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11/15/2013 McKinsey & Co - Why crowdfunding appeals to the Middle East
12/30/2013 KQED Radio - Richard Swart - A How-To Guide to Crowdfunding 12/20/2013 Gulf Times - Silatech Hosts Seminar...

3 Key Takeaways from the LendIt 2014 Conference

What a difference a year makes.  The 2014 LendIt conference had nearly 1,000 attendees and 100 online lending companies represented in the space – nearly 4 times the 2013 event.   What was also interesting is that over 50% of the attendees classified themselves as professional investors.  While there were many interesting speakers and sessions (LendIt will make these available online soon), here are three of the topics that garnered a lot of interest at the conference:Screen Shot 2014-05-08 at 8.51.41 AM

  1. P2P is no longer an accurate label/descriptor for onlineNew players and verticals have emerged in the space. Financial institutions are rapidly entering and helping lending platforms achieve scale. As such, P2P is no longer an accurate title.  During a presentation on the $1 Trillion dollar market size of this industry, Charles Moldow, of Foundation Capital, suggested using “Marketplace Lending” instead of P2P lending to better describe the phenomenon because it is a new online market with many types of participants to source and use credit products.   This is the term I will use going forward to describe this market. 
  2. This is not a winner take all market (Amazon), nor is it a free-for-all (Groupon).  While there will be consolidation in the market, unlike Amazon in e-commerce, there will an ecosystem of funding sites that will continue to exist andThis is due to the high barriers to entry in the market including regulatory burdens and scale required to break even. Several speakers indicated that platforms needed to reach at least $1B in origination to reach break even.
  3. The UK and German marketplaces continue to experience massive growth and are interesting to watch for lessons learned to apply in other markets.  While the traditional lenders largely ignore them companies like Funding Circle, Ratesetter, Assetz and Zopa, continue to experienceThey are seeing more than twice the annual growth in loan originations, while maintaining default rates of between 0.7%-1.7%.  While these platforms began as peer-to-peer or peer-to-business lenders, they now (to varying degrees) are seeking institutional capital while they scale up inventory and operations.  Also, unlike some of the marketplace lenders in the US, they cap their gross yields at 12-15%.  In the case of Funding Circle, the SME lending platform, the UK government continues its program of co-investing in certain loans to UK businesses as a way to support lending to SMEs that traditional banks continue to refuse to do. 

A year from now, it will be interesting to see the developments that will have taken place in this market, the development of secondary markets, the securitization of these loans, the globalization of platforms and the development of an ecosystem of companies that will support advances in underwriting, due diligence and transparency.    If the marketplace lending space were a 1000 page novel, I’d say we were only at page 70 today.  

Hey Oculus Twitterverse, You're Angry at the Wrong People

Last week Facebook announced it would acquire Oculus Virtual Reality for US$2 billion. 18 months earlier Oculus used crowdfunding platform Kickstarter to raise US$2.5 million from supporters. Unfortunately, none of those backers were equity holders. Owning equity in Oculus wasn't an option for these supporters because the JOBS Act, which was signed into law in April, 2012 and legalizes the ability for companies to use crowdfunding platforms to sell debt or equity, hadn't gone into effect yet. (It still hasn't 2 years later). Outside of Kickstarter however, there were some seed investors that were able to invest in Oculus at a $2.5M valuation.  So you can understand why there are some pretty upset Oculus Kickstarter backers whose dollars didn't earn them an 800x return like the investors but feel they are partially responsible for the success.   

This is not another rehash of the Occulus acquisition by Facebook.  I am only focusing on one thing; misdirected anger. Occulus and Kickstarter did exactly what they offered in their kickstarter campaign. They didn't create the laws that prevented people from investing in private companies unless you are the wealthy 1%. They also didn't create the laws that made it illegal to use kickstarter-like platforms to raise equity for a business until the JOBS Act goes into effect.

