Bye Bye, Gary. Donald Trump’s election means the certain exit of SEC Chair Gary Gensler. The controversial Biden appointee sees the writing on the wall and will reportedly exit by Thanksgiving. Many people will cheer this news. Gensler’s anti-crypto stance chafed the burgeoning community of Web3 entrepreneurs, coders, and wonks. For example, Trump drew raucous cheers at a Bitcoin conference, when he announced he would fire Gensler “on day one.”
Gensler departure means Reg CF outlook bright
But while crypto gets the attention, other parts of the emerging decentralized economy are also cheering new blood at the stodgy commission. Regulation Crowdfunding (Reg CF) got a revamp in the closing days of the first Trump administration. The regulator increased offer limits, increased investor limits, loosened communication rules, and allowed cap-table-friendly special-purpose-vehicles (SPVs). These moves as well as a generally business-friendly administration helped boost Reg CF’s profile and prowess according to Crowdfund Capital Advisors (CCA)—the leading Reg CF data curation outlet:
From 2016 to 2020, the percentage of successful campaigns grew from 49% to over 70%
Investor participation also surged, with investor checks increasing from 21,750 in 2016 to 360,702 by 2020
From 2019 to 2020, the industry saw a jump in total funds raised from $133 million to $247 million, correlating with Trump’s tax policies and deregulation efforts
Of course, some of this surge is due to COVID and investors becoming more comfortable with online investing. Nonetheless, hopes are high for Trump’s second term for Reg CF and investment growth in general.
Industry insiders see bright outlook for Reg CF in second Trump term
When asked about Trump’s second term prominent industry lawyer Doug Ellenoff told Crowdfund Insider:
Obviously, the speed and expressions of change will be determined in part by the specific new replacement [for Gensler], but directionally, I believe that the impact of deregulation will be seismic. . . The activity level of capital formation transactions will accelerate off of a nicely forming 2024 base. I would fully expect broad support for many crowdfunding changes to advance and expand it as a useful marketplace. I would begin to push now.
Among the proposals that may come with the push, CCA suggests increasing the Reg CF offer cap to $20 million. (Good). This would likely toll the death knell for Reg A+ Teir 1, which has a similar cap but forces issuers to deal with shuddersome state regulators.
CCA also suggests creating a $2 billion “co-investment fund” whereby retail investors would invest alongside the government so as to “[mitigate] risk for individual investors.” (Bad). As I have written before this is a terrible idea and the opposite of a deregulatory stance. The government has no business using taxpayer dollars as public venture capitalists. Startups should rise or fall on the benefits they bring to the market, and individuals should not invest money in these relatively risky ventures they can’t afford to lose.
America First for the private capital markets
Overall, however, along with the rest of the capital markets, the Reg CF future looks bright. CCA estimatesReg CF investments could “jump from an estimated $563 million in 2024 to nearly $750 million in 2025.” This would mean more jobs, more innovation, and more robust economic growth. “America First” in the private capital markets looks “Great Again.”
Now, as we approach mid-decade, Reg CF is again ascendant. And it will continue rising. As the decentralized, “sharing” economy moves beyond its West Coast origins and the rest of the country embraces it. By next decade, B-to-C businesses will incorporate Reg CF into their capital-raising strategy or risk being left behind.
Some numbers from the report:
284.5% Average growth in revenue between the year an issuer was successful and the following year
17.8% Bureau of Labor and Statistics Reports that approximately 50% of all new businesses fail within 5 years. Within Investment Crowdfunding, only 17.8% of funded companies have gone out of business.
$2.2B invested $75.6B worth Companies that have been funded and priced to their most recent valuation
Average investment size nears $2.5k
Average raise topped $500k for the first time in 2023
Total investment topped $150M for the first time since 2021
Trends show a bright outlook for Reg CF in 2025 and beyond
Here are a couple interesting charts among the hundreds in the report:
Why companies will choose Reg CF in 2025
More companies are looking for ways to integrate their business with their customers and build brand loyalty. Here are a few ways Reg CF helps:
Broaden your investor base: Unlike other funding models, Reg CF can diversify your investor base from both a financial and geographical standpoint. Reg CF portals can accept investors from anywhere in the US, giving your business a potential foothold in all 50 states.
