By Marc A. Leaf, Robert T. Esposito, and Abigail Luhn,
The Securities and Exchange Commission (SEC) is now accepting Form C filings from private companies seeking to sell securities through registered crowdfunding portals. We have been following the nascent crowdfunding space closely and will continue to monitor the adoption of crowdfunding as a new method of financing private companies.
In this alert, we will analyze offerings conducted through crowdfunding portals, offer tips for those thinking of entering the space, and provide a summary of the SEC’s final rules and forms for equity crowdfunding (“Regulation Crowdfunding”).
The Drinker Biddle Crowdfunding Report, an open data set providing information on the first 50 offerings conducted under the Regulation Crowdfunding exemption, is available for download. The report provides data on filing dates, issuers, type of security, investment amounts, funding portals and other information.
Analysis of the First 50 Offerings
In general. As of June 30, 2016, 50 companies have filed a Form C with the SEC to offer securities under the Regulation Crowdfunding exemption. Minimum target offering amounts range from $20,000 to $500,000 per offering, with a median of $55,000. All but one of these issuers, however, have disclosed that they will accept offers in excess of the target amount, including 27 issuers that say they will accept investments at or near the maximum permitted offering amount of $1,000,000. In contrast, 18 of the first 50 issuers elected to cap their offering at just $100,000, with the remainder setting an offering cap of between $200,000 and $500,000. In the aggregate, if this first wave of retail crowdfundings is successful, 50 small companies will raise an aggregate of $6 to $30 million in new capital to fund their businesses.
While announced offering durations range from 21 days to one year, the median period that issuers say they will keep their offerings open is just under six months, with about half electing an offering duration between 166 and 182 days.
Eighteen different jurisdictions of incorporation are represented among the first 50 issuers; however, nearly half of the initial filers (24) are Delaware entities. Early data shows that issuers tend to be early-stage startups, with a median issuer age of just 354 days. Nevertheless, nine of the issuers were more than five years old, and the oldest was incorporated in 2003.
Regulation Crowdfunding does not restrict the type of securities that may be offered under the new regime, and the first 50 issuers offer a broad array of securities to prospective investors. The two most commonly offered securities, which constitute three-fifths of the first 50 offerings, are common stock (16) and the so-called Simple Agreement for Future Equity or “SAFE” (14)—a financing instrument developed by startup accelerator Y Combinator that has been described as “convertible debt without the debt”. Other securities being offered include debt securities (seven), preferred stock (six), LLC units (five), and convertible notes (two).
While a total of 12 funding portals have registered with FINRA to date, the early mover Wefunder portal hosts more than half (26) of the first 50 offerings. The StartEngine portal has secured eight offerings, with the remainder split among other portals, including SeedInvest, Next Seed, Flashfunders, and Venture.co.