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2013 Crowdfunding Predictions Revisited

Last December, I ventured out onto that proverbial limb and made a few predictions about what 2014 was likely to hold for crowdfunding. Now that the New Year is almost upon us, it’s time to revisit these predictions. Let’s see how accurately my crystal ball viewed the future.

“The implementation of the JOBS Act will not lead to an explosion of equity crowdfunding.”

Equity crowdfunding, by almost any measures, has grown dramatically. But the JOBS Act wasn’t the driver. Though many thought that the finalization of the JOBS (or Jumpstart Our Business Startups) Act—which directed the SEC to both simplify IPOs and corporate fundraising, and also allowed individuals to invest in crowdfunded equity campaigns for startups—would serve as what the Harvard Business Review described as a “big bang moment” in equity crowdfunding. So far in 2013, this has not been a key driver for growth.

Why not? It’s complicated.  Timing is a big part of it.  Title II of the JOBS Act, which allows for general solicitation, didn’t go live until September 23—long after most people thought—so we’re just starting to see its initial effects. For instance, CircleUp just closed our first deal using Title II. While companies, and their attorneys, work to understand the rules related to Title III, the growth will take time.  In the long run we still believe Title II will be a big driver for private capital raises.

Title III is a different story.  This section of the JOBS Act allows unaccredited investors to invest, but it stilll has not been implemented.  Nonetheless, the rules have been proposed by the SEC, and those rules don’t look attractive. It’s extremely hard for us to imagine any attractive company raising money using Title III. Its restrictions are simply too significant.

“Donation-based crowdfunding sites will differentiate or die.”

When I say donation, I’m including rewards sites.  I was too early about this one, but I think it’s still correct.  Just as in so many other web industries—social media, flash sale sites, etc.—I believe this consolidation will play out over time. Successful donation sites are already differentiating based on industry or other factors, such as an integrated API (See Crowdtilt’s very interesting API). Of course, the main exception to this rule is Kickstarter, which is gaining scale rapidly. To grab market share from Kickstarter, I believe donation/rewards sites will have to discover a powerful niche, or risk dying a slow death—or a quick death, depending upon their funding.

Want evidence that some of the donation-based sites are struggling? Look at how few have been able to get funding outside of the top 3-4 (there are hundreds).  Or look at the turnover at the top of their leadership teams. Many have seen significant turnover.

“Angel groups will embrace equity crowdfunding.”

This was my most accurate prediction..

Investors look for good investments.  The smartest ones aren’t relying on deals that happen to stumble across their door or present to their local angel groups.  We’ve seen thousands that are now turning to crowdfunding to find high quality dealflow and additional diligence materials that weren’t available offline.

Groups like the Foundry Group’s FG Angels are taking advantage of the ease that crowdfunding offers, as forming an online syndicate is much faster—and simpler—when compared to the process of forming a seed or VC fund. For instance, CircleUp offers profiles of startups that include data such as industry stats, bios, testimonials, product demos and major competitors, making it easier for professional and non-professional investors alike to vet potential investments.

“Consolidation.”

This prediction is a TBD, but we’re already seeing trending toward consolidation. Though the number of platforms still hovers in the 400s and volume continues to grow—a 105% increase from 2011 to 2012, according to Massolution—many of the sites making the most noise in 2012 are now silent. In large part this is because they are running out of money. Many others are realizing it simply takes longer to build a marketplace than they expected, and venture capital firms are already seeing a few winners emerging. Over time, expect to see this trend continue.

Anything you think I missed? Feel free to let me know in the comments section.

Source : Forbes

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Music and Crowdfunding: Can New Bands Get Off the Ground Using Crowdfunding?

Posted by  | Dec.  12, 2013 |

Camille McClane is a freelance tech author who specializes in the study of how social media and internet marketing have revolutionized global 21st-century business models. Camille has taken particular interest in crowdfunding and its viability as a source for securing funds for almost anything these days. She hopes you enjoy this article and will be better equipped to start your very own crowdfunding campaign!

In case you haven’t noticed, the music industry has changed drastically, and nobody has felt this upheaval more than you: the talent. In the old days, once you climbed the mountain (you know, putting together a band and songs) and finally got in the same room with an agent who liked your stuff, then the rest was smooth sailing. All you needed was talent (and, well, luck and connections). Now even this truism has changed, and the mountain becomes ever higher. How many talented people do we know that have got their ducks all in a row, written, recorded and produced a fantastic EP, played it live, built a following, and sat down with an agent to be told, ‘well, if you can come up with 10, 20, 30,000 thousand we can launch you properly.’

