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Crowdfunding Season

Take Me Out With The Crowd

by Scott Harrigan, CEO of Securitize Markets
Apr 4, 2022

You’re driving down the highway to the big game. The cars ahead of you slow to a crawl as the road narrows to one lane. Even though the stadium you’re going to is just around the bend, it’s taking forever to get there. What if there was a way to change the rules of the road so when there’s overflow traffic, more people could get to the game and cheer on their team?

This is essentially what regulated crowdfunding does for investors. It enables more people to participate in a collective show of support by investing in a company together, bringing fans closer to the action by cutting through the traffic. Crowdfunding helps more people show up to the game and support their team. Instead of cheering on your team and then going home, you actually get to own a piece of the team and share in its success.

As a sports fan and a CEO, I’ve watched these parallels develop over time, and I’m confident that lowering the barriers to participation in a regulated and compliant way helps investors show their support en masse. Based on what I’m seeing within my company and around the industry, it’s evident that crowdfunding is still in its early innings and that 2022 and 2023 will see new all-star companies knock their fundraising goals out of the park.

Dry Powder

In 2021, regulated crowdfunding raised $1.1 billion, and is on course to double that in 2022. With dry powder (cash or investments with liquidity similar to cash) on the sidelines reaching an estimated $4.6 trillion across low-yield money market funds, investors now have more capital to participate in larger raises and support their teams in bigger ways. Where will they allocate it as domestic inflation soars to 7.5% and global equities retreat?

After seeing the digital wallet company, Exodus, raise $75 million from 6,800 investors last year—92% of whom were individual investors like you and me—I believe that crowdfunding can lead the way. Recent updates to regulation increased the amount of money businesses can raise, including how much investors can contribute toward funding new businesses every year. Now, businesses can easily manage operational expenses without needing to go on frequent fundraising tours. This creates the potential to do more business with less work.

While investing in blockchain technology and crowdfunding presents unique risks, such as liquidity, market and regulatory risk, choosing the right platform can help people invest with a proper footing. Where Exodus demonstrated the value of these amended regulations early on, others will show how dry powder can amplify the trend.

As increased capital limits signal to investors that more opportunities may be just around the corner, the digital securities firms that are issuing and managing the process must provide solutions that turn traffic jams into fast lanes. After that, the sky's the limit.

Crowd Signaling

Here are three key indicators that lead me to believe this investment trend is only just beginning:

  • Organic growth: In 2021, regulation crowdfunding (Reg CF) raised more than $500 million according to a year-end letter from the chairman of the Crowdfunding Professionals Association. What’s more, fundraising issuers rose 77.6% more in capital commitments during 2020 than in 2019 despite the introduction of Covid-19. According to reports by Crowdfund Capital Advisors (CCA), the amount of money involved in Reg CF deals doubled on a monthly basis from November 2019 to November 2020. Over the same period, the number of deals increased by 50% and the average amount invested per investor increased as well. This year-over-year momentum demonstrates the utility of Reg CF and mounting interest from issuers, businesses and investors.
  • Amended regulations: Reg CF is expected to deliver a 11.2% compound annual growth rate through 2026, doubling returns approximately every six and a half years. As we see crowdfunding become more popular, the regulations amended in 2021 are making it possible to allocate more capital to Reg CF and Reg A+ raises at the same time. This timing couldn’t be better. The ability to match crowdfunding interest with expanded avenues for capital formation sets up new pathways for liquidity.
  • Leading examples: In 2021, Reg A+ security valuations exceeded investor expectations. The blockchain protocol Stacks started in part as a Reg A+ security and more than quadrupled in value, moving from $0.45 to $2.21 by the end of 2021. The robotics company Knightscope used Reg A+ in January 2022 to raise more than $20 million and finished out its first week trading up approximately 60%. These are just some of the leading examples.

Crowd Formation

The way capital has been forming around crowdfunding could be a sign that more retail investors want to invest in companies they are fans of. The dry powder on the sidelines is ready to go, and I believe we’re at a tipping point. As participation increases, private market performance will improve and shape where investors put their money. Savvy investors will allocate more capital to crowdfunded raises through the beginning of the year to try and outpace inflation expectations for 2022 and beyond.

CCA expects more than 2,500 new issuers to enter crowdfunding in 2022 alone. Reg CF is expected to take in more than $1 billion in 2022, doubling the previous year’s inflows. And software companies, which saw a 300% increase in online funding in 2021, are expected to continue their momentum in the years ahead.

With trillions of dollars on the sidelines, the big game is fast approaching. Businesses have an opportunity to usher more fans into the stadium by opening up more lanes on the highway. That way, when it’s time for game day, investors can cheer on their team and take home a prize: ownership in a company they believe in.

Originally published in Forbes Council.

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