It is time to stop directing their anger at Oculus or Kickstarter. Instead, supporters should shift their dismay to the group that prevented them from making an investment in that company (that had the chance to reap a financial gain in the process) in the first place: The Securities and Exchange Commission (SEC).  If the SEC had moved faster to write and approve the rules for equity crowdfunding for unaccredited investors (a.k.a. the vast majority of people living in the U.S.), then Occulus could have made the decision to raise money via either equity or debt crowdfunding (likely equity since it had no revenues or prospects for very near-term revenues to support a debt repayment).  IF they had made this decision to raise money via equity crowdfunding and IF individuals made these investments, they would have reaped the same rewards as other stockholders with the same class of stock.  

My point in not to say that everyone is going to get rich on investing in startups.  My point is that if the SEC had moved more quickly in their rule making progress (remember, it is now 2 years since the President signed the bill), tens of thousands of businesses and startups across the US could have had new options to consider in raising capital for themselves. This would have created more jobs and innovation for our economy and potentially other companies that might have created a financial gain for their investors. Not the "truth is stranger than fiction" type of returns Oculus delivered, but returns (via equity or debt investments) none the less. Let's congratulate innovation and hard work and let's direct the frustration with the inability to make investments in startups and private companies, at those that can can help alleviate it.  

If the SEC will move forward and issue final rules that provide companies with the opportunity to raise capital, other companies will have a shot at building their vision and regular investors will have the chance to be a part of it if they choose to be.  

PLEASE NOTE:  It is entirely unlikely and insanely rare for a company to sell for $2B in less that 2 years (or ever, for that matter).  Historically, most startups fail and historically, most people who make investments in early stage companies or small businesses loose money. Making investments in startups and small businesses is very high risk and if one chooses to make these high risk investments, they should be limited to a very small percentage of their total portfolio.  

Why is September 24th a Huge Day for Entrepreneurs? Title II of the JOBS Act and Crowdfunding for Accredited Investors Begins

More Investment Money Means Potentially More JOBS!

On September 24th, there will be a sea change in how entrepreneurs can seek money from early stage investors - one of the largest changes to securities laws in 80 years.  On September 24th, Title II of the JOBS Act (a seven-part Act signed into law by President Obama on April 5, 2012) goes into effect.  Here are the key questions to be asking.


Screen Shot 2013-09-20 at 7.52.19 AM


Question: What is the change is that is going into effect?

 Effective as of September 24, 2013, Issuers of shares (under New Rule 506c) may use general solicitations and general advertising to effect a private placement. Prior to this any public means of communication like magazines and television were excluded from avenues for raising money for companies unless they were public. You really needed to know someone who was raising money in order to invest. There must have been a pre-existing relationship. Now that pre-existing relationship doesn’t have to be there. So businesses can reach more potential investors, faster, via the Internet and social media.

Now private companies can use those mediums as well as the Internet and the social network to reach millions of potential investors.  This reverses an eight-decade-old law. 

Question: Can anyone invest?  Is this crowdfunding for unaccredited investors that we’ve been hearing about?

No, not anyone can invest. While anyone can see the solicitation for funds, the completed sales, must only be to “accredited investors” and the Issuer (the company, broker/dealer or 3rd party Web platform) has the burden to verify that the investor is “accredited.” An accredited investor is someone who makes over $200,000 for the last 2 years or has a liquid net worth of $1M.  Crowdfunding for unaccredited investors is still waiting on the SEC to come out with the proposed rules. Unaccredited investors that might see these solicitations cannot invest in these offerings. Companies accepting funds must be careful to verify accreditation.

Question: What is the maximum amount that can be raised?

Unbeknownst to many people there is no cap on the amount that can be raised.  While this has always been there, the ability to use the Internet to reach more investors has the potential to lead to a lot more investment money. This influx into the economy could be a boon for businesses and jobs. This can be beneficial for startups, small businesses and even Venture funds.

Question: What are the risks?

There are many. 