There is one silver lining: new paths up the mountain have been opened up in the upheaval. If you look around the landscape of new bands and new players, you’ll notice that it is the entrepreneurial bands–those that not only persevere, but take advantage of new technologies and new media to connect with potential listeners–that stand a greater chance of making it.

Enter crowdfunding: Whether it’s Indiegogo, Crowdfunder.com (popular with small businesses) or a myriad other options, crowdfunding has become a saving grace for musicians running out of options. Utilizing social media channels already developed, one can quickly advertise a new song, recording or event and galvanize this network. The supporters directly enable and contribute to the band’s work, reemphasizing the importance of a fanbase.

Here’s how they work: Kickstarter, another option, offers a simple all-or-nothing approach, in that the entity seeking donations posts a target amount desired. If the target goal is accomplished, Kickstarter takes a 5% cut. If not reached, all the money is returned to the originating donors. The site seems the most robust channel for getting a project successfully funded; of 24,951 Music projects, 13,379 have been successfully funded. 574 of these have raised at least $20,000, including the $1.1 million raised by Amanda Palmer of the Dresden Dolls.

Indiegogo presents the most interesting option, as they offer one of the most popular alternatives to an ‘all-or-nothing’ approach. Their flex-funding method takes 9% if the goal isn’t met, but the entity seeking the funds keeps everything pledged – the Indiegogo cut drops to 4% if the goal is met. The understandably loftier targets skew the success rate to less than that of Kickstarter’s, but Indiegogo does not make the statistics publicly available for easy comparison.

Rabbl comes across as the interesting new way to crowdfund. Bands no longer have to eat the cost for gambling on specific venues and where to tour. Essentially, it allows a band to feel out the interest for a specific venue and date without committing. Instead of a specific total amount donated, the goal would be selling so many tickets at a reduced rate to ensure a profitable night for all involved parties. The site’s social media proclivities, namely that of a profile page accompanying any projects the band enacts, enable for much more than a research tool. Other bands, local to the proposed area or just crossing paths at the right time, can latch on to projects to support the band – lending their name and fanbase by offering to play an opening slot for example.

Crowdfunding has changed: All the way from the top, President Obama has transformed the way crowdfunding works. Due to Title II of the Jumpstart Our Business Startups (JOBS) Act, restrictions on investment opportunities have been lifted. Rather than opportunities for individuals, films can now be financed utilizing “equity crowdfunding.” This means, basically, that whereas before you were only able to offer perks to supporters of your crowdfunding campaign, now you can actually offer equity, ie, profit. So, rather than telling fans that you’ll give them an autographed t-shirt if they pledge $100 to your campaign, now you can actually exchange 1% of your profits from the album in return for an investment of $100. You become a business, and your fans become investors.

The details are a bit more complex: basically, Title II defines applicable investors as individuals or married couples with an annual income of $200,000 for those who are single and $300,000 if married (basically, your parents and your trustafarian friends). This amounts to 9 million Americans who qualify under this standard, opening up a new source of largely untapped potential. The excitement of getting new music aside, the investment opportunities are equally abundant.

It’s not just them, however. Title III of the JOBS Act lets smaller players in on the action. With a cap of $1 million, a musician can accept up to 10% of the annual income of a 6-figure earner and up to 5% of an individual who earns less. Which means that, your friend waiting tables at Jerry’s can invest $500 of his hard-earned $10,000 annual salary in you! Not just because he thinks you’re awesome, but also because if you make it, then his annual salary just went up!

Crowdfunding projects are still work: Attempt to sell enough tickets on Rabbl to a popular venue, leak one song off the proposed project to be funded, tout the biographical credits of the big names the band is looking to work with on the next recording: however an act makes his followers, fans and potential business partners understand the focus and effort that will go into the project. In other words, effort goes not only into being a musician, but into succeeding as a musician. Excitement and fanfare over popular projects are helpful, but there’s an underlying reason known commodities earn the trust of investors: it’s called a return on investment.

This is where these sites can help the lesser to the complete unknowns. A successful campaign is a voucher for one’s trustworthiness. These sites don’t fill in the entire budget for tours or albums, they typically get the band to the next step in the long process that is carving out a career in music. After all, raising enough money can attract a big enough producer to attach his or her name to your project or a label to reconsider terms of a contract. Then, the campaign starts anew, with a much more robust target, a brand new outlook and the attention of a new pre-established fanbase – if not a more traditional financier outright. Typically, the band can even take advantage of those eager to be a part and help turn a profit from simple things like old instruments, setlists and other memorabilia to be trashed otherwise.

