- August 1, 2017: Vol. 4, Number 8

Crowdfunding: It is not just for real estate anymore

by Steve Bergsman

Earlier this year, Jack Jacobs unveiled GridShare, a crowdfunding platform solely targeting renewable energy projects. Jacobs, the company’s cofounder, asserts that GridShare is the only organization doing renewable energy, equity-based crowdfunding.

Hmm. Equity-based crowdfunding? Isn’t crowdfunding about kickstarting some artsy venture? What is Jacobs talking about?

“This was the newest thing after the JOBS Act was passed,” Jacobs explains. “The Obama administration allowed companies to raise money from, and give equity to, non-accredited investors. Anyone can invest directly and not violate SEC rules for having a public offering. This was the first time in 80 years this has changed.”

President Donald Trump has spent much of his time during his first months in office trying to roll back Obama-era regulations and rulings, but small investors would be very unhappy if the President decided to go after that JOBS (Jumpstart Our Business Startups) Act of 2012, which created the hothouse crowdfunding climate the investment market is experiencing today. (Bill Hinman, the new head of the SEC, has expressed interest in actually expanding the JOBS Act.)

Before the JOBS Act, crowdfunding sites were only operated on a reward or donation basis. After the JOBS Act, any investor could now receive equity in a venture company in exchange for a funding contribution.

“The reward-based space is not insignificant when it comes to the amount of money entrepreneurs can raise,” says Sally Outlaw, cofounder of Worthy Financial. “Kickstarter has raised over $3 billion. But, backers don’t get a financial return.”

Outlaw cites the example of Oculus Rift, the virtual-reality headset company. The venture raised $2 million on Kickstarter. A short time later it was acquired by Facebook for $2 billion. Kickstarter backers on Oculus Rift may have gotten a headset in return. If they were equity investors, for every $1,000 invested the return would have been around $145,000, or 145x return on their money.

The JOBS Act included something called Regulation A+, which created the legal means for small businesses to raise up to $50 million in capital online.

At the end of 2016, Crowdfund Insider reported issuers had publicly filed offering statements for 147 Regulation A+ offerings, seeking up to $2.6 billion in financing, although only 81 offerings asking for $1.5 billion had been qualified by the SEC, and just $190 million had been raised.

So here is where crowdfunding is today. There are four major pieces to this puzzle: 1) donation-based, which is designed for charities; 2) reward-based, such as Kickstarter and Indie-gogo; 3) equity crowdfunding, which evolved after the JOBS Act of 2012; and 4) peer lending or marketplace lending, which is really a debt market and investors participate in an interest return.

At first, equity crowdfunding was dominated by the real estate crowd. In 2015, when London-based Cambridge Centre for Alternative Finance did one of the first studies of Internet financing for the Americas, it separated real estate crowdfunding ($486 million raised in 2015) from equity-based crowdfunding ($598 million in 2015).

In the same study, the Cambridge Centre also noted: “The Americas increased use of alternative finance by 212 percent from 2014 to 2015; real estate models are scaling rapidly, generating $1.26 billion in 2015 in the United States alone.”

Finally, the study cautioned, such regulatory changes as Regulation A+ of the JOBS Act had the potential to produce a “ripple effect across the region.”

That was an insightful prognostication, but in ways unexpected.

Entrepreneurs looked at Regulation A+ and said, If this works so well for real estate, why not for other hard (or real) assets?

It took a while for this to happen, with most of these specialized crowdfunding sites only appearing in the past couple of years. The new platforms do not cover everything in the real assets class, and if the sites do, sometimes they are not clear or definitive. If investors are looking, for example, to crowdfund in the infrastructure space, they will not find a platform raising capital for building roads or bridges, but they might find a platform raising monies for a sculpture in downtown Chicago or funding a park.

“Crowdfunding has moved into a lot more sectors now,” says Outlaw. “It started in the arts and moved into the equity space, mostly with small business and real estate, which is exploding right now, but you also have these niches for solar, agriculture, etc. These can be under equity investments or peer-lending investments.”

In the real assets class, one of the earliest niche, crowdfund sites targeted agriculture with AgFunder, which gives individuals and institutions the ability to make venture capital investments in agriculture- and food-technology companies. A few other agriculture crowdfund sites have emerged, including Cropital, Barnraiser and FarmFundr.

Some of these new real assets crowdfund sites are downright attractive.

“Invest like an Oil Baron or Baroness,” is the catchphrase for Crudefunders, a crowdfund site for oil and gas investing. For as little as $1,000, the site boasts, it can “provide almost anyone over the age of 18 the opportunity to own a piece of an oil well.”

Or invest in a gold mine.

Last year, Chad Williams, the CEO of Toronto-based Red Cloud Klondike Strike, introduced its crowdfunding platform for the mining industry aimed at democratizing mining investment by reaching a retail investor audience not traditionally engaged in the space. Since then, it has expanded the platform to offer accredited investor access to private placements and other financing offerings. At present, it appears to be the only online platform for the issuance of mining company securities.