    1. First, as with any investment there are no guarantees that you will see a return, that you will get your money back or a timeline attached to if and when you see a return.
    2. Second, there is no review of the offering by the Securities and Exchange Commission. Solicitations can be online or offline and made to any potential investor. While forms need to be submitted to the SEC, there is no requirement for review of the offering by any State Securities Commission. Since State Securities police the markets there is an opportunity for fraud.
    3. Third, this is really buyer beware.  Investors need to be cautious before they invest.  Investors should only invest in people they know and trust and opportunities they believe in. They should take time to educate themselves about investing in the private markets and understand that in many cases the securities they buy will not be liquid, meaning they are not converted into cash easily.  As a matter of fact in many cases you might have to hold on to them until the business sells, merges or goes public.

             Question: What are the benefits?

The majority of wealth in corporations happens at their early stage.  While there is a tremendous amount of failure after 5 years, companies that succeed not only create a vast number of jobs but a return on investment that exceeds many other investment opportunities.  That being said, investments into high-risk companies like startups and small businesses should never equate to more than 10% of an individual investor’s portfolio.


  1. What does this change mean?

    1. Issuers can reach moreWhy is this important?
      1. According to the IRS there are around 6M accredited investors in the USA.
      2. According to the Angel Capital Association:
        1. Only 10% of them invested in private companies
        2. However, those investors pumped $23B into those companies
        3. With the lift on the ban the potential to reach every 1% more of accredited investors represent another $2.3B into the economy and jobs
  1. Is this Crowdfunding?
    1. Crowdfunding is using the social network to solicit funds for an idea via an online platform likeIf a website like this is used under the new law and the solicitation is targeted to accredited investors, you could consider this the first wave of equity or debt-based crowdfunding.
    2. However the change in the law does not require the use of websites to facilitate theWe think this might be problematic because crowdfunding websites bring transparency to the process by forcing all the documents related to the offering online.  This means there is a digital footprint of everything that happens.  Digital footprints have been shown to increase transparency since people are afraid of repercussions.  Not having a footprint of what people are offering or saying can lead to problems.
    3. When Title III of the JOBS Act goes into effect, businesses will be able to solicit both accredited and unaccreditedHowever there is a $1M cap on how much issuers can raise as well as caps on how much investors can risk.  In what just went into effect, there are no caps on issuers or investors.  This means investors can lose a great deal if they aren’t careful.
    4. By not forcing this to happen on SEC registered websites, it might be difficult to police theTitle III of the JOBS Act requires that these transactions take place on websites that are registered with the SEC.


Net-Net This could be a huge influx of capital upwards of $2.3B for every 1% more of accredited investors that begin to invest in private companies.

  1. All issuers and participants in the offer and sale of securities who may elect to utilize the new freedoms afforded by Rule 506(c) should proceed carefully and to generally solicit and market the offering of unregistered securities in a manner that doesn't draw unwanted attention.
  2. Issuers should consider hiring a law firm like Ellenoff, Grossman and Schole to review their documents and assist with filing their forms with the SEC.
  3. Issuers should consider listing their offerings through an “accredited investor crowdfunding platform” like SeedInvest that can help them follow the steps to be compliant.
  4. If you are an entrepreneur and you have never raised money before, you need to EDUCATE yourself before you getThere are resources:
    1. Success With Crowdfunding– Provides online step-by-step training and education including:
      1. Introduction to Crowdfunding
      2. Title II for Issuers
      3. Title II for Investors
    2. Crowdfund Investing for Dummies – Lays the groundwork for raising money using the Internet and is a resource for issuers looking to raise money from both accredited and unaccredited investors.

The Law

This isn’t easy.  Companies trying to raise money will have to work for it.  Here’s a breakdown of what issuers need to confirm.  (Some of this is repetitious to above).