Turn your customers into marketers: Reg CF allows your customers to become financially invested in your business and see their investment grow as your business grows. This provides a free marketing campaign for your business with every new investor.
Incentivize your investors: Reg CF allows you to provide perks as part of the investment. Depending on the product this could include the product itself, ‘founder’ status on your website, access to events, or anything else that may induce an investment.
Prove value to institutional investors: A successful Reg CF raise can show larger, institutional investors your business is ready for the big money. Many larger investors are now requiring “social proof” of a company’s business model. Your business can show larger investors value and momentum and provide your business “bridge money” while larger investors evaluate your model.
Whether you’re inclined to defend ‘MAGA Country’ or exclaim ‘Black Lives Matter,’ new research suggests your crowdfunding campaign should exclude your politics.
A group of academics recently researched nearly 20,00 Kickstarter campaigns. They found those who were overtly political raised less money than apolitical campaigns—although the distribution wasn’t even. Companies using conservative speech garnered 9% less money and those with liberal speech 17%. Relying on “expectancy violation theory,” the researchers found the political messages turned off potential backers because it created a negative expectancy and harmed credibility. According to the researchers, this theory, “assumes that behaviors are a rules-based system grounded in society’s psychological or cultural standards and that individuals develop normative expectations about the appropriate behaviors people should use during communication.” In settings where political speech violates expectations, the speakers come across as unprofessional.
Millennials mix crowdfunding and politics
The research runs counter to certain demographic and social realities. Post-COVID, more companies have engaged with crowdfunding for less conventional reasons as shutdowns upended people’s lives and the economy. Further, Millennials have become heavily involved in crowdfunding campaigns as they’ve entered middle-age and are more likely to let their political flags fly than previous generations. One study showed three of four Millennials had donated to a crowdfunding campaign during the pandemic. And many of these were political in nature ranging from held ‘Build the Wall’ to #metoo.
Of course, crowdfunded startups aren’t the only companies dealing with political landmines. Millennial Alissa Heinerscheid famously drove Bud Light off a revenue cliff with her promotion of transgender influencer Dylan Mulvaney. Other public companies receiving pressure from Wall Street’s ESG/DEI fetish have become targets including Harley Davidson, Tractor Supply, Coca-Cola, and Netflix.
Those companies have the ballast and built-in good will to survive political scandals. Startups in an already challenging funding environment do not. Thus, the message is clear for founders. Talking politics to your apolitical funding crowd comes with risks you may not be able to afford.
Crowdfunded startup survival more likely amid VC pullback
“Startups are dying amid a historic drought in venture funding,” began one recent Wall Street Journalarticle. “The pace of startup shutdowns, fire sales and sharp business-strategy changes is picking up,” began another. Yikes!
Higher interest rates, macroeconomic concerns, and unsettled geopolitical events have all contributed to a shaky environment for startups recently awash in cash. A startup “mass extinction event” is underway, as the head of one capital fund remarked. This is due partly to belt-tightening measures among venture capitalists. Startups seeking capital raised $37 billion the first quarter of this year, a 55% decline from last year. Indeed, according to Pitchbook, in 2022 the -7%, the return rate for venture capital firms was its lowest since 2009.
VC-backed startups are struggling
Anecdotes back the numbers. Once unicorn-potential startups with massive valuations are flatlining as market realities sink in. Hopin, an events startup once valued at $7.8 billion recently sold for a measly $15 million. Zume, a robot pizzamaker, once valued at $2.35 billion couldn’t turn pies into dough fast enough and is winding down. WeWork a hotshot of yesteryear whose valuation peaked at $47 billion is headed for a Theranos-style downfall. The list of lesser knowns failing to keep afloat grows daily.
Startup survival has always come with long odds. 7.5 out of 10 venture-backed startups fail. Only 16% went public or had a successful acquisition within seven years of getting their first VC check according to one study.
