It's been a four full months since the Title III equity crowdfunding provision of the Jumpstart Our Businesses (JOBS) Act went into effect, allowing small businesses and startups to raise up to $1 million annually in crowdfunded securities investments from both accredited and nonaccredited investors. As of Sept. 15, businesses had raised more than $7 million in capital investments using Title III.
Although Title III is a particularly young section of the JOBS Act, it's been hailed as a potential game changer for small-scale financing. Whether a company's projected growth is too flat to interest venture capitalists or an owner simply doesn't want to end up beholden to one highly powerful investor, Title III is seen as a way to raise growth capital without sacrificing independence. Moreover, campaigns can be targeted at locals within a business's community, helping to build a loyal customer base that maintains a stake in the company's success. [See Related Story: Title III Crowdfunding Ruling Changes Startup Fundraising for Good]
"I think Title III will change financing. If you look at how the industry evolved in Great Britain when they did it, we're already growing faster than they were," Mike Norman, CEO of equity crowdfunding platform WeFunder, said. "It will take a little time, as any new securities legislation does. Awareness is the biggest challenge right now. A true test and the most compelling part is that we now have companies that have raised meaningful funds from investors. How can they activate those investors in terms of promotion and customer loyalty?"
WeFunder has tracked the growth of the equity crowdfunding industry so far, and the early statistics appear promising. More than 9,000 investors have contributed $7.14 million so far, helping to fund 29 successful offerings, three of which raised the full allotted amount of $1 million in capital. In just the past seven days, investors from the crowd have contributed $112,068 to small businesses.
For companies like stock-photography gallery Snapwire, which crowdsources made-to-order photos from over 300,000 photographers worldwide, leveraging the power of an already-engaged community led the company to immense success in its Title III equity crowdfunding campaign. In 72 hours, Snapwire had eclipsed its fundraising goal. Now, the company holds about 280 percent of its goal in investments.
"The very truthful reason we got into equity crowdfunding is that we struggled to raise capital from traditional [venture capitalists]," Chad Newell, CEO of Snapwire, told Business News Daily. "We were such a leader in doing this — nobody had run a successful campaign yet at the time. I had little expectations other than a fair degree of confidence that we'd be successful."
For Newell, the key to success is about the market response to an idea, and Snapwire was lucky enough to have that 300,000-strong community of photographers who wanted to see the company succeed, he said.
"The crowd collectively makes the decision as to whether this is a good investment or not," Newell said. "We're 273 percent funded now, and we're going for the full" legally permitted amount of $1 million.
Vincent Bradley, CEO of equity crowdfunding platform FlashFunders, said he is convinced Title III holds the potential to revolutionize finance for truly small businesses. While Bradley acknowledged that the provision is still in its infancy and there's "work to be done," he said equity crowdfunding holds special promise for brick-and-mortar businesses and those in highly regulated industries, such as alcohol or health care.
"Where this will change the game and we'll see a paradigm shift is with brick-and-mortar small businesses that are getting crushed in this economy because lending has stopped for small businesses," Bradley said. "There needs to be an injection of capital, and I think that this is going to have a huge, huge, humongous impact on mom-and-pop, brick-and-mortar businesses as education improves. Right now, nine out of 10 people that I talk to don't know what equity crowdfunding is … so that's the job we need to do."
That lack of education is the only thing holding Title III back, Ron Miller, CEO of crowdfunding platform StartEngine, said. As equity crowdfunding becomes more ubiquitous in the marketplace, it will gain "considerable traction," Miller said.
"The structure of how small businesses have been financed has been set in motion for many years by tradition and practice," Miller said. "This has all come around in [four] months and gained a lot of traction in a short period of time. That said, to succeed, it's likely to continue to require the perseverance of the industry, as well as founders and entrepreneurs who want to use that tool to raise capital to grow their companies."
A larger piece of the awareness challenge is anchoring a business within a local community, giving neighbors a stake in one another's entrepreneurial endeavors, Norman said. By generating excitement and incentive to support one another, as well as by keeping the lion's share of the profits in the local economy, Title III can actually serve as a democratizing force, he added.
"There's this idea that if you give local residents ownership in their community, they can benefit in some way, shape or form from additional value flowing into communities and rising property values," Norman said. "And it's not just on the investors-making-money side, but also in job creation. It's helping businesses expand and hire more people from the local neighborhood. The vehicle to make that happen didn't exist before."
And the data show that small investments are driving equity crowdfunding forward. According to data compiled by WeFunder across the entire industry, more than 70 percent of Title III investments were under $500, while more than 30 percent were exactly $100. The power of crowdfunding is wrapped up in large groups of people chipping in small amounts to support companies they feel passionate about or connected to.
That's where future success will come from, said Grant Harvey, who worked as an advisor on several equity crowdfunding campaigns.
"As of now, I'm impressed with the amount that has been raised. The fact [is] that it's about $7 million worth of money [that] has been raised, but obviously, if you look at the bulk of the campaigns, a lot of the successful ones are about $100,000," Harvey said. "That's small compared to the bigger landscape of angels and VCs, but my take is that this is a really good opportunity for companies that have an instant buy-in to the community, from a larger group of people."
When that happens, he added, the incentive becomes clear for those small-scale investors to patronize the business and spread the word to their friends and family, opening the door to an entirely new form of entrepreneur-community cooperation.