  1. All solicitations must be accurate
  2. Companies need to make sure each potential investor receives a full private placement memorandum (these require lawyers and can cost at minimum $25,000) so this will likely mean that people using this means of raising money will be raising more than $500,000
  3. Companies, as mentioned above, must verify each investor is indeed “accredited”
  4. Form D will be expanded and require addition information including:
    1. Issuer information
    2. Issuer website
    3. Type of securities
    4. Details about purchasers (individuals or entities)
    5. Use of proceeds
    6. Description of general solicitation
    7. Description of verification methods
    8. File Form D within 15 days before general solicitation begins
    9. File an amendment to Form D within 30 days after completion of the offering
    10. Include a legend in offering materials for generally solicited deals
    11. For a period of two years, submit offering materials to the SEC for review and analysis (these materials will not be available to the public via the SEC website)
  5. For the first time in history the ban on general solicitation is lifted.
    1. No need to engage a middleman, no need for a broker
    2. However, they can only take funds from accredited investors.
  6. Prior to this change accredited investors self-certified their status
  7. Now the burden of certification falls on the shoulders of the issuers
    1. Con – Investors might not want to release their privateIssuers might not have the manpower to read through all the documents to confirm accreditation.  If issuers do not follow reasonable verification procedures, they may be in violation of the 1933 Act resulting in significant penalties, including rescission rights on behalf of investors.
    2. Pro -  Accountants or lawyers can act as the proxy forThere is talks about US Treasury creating a plug-in to the IRS tax tables for investors to print off a government issued accreditation certificate which would solve this problem

Crowdfunding: Income or Gift

Although Internet based crowdfunding has been around for at least five years, a large degree of ambiguity still exists around how to file taxes for money raised. With no definitive ruling from the IRS as to how crowfunded money is to be taxed, the burden of making sure that everything is in order rests completely on the head of the person (or entity) raising the funds. This is a scary responsibility to take on for most people raising money via crowdfunding. However, listed below are some recommendations by experts in tax law, whom we interviewed, that should help to simplify the task. (Disclaimer- These are general guidelines and should in no way replace the advice of a professional accountant):

Are rewards being issued?

The majority of campaigns are being hosted on reward-based platforms. Depending on the structure of the campaign and the level of donation, the rewards offered may be intangible, such as a thank you e-mail or an honorable mention on the company’s website, or it may be tangible, such as a small token of gratitude or a pre-sale of a product. Tangible gifts may include products or services.

If the perks are not tangible then it’s not taxable, as no sale has occurred. In this case, donations are considered gifts, which according to the IRS, is the responsibility of the giver. This donation is not taxable up to $14,000 per person for a single donor or $28,000 per person for married couples.

If the reward is diminutive compared to the amount given, such as a gesture of gratitude, then no transaction has taken place. For example if a funder were to donate $50 and they were to receive a mug or a calendar as a thank you, this would not count as a transaction but rather a gift.

If the rewards issued are tangible and comparable to what the market price would be for that good, then it is a business transaction, and any profit derived from the sale is considered taxable income. If production expenditures match or exceed business earnings, then you may not owe anything. In other words, if the difference between the amount received and the cost of providing the perk/merchandise comes to zero or less, no tax payment is required.

If you are a registered non-profit organization or are partnered with a non-profit organization, and have applied to the IRS for tax exemption status, then you will owe no tax on income earned.

Does the reward have a well-defined market price?

If the reward has a well-defined market price and is being pre-sold or sold at a comparable price, your state government may expect your customers to pay a sales tax. Check your state laws regarding sales, particularly concerning Internet sales. (

Are you an artist?

Pre-selling or offering up as a perk paintings, movies, publications, or other forms of physical media where the amount donated to receive a particular perk is comparable to the market price of the good may be subject to a sales tax. 

If you are offering a reward where your costs of production are less than the amount earned through crowdfunding, then the profit is considered income and is subject to an income tax.

However if production costs exceed the amount received then no income is earned and income taxes are not applicable.

If producing an audio record, for example, and all the money received go to studio fees, no taxes have to be paid. Any income, meaning any monetary gain derived after considering the costs of production, is subject to a tax.

Are these funds being raised for a charity or registered non-profit organization?

The IRS lists the types of organizations that fall under charity and non-profits that qualify for tax exemption as well as criteria required to achieve exemption. Note that even if an organization is recognized as a non-profit it is the organization’s responsibility to apply for recognition. (

Donors can only receive tax deductions if they donate to a registered 501(c)(3) non-profit organization or a qualified charity organization. If a perk was received, the donor can only deduct the amount that exceeds the market value of the perk. ( Donations to a cause, unless associated with a non-profit organization or qualified charity organization is not tax-deductible.