Red Cloud offers several capital market services to the mining industry, most importantly helping mining companies raise money. Mostly this is done through its network of investors, and today it still involves a lot of phone calling and handshakes. Currently, about 80 percent to 90 percent of capital is raised in what Williams calls the analog format. The second mode of raising capital is the digital format, or online issuance of securities.

“We strongly believe this is the future,” says Williams. “It is slowly gaining acceptance among investors and there is no doubt in my mind that acceptance will accelerate. The Internet has revolutionized everything so there is no reason that it won’t revolutionize the way mining companies issue securities.”

In the meantime, Red Cloud is focused on leveraging its digital tools to expand the access of the services it provides.

One of the first companies to use the Klondike Strike platform was Radisson Mining Resources of Rouyn-Noranda, Quebec. In May 2016, the company announced it had closed the first tranche of a private placement that had opened on the Klondike Strike platform. The gross proceeds of the private placement amounted to just over $400,000.

According to Mario Bouchard, president and CEO of Radisson Mining, about 75 percent to 80 percent of the investors in the first tranche were brought in through traditional networking, while the remaining 20 percent to 25 percent came through the crowdfund platform.

Bouchard jokes, “We decided to crowdfund because we like to do things the hard way.”

What actually happened was 2016 was not an easy year to raise money, so when Chad Williams called Bouchard to see if he would like to try his new crowdfund platform, Bouchard decided to jump. “Our thinking was, even if we don’t raise money, we will have good exposure,” says Bouchard.

Would he do it again?

“Not at this moment,” says Bouchard. “The money we raised via crowdfunding is not big enough. Last year, we needed $500,000 to $700,000, and now our project needs more money. We have to use a bigger money-raising platform.”

“Every new issue that Red Cloud has been involved in since the platform was launched a little over a year ago has also been on the online platform,” says Williams. “I’m guessing that’s about 30 companies. On any given issue we see either zero interest in accessing the deal via our online platform to as much as 20 percent. It varies as to how the market is doing, pricing, types of issues, all kinds of different factors.”

He adds, “We are still trying to figure out what works and what doesn’t work.”

Then there is GridShare, which, as noted, is the only crowdfund site specializing in an energy niche. “Renewable energy is a natural for this because it is a very capital-intensive industry and it is not always so easy for developers to raise money,” says Jacobs. “I’m a lawyer by training and I represent renewable energy developers all the time. One of the main requests is that we help them connect with investors.”

GridShare does not favor one technology over another. Of the first three ventures to use GridShare, two were solar and one was a wind project. One of the solar projects is something called community solar, and that one particular community will own a piece of it. The other is a little more adventuresome, floating solar. In this venture, the entrepreneurial hosts put solar panels on floaties and launch the floaties on California reservoirs. The idea behind it all is that the panels do not crowd expensive land and the water keeps the panels cool, which means they operate more efficiently.

Although the wind project involves conventional turbines, it, like other ventures on GridShare, promise unconventional returns (after the capital is raised and the project is underway). The wind project offers a return of 10 percent after 12 months. One of the solar projects is offering a 20 percent return.

While those returns look good, these crowdfund ventures hold a lot of risk. Jillian Sidoti, who practices securities law and has been doing crowdfund work for the past dozen years, explains the ambiguity about the risk.

“I hope there are no new regulations,” she says. “This is a regulated industry. Everybody has to go through serious pieces of regulation just to get listed on a platform. And these platforms had to do some serious things to become a platform. FINRA [Financial Industry Regulatory Authority] is no joke and you don’t want to mess with it. On the other hand, it is a matter of when people start losing money on crowdfund sites or a situation develops where money is misappropriated. Those of us in the crowdfund industry have got to be vigilant.”

Currently, there are two types of crowdfund investors, opines Dara Albright, president of Dara Albright Media, “those who understand an industry very well because they work in it and those who are simply comfortable investing online.”

That will change.

“The technologies are advancing, giving access to more people to invest in these venture deals through micro-increments,” says Albright. “As an investor, you can use technology to invest in tiny increments and spread your capital across many industries — an agriculture venture deal and a natural resources venture deal. As a result, small retail investors will soon be able to achieve not only the same type of diversification as a larger or institutional investor, but an opportunity to generate a return if one of them hits.”

Niche crowdfunding is an emerging trend line, observes Andrew Dix, co-founder and CEO of Crowdfund Insider. “You have these platforms looking to target specific niches. Over time some of these platforms will probably be successful. I don’t know if it is a foregone conclusion that they all will be successful. The entire industry is learning.”

In a sense that is true, as the pioneer crowdfund platforms try to figure what is effective, and as regulations, which are still evolving, harden over time. In the long run, the best of these platforms will stay the course.

Steve Bergsman is a freelance writer based in Mesa, Ariz.

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