- Category: Crowdfunding Platforms
- Published on April 15, 2014
Recently, the CCA Group performed an audit on the crowdfunding ecosystem in the United States. Speaking with industry experts, performing original research, and updating
a database of all active and inactive crowdfunding portals in the country, we were able to develop a “30,000 foot” view of the ecosystem, including a closer look at the types of platforms in the space (e.g. lending, reward, equity, etc.), the verticals (e.g. business, non-profits, etc.), and comparative social metrics. In this post, will take a look at three takeaways.
Niche Plays Tend to Survive
Business programs around the world often teach that startup businesses who identify and exploit a niche have a much higher chance of surviving. In their paper New Firm Survival: Industry, Strategy, and Location, authors Sterns et. al. write “niche purveyors were found to have increased survival chances” and from our initial analysis, this rings true among crowdfunding portals in the United States. When looking at the failure ratio of crowdfunding platforms by vertical, those platforms that could only be described as crowdfunding for “everything” had a 48% chance of failure. That is, of the platforms from our previous database and with the new platforms our team was able to identify, 48% of the platforms that were set up to fund “everything” were no longer active as of the time of this study. Conversely, though there are a few funding portals that focus exclusively on environmental causes, all of the portals that we’ve been able to find in this vertical are still active. See figure 1 for a breakdown of the failure rates of US funding portals by vertical.
Funding for Businesses is a Crowded Part of the Ecosystem
Our study breaks the ecosystem down into seven verticals: everything, nonprofits and causes, creative, environmental, businesses, science, and other. Of course, these verticals are somewhat imprecise and the classification of an individual funding platform into one of these categories involves some subjectivity on the part of the researcher. Nevertheless, one striking takeaway from our study is that the space for business funding platforms is crowded. Our study found that the “business” vertical had more than double the number of platforms than the second-highest category: non-profits & causes. On the opposite in of the spectrum, the least crowded parts of the crowdfunding ecosystem in the United States are funding platforms that focus on science and environmental issues. See figure 2 for a visual representation of the crowdfunding ecosystem in United States by vertical.
The Major Players Have all the Social Proof: a Natural Oligopoly?
When our team looked at some of the comparative social metrics between platforms in United States, we were struck by the presence of outliers. Looking at the descriptive statistics (see figures 4 and 5) of the active platforms that have at least one “like” on Facebook, the kurtosis (a measure of skew) is enormous, signaling that the distribution of these data is nowhere near normal. The same can be said for the audit of these platforms’ presence on Twitter. Instead of a somewhat normal distribution, there are a few players in the top quartile that dominate the crowdfunding presence on Facebook and Twitter. This is an important consideration given the impact that social proof has. It builds trust, attracts funders, and attracts campaign managers. This may not surprise many of the readers of this piece because a couple crowdfunding portals are becoming household names and others remain relatively obscure.
In his paper Supermarkets as a Natural Oligopoly, Paul Ellickson of the University of Rochester describes the “size of the store” as a factor that drives the success of few firms in the supermarket space: “The oligopolistic chains do not carve out separate turf, choosing instead to compete head to head with their rivals, with choice of store size behaving as a strategic complement. No other theory seems capable of explaining these facts.” Interestingly, he believes that this idea is not unique to supermarkets, but applies to many retail verticals saying, “the same features seem to characterize modern retailing in many arenas.” Could it be that a crowdfunding portal shares economic similarities with large brick and mortar retail spaces? If so, that might be a strategic lighthouse for portal owners.
Written by Davis Jones for CCA
- Category: Crowdfunding Platforms
- Published on December 07, 2012
- Written by email@example.com
Equity and debt-based crowdfunding (aka crowdfund investing) isn't even live yet and State regulators, rather than engage in effective and productive dialogue with our industry on how to best protect investors, has chosen to continue its misinformation campaign by describing fraud that is NOT crowdfunding, as if it were crowdfunding.
Crowdfunding, as part of the JOBS Act - a bipartisan bill that was signed into law by President Obama on April 5, 2012, is in the 270-day rule-making period by the SEC. Sometime in 2013 when the SEC and FINRA finish their jobs, communities will be able to come together on SEC-registered platforms to invest in businesses that have been "crowd-checked" and "vetted" by investors using social media. Unless a fraud-free issuer (background checks are mandated) reaches 100% of her funding target no money is exchanged. However a recent Investment News story paints a shady picture.