Did you raise more than $200,000 from more than 200 transactions?

Crowdfunding platforms do not handle any of the monetary transactions; those services are outsourced to third parties such as Amazon Payments or PayPal. The IRS therefore requires that you fill out form 1099-K, which ensures that online sales are reported and allows the IRS to track transactions for tax purposes. You should receive Form 1099-K upon earning $200,000 from 200  transactions. (,-Merchant-Card-and-Third-Party-Network-Payments) If you don’t receive a form, contact the company that processes these transactions to make sure a form hasn’t been filled out for you.

Do you have international donors?

Backers should not have to worry about customs fees because backers are making donations and not necessarily purchasing goods from retailers.

One difficulty may arise your campaign includes perks that fall under multiple taxation criteria, whereupon best judgment based on the information above must be made. Regulations associated with crowdfunding are still under development, but it is the campaigner’s responsibility to evaluate the appropriate criteria for taxation. 

Special thanks to Ron Worsham, Associate Professor of Accounting at Brigham Young University, and Randy Stucki, Audit Intern at Ernst & Young

How the Crowd Detects Fraud


There seems to exist in certain regulatory circles, particularly at the state level, a perception that Crowdfund Investing (CFI), when it comes on-line, will be rife with fraud. But this sky-is-falling mentality is unfounded and points to no structural or design problems with Title III and no data to support this conclusion. Contrary, the available data in markets where equity and debt crowdfunding currently exist (for example, Australia and the UK) supports the national imperative for crowdfunding and undermines their conclusion.  The reason for this is that crowdfunding is based on one of the most powerful tools today for weeding out fraud, social media. 

With the advent of the Internet, social media has gained prominence through websites like Facebook, Twitter, Google+ and LinkedIn.  It allows anyone to share any information in a social network and allow others to comment on that information.  Comments lead to further discussions and in many cases uncover nuances.  It is one of the main reasons for the Arab Spring and successful political campaigns.  Social media also drives consumer-buying patterns as people use it to rate products on and rate sellers on  It allows individuals who cannot otherwise see each other to have a mechanism to develop trust while making buying decisions.  This ‘circle of trust’ comes from the many-to-many interaction that takes place on these platforms.

This paper is meant to show how equity and debt crowdfunding, already in existence in other parts of the world has been operating fraud free for the past 7 years. 


Case One: Australia – Equity Crowdfunding 

The Australian Small Scale Offerings Board (, founded in 2007, is the largest investment crowdfunding platform in Australia and one of the largest in the world. It is an equity crowdfunding platform that has successfully served both accredited and non-accredited investors since its inception over 5 years ago, raising $130,409,669 since 2007. 132 companies have been funded to date and not a single case of fraud has been reported. ASSOB operates within the current securities structure in Australia.

ASSOB uses a three-stage fundraising model (each stage is held at different valuations).  Companies must be vetted prior to going on their platform.  There have been 176 pitches funded since inception. 83% of companies funded are still operational (compare this to 50% of US companies that fail within one year according to the Small Business Administration).  Subscribers have grown 26% annually, from 7,444 in 2007 to 23,859 in 2012. 

Businesses can raise between $50,000 and $5M.  (The limit in the US Legislation is $1M. Much lower than the upper cap in Australia).  A wide range of businesses have been served, from seed to established, across most industry verticals.  The average equity raised is $522,915 and the average equity offered is 21%.  The average number of investors per issue is 14. The average size of investment is $38,023.  This is comparable to a 2012 Study performed by the Crowdfunding Professional Association that found that Accredited investors in the USA will deploy approximately $30,000 into Crowdfunded opportunities.  (Unaccredited investors will deploy approximately $4,000). 

Issuers are required to choose a “Sponsor” to help with the fundraising process (preparing documents, due diligence, financials, etc.).  These "Sponsors" provide an ecosystem of professional service providers to help guide businesses through the fundraising process.  Sponsor fees range, averaging ~$5,000.  ASSOB’s Business Model includes an on-boarding application fee of $990, a $3,960 one-time admission fee; monthly maintenance fee of $458 and a success fee of ~1.5% of funds raised). The true cost of capital in the USA has yet to be determined.

