Federal Crowdfunding Offerings in the US

Thomson Reuter’s Practical Law division published an article that provides a comprehensive review of the 60 crowdfunding offerings that were filed within the first two months of Regulation Crowdfunding becoming effective on May 16, 2016. This publication contains highlights and a more detailed analysis of a nascent, but promising sector.

​Companies that have launched crowdfunding offerings differ greatly in terms of size, industry, creation date and origins. And yet, some market trends seem to be emerging:

  • More than 40% of those companies chose to file in the State of Delaware, way above California (2nd on the list) that registered 5 issuers, compared to 25 in Delaware. Striking as it is, this figure is actually lower than the proportion of publicly-traded companies registered in Delaware (more than 50% of the country’s total) due to the State’s business-friendly environment.
  • With 30% (or 18 issuers) of the total, Consumer Products was the industry the most heavily represented in the offerings filed, followed by the Internet & Mobile Apps, and the Services sectors with both 10 issuers. Together they account for more than 60% of all offerings.
  • A third of companies were created in 2016, and more than half in the past two years.
  • Less than 5% (2 out of 60) of companies had more than 10 employees at the time of their respective offerings. Overall, the median number of employees for crowdfunding issuers amounted to three.
  • Likewise, the majority of companies weren’t generating any revenue at the time of their offering, and common equity seemed to be the preferred type of securities offered to potential investors.
  • For those issuers that had yet to generate revenue at the time of their offering, pre-money valuations were in line with what can be observed in the traditional early-stage financing market. Excluding outliers, the average valuation is slightly under $5 million, with a median valuation of $4 million.
  • However, it appears that pre-money valuations for companies issuing preferred equity were lower than for the ones issuing common equity. This is is rather counter-intuitive as preferred equity is usually considered as more valuable (for a given company) due to additional rights and privileges. The authors argue that valuations being mostly decided by the issuers, irrational (or at least, unexpected) outcomes might occur. Another factor that could explain this observation would be that some companies chose to offer preferred equity at a low valuation, in order to compensate investors for additional risks.
  • Globally, less than half of the securities issued had a voting rights. This could be explained by companies’ reluctance to manage hundreds or even thousands of ‘small’ equity owners.

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