In the article they point to two examples of issuers being cited by the Commonwealth Secretary of Massachusetts for fraud ... neither of which are actually crowdfunding. In one example, Prodigy Oil and Gas allegedly sold at least $464,000 in unregistered securities to one Massachusetts investor. In another, Synergy Oil LLC of Oklahoma and two of its executives allegedly sold $35,000 of unregistered securities to two investors. Upon further digging in the Boston Herald, we uncovered that an agent was used to cold-call investors in one case and in the other the issuer "was subject to three state securities regulatory actions and had two criminal charges." Not much more is mentioned (e.g.: did they use a broker, were lawyers or accountants involved, were securities and criminal background checks performed, were standards based due diligence documents included) so the fine details are difficult to know. However it is implied that they were crowdfunding.
Here's why neither of these cases are crowdfund investing fraud, and why it is concerning to see state regulators not being more accurate with their statements:
1) Crowdfunding isn't legal yet. We are still waiting for the rules to be done. This includes the SEC and FINRA. So in reality what happened in the story is just fraud that was perpetrated under the current regulatory regime.
2) Crowdfunding, when it does go live (by law) must take place on SEC-registered websites only. These websites aren't live yet and hence in the story isn't crowdfunding.
3) Crowdfunding requires a crowd and not just one or two people. It also requires (per the legislation) that issuers direct investors to a funding portal's website (that is regulated by the SEC and FINRA) which per the story didn't seem to have happened. (They don't exist yet). General solicitation will be limited to driving people to the portal via social media, or "many to many communication". Traditional fraud is one-to-one communication like the example above (calling you on the phone or that email you receive from a princess in a far away land). In crowdfund investing, entrepreneurs will direct people to a portal where many-to-many conversations are taking place about an offering. This is what creates transparency. In fact, it will be far more transparent than has ever existed in the current private capital markets. These conversations and interactions create 'crowd wisdom.'
4) Crowdfunding per the legislation requires an issuer to hit 100% of their funding target that is listed on a SEC-registered website. If they don't hit it within the offering window, all the money is returned to investors. No reference to that in the story.
5) Platforms must perform fraud background checks (mandated by the legislation) to keep bad actors like the one in the example above out. The rules are still being determined and hence what happened isn't crowdfunding. (We are all in agreement that bad actor provisions are a good thing. Apparently the State Regulators are unaware of this proposed SEC rule on bad actors: http://www.sec.gov/news/press/2011/2011-115.htm
6) When this does go live the legislation mandates that there's a CPA review of the issuer's financials. That doesn't seem to be mentioned in the story. AND
7) This isn't crowdfunding because, when it does go live the legislation mandates that portals ...
(A) ensure that each investor—
(B) reviews investor-education information, in accordance with standards established by the Commission, by rule;
(C) positively affirms that the investor understands that the investor is risking the loss of the entire investment, and that the investor could bear such a loss; and
(D) answers questions demonstrating—
(i) an understanding of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers;
(ii) an understanding of the risk of illiquidity; and
(iii) an understanding of such other matters as the Commission determines appropriate, by rule;
(E) take such measures to reduce the risk of fraud with respect to such transactions, as established by the Commission, by rule, including obtaining a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity of every issuer whose securities are offered by such person;
When Crowdfunding goes live in 2013, rather than seeing articles like this, we'll more likely see stories about how hard it is to commit fraud under the crowdfunding regulatory scheme and yes, how we are helping state regulators to do a better job.
- Category: Crowdfunding Platforms
- Published on July 25, 2012
- Written by Jason Best
One only has to look at the wildly successful story of Pebble Watch to see that nations around the globe are in danger of losing jobs and GDP growth due to outdated regulations—that may cause their most promising companies to migrate in search of capital. If you are unfamiliar with the story of Pebble watch, here is the run down. Pebble Watch was a Canadian watch maker that developed a smart watch that synced up with smart phones. After years of trying to get funding at home in Canada they moved to the U.S. in hopes of securing venture capital. With the private equity markets in the U.S., anemic they launched a Kickstarter campaign as a last resort. The result—they raised $10 Million dollars, shutting off their Kickstarter campaign 8 days early due to heavy demand. While Kickstarter is a donation not equity based crowdfunding platform, the overall issue is the same—a promising company that will create a good deal of jobs had to leave the area to get money to create these jobs.