All these avenues and opportunities open up the band to more exposure and more potential for a critical mass to fund specific projects. The band’s entire profitability derives from developing enough fans to maximize the earnings potential when going on tour. The more fans, the more interest, the more the band allows itself to do. Crowdfunding reinforces the ideal by sharing that responsibility with its fans, the ultimate stewards of a band’s future, to a much more critical extent. Can you make a song that taps into the collective conscious of a moment? Can you book that holiday show to finally break out of the bar circuit? Can you connect with your fans to the point they are ready and willing to put their money where your mouth is?

In the end, you’re still climbing a mountain. However, the opening up of funding avenues means that you can now enlist a hundred (or a thousand, or a million) of your closest friends to help you make the climb. Good luck!

Source : http://www.themusicvoid.com/2013/12/music-and-crowdfunding-can-new-bands-get-off-the-ground-using-crowdfunding/

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How Crowdfunding Could Reshape Real Estate Investing

Crowdfunding, a new way to raise capital, has been gaining traction lately and it’s clear (at least to me) the result will be far-reaching. Traditionally, entrepreneurs or inventors would self-fund ideas or seek out banks and professional or institutional investors to secure the capital they needed to take their ideas to the next level. With crowdfunding, on the other hand, entrepreneurs can raise capital from a group of smaller investors in a secure and automated way online. At a basic level, here’s how crowdfunding differs from the traditional fundraising model:

Traditional Fundraising Model (Simplified)

Idea –> Pitch Banks or Investors –> Funding –> Execute Idea

Non-traditional Crowdfunding Model (Also Simplified)

Idea –> Set Up Crowdfunding Initiative –> Funding Goal Reached –> Funding –> Execute Idea

This “democratizing” of fundraising allows people outside the traditional investor groups and lenders to join in on the process. Kickstarter is still leading the way when it comes to creative consumer products with over $900 million pledged to over 125,000 unique projects. So far, crowdfunding has had the most success with tangible consumer products. For example, there might be an engineer who is building a more efficient bike seat and needs $10,000 to get it to market. He can post the project on a crowdfunding website and immediately have access to thousands (if not millions) of people and customers who would like to support bringing the project to market. Once the funding goal is reached, the money is transferred and the project can start.

For investors, crowdfunding means less risky, smaller dollar investments in projects they care about. For entrepreneurs, crowdfunding is a better alternative to traditional investment capital that improves the likelihood of securing the capital required to stay in business.

When we start to think beyond consumer products like new bike seats, we see other possibilities that impact other industries like real estate, startups, and even alternative energy.

To learn more about these possibilities, I did a brief interview with Nav Athwal, CEO of RealtyShares. He discussed his thoughts on how crowdfunding will affect the future of real estate investing. His Silicon Valley startup is thinking about the problem in the right way. Hopefully, his insights will help investors and other financial services entrepreneurs interested in crowdfunding.

Nav, how does traditional real estate investing work?

Real Estate is inherently fragmented and inefficient. Accordingly, although investors have a variety of options to choose from when investing in stocks and bonds, they have very few ways in which to access private real estate. Under the traditional “country-club” model to real estate investing, investors must solely rely on their own networks to access quality real estate investments. And to participate, you typically need to invest a minimum of at least $50,000-100,000. The problem is, most investors just don’t have that level of access or don’t want to put such a large sum of money into a single property, which obviously hinders diversification. And although REIT’s solve part of the problem, with REIT’s investors are investing in a pool of properties rather than a specific property. This in turn reduces transparency and control.

How do you apply a crowdfunding model to real estate at RealtyShares?

Through our online investment platform, www.realtyshares.com, we provide accredited investors access to real estate investment opportunities that are nationwide. Investors can browse opportunities by asset type (i.e. single family home or apartment building) or geography and can pool their money with other investors to purchase shares in these opportunities for as little as $5,000. Investors also have access to an investor dashboard where they can monitor their investments, returns and tax documents. Thus, through crowdfunding, we’re making investing in real estate as easy as easy as investing in stocks in publicly traded companies.

Why is crowdfunding particularly good for real estate investment? Is there a painpoint that traditional funding models don’t address?

