need to be established. Yes the industry is still very young and there have been a handful of well publicized and successful exits, but we are yet to see where the value for the majority of investors lies.
Stuart Lucas, co-founder of UK online share exchange Asset Match, has commented:
“With so many companies now trusting Angel Networks and crowdfunding to finance their growth, many of these businesses will find their investors demanding clear exit strategies and timelines to get some, or all of their investment back, preferably at a profit.”
While investors usually reap the rewards when the business trade sells or lists on a public stock exchange, the chances of either happening for these small cap firms are very small. Few companies lend themselves well to an IPO, and building a business to attract a buyer often takes much longer than anticipated. Investors will look for, and need other ways to exit. Private firms can accelerate their ability to raise future funds and grow by providing investors with a clear path to exit, attracting later stage investors in the process and keeping the flow of funds available for other businesses moving.”
The benefits of equity crowdfunding have been widely publicized. But one of the less-heralded opportunities that comes intertwined in the process is that new businesses are able build a new and unique relationship with their customers and interact with them on a higher level, sometimes turning customers into investors.
As Gil Michel Garcia, CEO of WAFU, explained:
“Equity crowdfunding will allow you to turn consumers into shareholders- that's the game changer”.