While it’s not directly related to most of the companies and investment types found among investment crowdfunding platforms, one of the stated goals of the 2012 JOBS Act was to make it easier for companies to go public using the traditional IPO method. MarketWatch columnist Therese Poletti recently took the position that on that count the JOBS Act has not lived up to its promises, noting that IPOs have actually been on a steady decline, with no appreciable increase following the 2012 JOBS Act:
But there’s also good reason to be careful before drawing the blanket conclusion that the JOBS Act “has not had the desired effect”. That’s because while it’s referred to in the singular, the JOBS Act was in reality an agglomeration of several bills and programs that had been meandering their way through Congress — calling to mind the words of John Godfrey Saxe (often misattributed to Otto Von Bismarck): “Laws, like sausages, cease to inspire respect in proportion as we know how they are made”.
So it is accurate to say that the JOBS Act was “heralded as a faster on-ramp to IPO”. Indeed, here’s what President Obama had to say at the signing ceremony:
As part of working on our partner site Crowdfilings, I’ve been digging in quite a bit lately to the SEC filings made by companies raising money through Regulation Crowdfunding, also referred to as “Reg CF”, which came out of Title III of the 2012 JOBS Act (and didn’t actually go into effect until mid 2015). So far there have been about 750 Reg CF offerings, which have raised about $60M (the number is higher if you also include the proceeds from “side-by-side” offerings, where money is also raised from accredited investors through a more traditional Reg D offering).
Obviously that’s quite small in comparison to the money behind those stubbornly private unicorns, but the number is growing fast, and if the trend follows the trajectory in the UK—which opened up equity crowdfunding to the general public about 5 years earlier than the US—that number should approach $1B by the early 2020s.
When a company wants to use Regulation Crowdfunding (Reg CF) to raise capital, it gets to expand the pool of investors it can draw from to be much bigger than the accredited investors traditionally participating in private placements and angel rounds.
In exchange for access to that wider pool of potential investors, the companies must comply with a range of disclosure and compliance requirements, from background checks on key executives to detailed financial and legal disclosures.
While it’s nowhere near the detail associated with public company filings, potential investors get to see revenue and profitability numbers, headcount, corporate structure and ownership details, and other information typically hard to come by for private companies. This adds some middle ground between the private company that doesn’t have to disclose anything to anyone except investors and public companies that have to disclose loads of information and data.
The formal offering circulars typically include much more detail, and combined with the kind of publicly available data that can be gleaned from sites like Crunchbase and LinkedIn, individual investors have access to a rich set of public information about these particular private placements.
And because the SEC filings require a fairly standardized set of data points, it also becomes possible to much more easily compare private companies (at least among the universe of those participating in Reg CF).
For example, as of this writing, the average company that has filed to do an equity crowdfunding campaign using Reg CF has 5 employees and about $260K in sales. Among those that have succeeded in raising at least their target amount, the average number of employees is slightly higher, at 6.8. And while 55% of the companies raising money report having no revenue at all in their prior fiscal year, among those that have successfully completed their campaign that number is 45% (more stats here).
While it’s hardly surprising to discover that more established companies with a track record of revenue growth are more likely to succeed in their fundraising, these kinds of comparisons have historically been much more difficult to do among private companies.
While equity crowdfunding in general—and Reg CF in particular—isn’t appropriate for every company looking to raise capital, among those that do, the requisite filings may well help normalize disclosure and transparency. That means that as at least some of the small companies raising crowdfunding money today become much bigger companies down the road, they will perhaps be less concerned with keeping tight control of key financial data than firms that only face truly public disclosures when considering a traditional IPO.
Personally I’ve found it enthralling to browse the filings for companies raising money through Reg CF. It’s a fascinating window into a wide range of businesses across many industries, and while it’s no doubt a competitive concern among some firms to release more information publicly, it’s also a valuable tool for amateur investors (and aspiring entrepreneurs) to learn more about the inner workings of early-stage companies.Have a question about crowdfunded investing? Want to learn more but aren’t sure where to start? You can explore more than 100 crowdfunding investment platforms in our database and learn more about the nuts and bolts of crowdfunding and alternative investing on our blog. And before investing, we strongly recommend getting a clear picture of your overall finances using a tool like Personal Capital. It's free, it's what we use to track our own finances, and when you sign up using that link you'll be helping to support YieldTalk.