Crowdfunding eliminates most of the barriers or difficulties involved with traditional real estate investing. Real estate is time consuming, expensive and requires skill and local knowledge. Accordingly, unless you’re willing to invest $100K into a single asset and can afford the time and effort to actively manage and operate the property, it isn’t a viable investment option.

Crowdfunding through platforms like RealtyShares not only provides a level of access and transparency that has never before been possible for real estate but also greatly reduces the time and capital requirements needed to invest. That is because each investment is passive and investors don’t have to worry about the usual headaches that come with property management and the investment minimums are much lower. This allows investors to invest more quickly and also to allocate the same $50-100K they may otherwise put into a single property across multiple properties in different geographies thereby achieving greater diversification.

Imagine sitting on your couch in New York and browsing apartment buildings or single-family home investments in Los Angeles or Seattle from your laptop or tablet. Crowdfunding is making that possible.

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Taking The ‘Fun’ Out Of Crowdfunding

The following guest post is by Tom Murphy, a partner at the law firmMcDermott Will and Emery and who has represented the issuers or underwriters in more than 30 IPOs. He has also represented Fortune 500 companies in connection with multibillion-dollar acquisitions.  

Crowdfunding is a trendy and cool buzzword. “Crowd” sounds sociable and “funding” is, of course, always good. But equity crowdfunding as contemplated by rules proposed by the SEC in late October is not promising.

Because it sounds good, the term “crowdfunding” is applied, sometimes confusingly, to vastly different funding models, including “donation funding,” (e.g. Kickstarter), in which no investment is involved and “backers” expect no return; “advertised” private offerings, which have only been legal since September and allow the general solicitation of investors directly by private companies seeking funding, known as “issuers”, or through intermediary sites like CircleUp, provided all investors are “accredited” (meaning wealthy); and “real” equity crowdfunding contemplated by the JOBS Act, which I describe here. This last model would allow non-public issuers to sell securities to anyone, regardless of their sophistication, net worth, or income, and no matter how risky, albeit in limited amounts and with many restrictions.

While the first two models work, the restrictions and requirements in the JOBS Act and the SEC’s proposalare too substantial, for this model to work efficiently in the real world. All three sets of crowdfunding players – the issuers, investors, and portals (websites that connect the other two) are likely to be disappointed.

For issuers the first problem is that, unlike private offerings, advertised or not, in which confidentiality can be generally maintained, crowdfunded enterprises will be public companies “light.” They will not be subject to all the voluminous and costly rules applicable to publicly traded companies, but several parallel unpleasantries will nonetheless apply.

For one thing, crowdfunded companies will be required make publicly available their financial statements (or, tax returns), comprehensive offering documents and specific disclosures of the risks involved, by filing with the SEC. This sensitive information will be accessible to competitors, suppliers, customers, employees and everyone else, at a time before the issuer even knows if the offering will succeed.

There will also be ongoing requirements to provide updated information publicly. This “open book” life has always been a major reason to forego or delay a public offering and should have a similar effect on those considering equity crowdfunding once they fully understand it.

A related risk, exclusive to equity crowdfunding, will be the uniquely public nature of the offering process itself. To allow the “wisdom of the crowd” (if such exits) to be tapped, portals will be required to facilitate investor commentary and communication. Anyone, even those with ulterior motives, may provide “advice” to potential investors, right on the portal website.

Crowdfunding will likely be quite expensive for the amounts raised. Offerings are limited to $1 million annually and even that drops to $500,000 if the company’s financial statements are not audited, and $100,000 if they’re not reviewed. Financial statement preparation and auditing can be expensive, especially when auditor reports will be used to sell securities.

Other expenses will include legal fees to prepare offering documents designed to achieve the delicate balance between making the investment attractive while still being sufficiently candid and cautionary to avoid liability for inaccurate or misleading statements. This is what we securities lawyers do for a living and it’s expensive to do it right.

Crowdfunded companies will have large numbers of shareholders – likely upwards of 1,000 – to whom they and their directors and officers are accountable and owe fiduciary duties. Many of those investors will be unsophisticated and unforgiving if things don’t go well. This means spending significant time and resources on investor relations, and in some cases outright “handholding,” or risking an unhappy and perhaps litigious shareholder base.

Picking the right portal will also be important. Each offering must occur through only one portal of an SEC-registered broker dealer or a “crowdfunding portal.” Neither the portal nor the issuer will be allowed to advertise a specific offering or give one offering prominence over others on the site. So issuers will not be allowed to use multiple sites or other means to increase their exposure. Only advertising of the portal itself will be allowed.