Once ideas are approved they go live on ASSOB’s platform.  An issuer uses social media (email, Twitter, Facebook, etc) to reach out to their social network to attract investors.  Investors are allowed to comment on pitches.  Issuers must defend comments on platform in an open dialog.  Transparent Issuers that meet the confidence of the crowd with sound business models are funded.  No fraud has been reported.

Case Two: UK – Equity Crowdfunding

Crowdcube ( is the largest equity-based crowdfunding platform in the UK has been operating since February 15, 2011 with no reported fraud.  Crowdcube operates within the current securities framework within the UK and allows issuers to raise equity capital using an online portal.  

29 pitches have been funded with £4.25M.  Average raise is £146,552.  Average equity given up is 16%.  Average numbers of investors is 63.  Average days to fund are 51. Average age of entrepreneur is 40 and total number of registered investors is 24,023.  No fraud has been reported

Case Three: UK – Debt Crowdfunding

UK based, Funding Circle ( was founded in 2010.  It is an online marketplace enabling savers and investors to sidestep banks and directly lend to small businesses.  Funding Circle differs from other lending platforms in that it facilitates loans to businesses, rather than consumers while also proving easy access to investors’ money at any time. It provides low cost finance for small, UK firms frustrated by the loan terms offered by the banks.

The monthly repayment loans available are for one, three or five years and for between £5,000 and £250,000. Each loan is comprised of small amounts of borrowing from many different people who compete to lend to the business in question, enabling it to borrow at a better rate. With no bank in the middle, both investors and borrowers achieve a better deal.

Funding Circle investors receive 8.4% interest on average.  Some investor specific statistics: 27,000+ investors registered with Funding Circle. The average amount an active investor has in their account is £5,000. Average gross yield is 9.1%.  Investors recently exceeded a total lending of £63 million. Average loan amount approximately £60,000Approximately 1.5% bad debt ratio. Business borrower statistics: 1200 + businesses have borrowed via Funding Circle. More than £1 million lent to small businesses every week.  Similarly, there have been no reports of fraud.  (Additional statistics can be found

Case Four: US - Fraud Derailed

An example of fraud that was derailed on a portal is a campaign on Kickstarter called Mythic.  From

“A recent video game project on Kickstarter that turned out to be fake. As BetaBeat reports, the crowdsourcing scam was exposed by a crowdsourced investigation:

... a campaign for an action video game, MYTHIC: The Story Of Gods and Men, has just been busted by forum users at Reddit, SomethingAwful and Rock, Paper, Shotgun. The creators claimed to be an independent studio, “Little Monster Productions,” of 12 industry veterans in Hollywood. “Our team has done a significant amount of work on the World of Warcraft series as well as Diablo 2 and the original Starcraft,” says the project page. 

Bull____, said the Internet. Turns out the art was cribbed, the text for backer rewards was copied and pasted from another Kickstarter project, and even the office photos were from another game studio, 
Burton Design Group.

When people brought their accusations to the Kickstarter comments, the developers made a few weak attempts at deflection then quietly shut down having raised just under $5,000 (far short of their goal, so that money won't actually be released). With Kickstarter gaining more attention every day, we're sure to see more attempts at scams—and maybe even some successes—but with a savvy community that polices itself like this, the scammers face an uphill battle.”


Technology has become a common component in our daily decision making process.  Using the feedback from the community has also become a common way in which we further analyze our decision.  In today’s technology driven world, if you want to know about a new restaurant, you may well consult, if you want to buy a product you look at the ratings or if you wish to purchase a something from someone you don’t know on you check out the seller ratings. This is the new crowdsourced diligence paradigm. There was little transparency in the Venture Capital world, until the site emerged, and became the "Yelp of Venture Capital" by having the portfolio companies rate the VCs.  What is the equivalent site for rating entrepreneurs? Essentially, it doesn't exist, because there are no major crowdfunding platforms to support it.  Title III will fill this void.  Knowing that social media has helped provide transparency in these other markets can also help provide the same transparency and credibility to the crowdfund investing market.