Crowdfunded startup survival more likely
But those that choose equity crowdfunding (Reg CF) over or in addition to the whales are more likely to survive. Unlike VC partners, Reg CF are more likely to be patient with startups trying to find their footing or pivot due to market conditions. By definition, they are casual, passive investors, investing disposable income. With lower stakes comes less pressure and more willingness to support a further round. Reg CF investors also tend to be more loyal as they are more likely to already be in the founder’s extended network and are often investing in part to support the founder personally. Further, for consumer-facing businesses they are more likely to already be customers or clients engendering further loyalty.
These factors matter when times get tough as they currently are in the present startup environment.
Crowdfunded startups add extra benefits beyond survival
Beyond surviving tough times, here are other reasons founders should consider a Reg CF round in place of or in addition to VC money:
Broaden your investor base: Unlike other funding models, Reg CF can diversify your investor base from both a financial and geographical standpoint. Portals can accept investors from anywhere in the US, giving your business a potential foothold in all 50 states.
Turn your customers into marketers: Reg CF allows your customers to become financially invested in your business and see their investment grow as your business grows. This provides a free marketing campaign for your business with every new investor.
Incentivize your investors: Reg CF allows you to provide perks as part of the investment. Depending on the product this could include the product itself, ‘founder’ status on your website, access to events, or anything else that may induce an investment.
Prove value to institutional investors: A successful Reg CF raise can show larger, institutional investors your business is ready for the big money. Many larger investors are now requiring “social proof” of a company’s business model. Your business can show larger investors value and momentum and provide your business “bridge money” while larger investors evaluate your model.
RS Biotherapeutics is a company on a mission. Specifically, to “develop life-changing medicines for the millions of people suffering from diseases characterized by pulmonary inflammation.”
When this exciting new company was looking for extra capital to grow it operations, it turned to Reg CF, the SEC exemption that allows private companies to accept investment from everyone.
The company recently closed its Reg CF round on the StartEngine platform with nearly $200k in extra capital.
Many franchises are struggling right now due to many factors, including residual COVID issues, uncertain economic outlook, high interest rates, and labor shortages.
Those looking to start or expand their operations are struggling with limited financing options.
One option many franchises have not considered is Reg CF crowdfunding. Reg CF allows private companies to raise capital and sell securities to the public within certain limits. This law or “exemption” is tailor-made for the franchise industry.
Franchises have natural advantages for Reg CF crowdfunding raises
First, franchises tend to be B-to-C. Working directly with the public means franchisors and franchisees contact potential investors every day by serving them as customers. If you keep in touch with your customers through email and/or social media, you already have a ready-made crowd to tap for investment. You can tailor your raise to suit your existing customers.
Through the Reg CF crowdfunding campaign and after, franchises enjoy further benefits including:
Broaden your investor base: Unlike other funding models, Reg CF can diversify your investor base from both a financial and geographical standpoint. Reg CF portals can accept investors from anywhere in the US, giving your business a potential foothold in all 50 states.
Turn your customers into marketers: Reg CF allows your customers to become financially invested in your business and see their investment grow as your business grows. This provides a free marketing campaign for your business with every new investor.
Incentivize your investors: Reg CF allows you to provide perks as part of the investment. Depending on the product this could include the product itself, ‘founder’ status on your website, access to events, or anything else that may induce an investment.
Prove value to institutional investors: A successful Reg CF raise can show larger, institutional investors your business is ready for the big money. Many larger investors are now requiring “social proof” of a company’s business model. Your business can show larger investors value and momentum and provide your business “bridge money” while larger investors evaluate your model.
What franchises need to know before a Reg CF crowdfunding campaign
First Reg CF law is somewhat unsettled when it comes to franchises. For example, your raise as a franchisee could be “imputed” to the franchisor. This could complicate things for the franchisor and limit raise capacities. For example, if two franchisees were to raise using Reg CF the aggregate limit may apply to corporate, limiting how much they could offer. This is because Reg CF limits raises through “control.” As the franchisors “control” operations through the franchise agreement it may limit Reg CF’s availability.
One possible workaround is for the franchisor to disavow “control” related to the franchisee’s capital raising in the agreement. But this is yet untested—although less likely to raise SEC concerns absent fraud or misleading statements.
Overall however, Reg CF is a useful financing tool for franchises. One that is bound to become more prevalent in the future, simply because it makes good business sense.