Portals will be required to register with the SEC and with either a securities exchange or FINRA. They will have expensive regulatory requirements, including reporting, record keeping, and regulatory inspections as well as specific diligence obligations regarding the issuer, like conducting background checks on its principals and confirming that it can maintain adequate records.

There will be specific portal requirements for the operation of the sites, such as holding investor funds, allowing cancellation of orders, providing investor education, and facilitating communication among investors.

Crowdfunding portals will also be prohibited from investing in their issuers or engaging in trading, advisory, or custody activities and thus will have limited income sources beyond their share of offering proceeds. Perhaps even more troubling, the SEC release accompanying the proposed rules indicates that portals will likely be subject to the same securities law liability as issuers. For all these reasons issuers can expect portals to charge a substantial percentage of the small amounts raised to compensate them for their costs and risks.

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Should You Crowdfund with Clients ?

Think E-Trade revolutionized online financials? Welcome to crowdfunding — the ability to for anyone to invest in nearly any kind of option or enterprise over the Internet at any time. Should your clients be involved?
Dec. 11, 2013          

Think E-Trade revolutionized online financials? Welcome to crowdfunding — the ability for anyone to invest in nearly any kind of option or entreprise over the Internet at any time.

“Crowdfunding is essentially a very old ancient concept,” says Jason Best, co-founder of Crowdfund Capital Advisors. “What is new is the ability to publicly solicit via social media. It’s going to a very big change.”

Nearly anyone who spends time on the Internet is familiar with Kickstarter — the online site that offers rewards to crowds of users who kick down (usually) small sums of capital to help launch a new satellite, self-cleaning shirt or an all-natural licorice company. The firm is expected to tip $1 billion in funds raised sometime in 2014.

Crowdfunding, however, is different. There’s no promise of a key chain, vintage postcard or a rainbow array of sweets once the project is funded and completed. Here the reward is un-promised — an investment made in a small business or start-up that may pay a return and more likely will not. After all, 50 percent of small businesses fail in the first five years, according to the U.S. Small Business Administration. To date, investors have long had the opportunity to invest in a friend’s new bar, a sister’s catering business or an uncle’s new bike shop, but not through general solicitations.

But Title III of the 2012 JOBS Act should open the doors to allow companies to solicit investments from literally anyone — accredited or not. It’s now in a 90-day comment period expected to close in January 2014. Online firms are lining up, getting ready for what they believe is bound to turn investing on its ears. There’s even talk of launching an accreditation for reps through the nascent National Crowdfunding Association, says its executive director David Marlett. Yet, even some of crowdfunding’s biggest cheerleaders are asking: Is this the right investment vehicle for everyone?

“We don’t shy away that this is a high risk investment and that most start-ups fail,” says Best, who co-authored some of the ideas used in the JOBS Act. “But it really is the next extension of the social web, Web 3.0, and where the Web meets capital formation.”

Shawn McLaughlin couldn’t agree more. As the co-founder, CEO and president of McLaughlin Ryder Investments in Alexandria, Va., the opportunity to raise capital for small business owners who are clients, plus creating new investment possibilities for others, has too much potential to ignore. He’s even invested in a crowdfunded project himself, he says. And so when the option to push a button and invest capital online with anyone is green lit, he’s going to be right there with his clients looking at the possibilities.

“Our view is this is like any area of investment,” says McLaughlin. “It will be important to look at the sources. There are certainly going to be risks in this area.”

For starters, rules and regulations will monitor those seeking to raise capital from anyone. This has some questioning whether the effort is worth courting the non-accredited investor as their smaller net worth may not be capital enough to pursue.

“There are people arguing, and they’re probably right, that accredited investors hold more of the wealth than unaccredited investors,” says Alon Goren, CEO and co-founder of the Santa Monica, Calif.-based Invested.In, which builds crowdfunding platforms for companies. “Going after those folk may not be the right move for every business. It will all have to depend on the specific niche markets.”

McLaughlin agrees, but is still excited about crowdfunding options, particularly around investments for a client’s own community, where they may feel more passionate to invest. He knows, though, that explaining the pitfalls and losses to his own clients will be crucial. Sure, it may be fun to click and send funds towards a new gluten-free pancake house in the neighborhood. But for reps, any investment, crowdfunded or not, still requires due diligence by both clients and their rep.

“There will good deals and bad deals,” says McLaughlin. “And people will need to be careful.”