The astronomical success of more and more crowdfunding donation campaigns on platforms such as IndieGoGo and Kickstarter has created significant interest in the space, and it’s only grown exponentially over the years.
With several companies soaring from humble beginnings to becoming multi-million dollar enterprises—and in at least one instance, multi-billion dollars with Facebook’s (FB) $2 billion acquisition of Occulus Rift—many entrepreneurs and investors are wondering when they’ll be able to take this one step further in the form of equity-based crowdfunding. But that’s much, much easier said than done.
Ruth Hedges, a pioneer in the crowdfunding industry, has been helping to lead the charge to make that concept a reality. She’s been talking to anyone and everyone interested in a future in crowdfunding—entrepreneurs, investors, industry professionals, regulators, and more.
Hedges also co-founded the Annual Global Crowdfunding Convention and Bootcamp to better educate those in the crowdfunding space. equities.com had the opportunity to speak with Hedges on this year’s event and to get her opinion on the current state of crowdfunding, particularly Title III of the JOBS Act.
EQ: The 3rd Annual Global Crowdfunding Convention and Bootcamp is taking place in Las Vegas in October. What is the purpose of the event and how has it grown since the first one?
Hedges: It’s really an event where people can learn about all aspects of crowdfunding in detail. We’ve grown considerably from when we first started, and the mission now is to provide valuable information and education about all the different kinds of crowdfunding models and strategies from around to world to the entrepreneurs, investors, and even lawmakers that need it.
When we first started in 2012, I wanted to create an educational seminar to help people make sense of the JOBS Act, which had just passed at the time. I actually helped to write the framework and get Title III passed through Congress. I worked for several years with a group called the Startup Exemption trying to get Congress to remove an 80-year-old securities law.
What we ended up with wasn’t exactly what we wanted because it became a lot more complicated. So since I was in Las Vegas, and since it’s the convention capital of the world, I decided to put on a small bootcamp and convention for crowdfunding. I didn’t know if anyone had ever done a crowdfunding convention, and clearly no one had ever done one around securities crowdfunding because it’s very new.
At the same time, the crowdfunding industry on the reward side was exploding. So it really was perfect timing. We had a great showing for the first event, and there was the great demand last year, so I decided to turn this into a global crowdfunding convention since the industry was growing so fast. So here we are.
This year, we have people coming from 12 countries, and in fact, the Spanish embassy bought 10 tickets to have companies attend so that they can bring this knowledge back to their own country. A lot of other countries don’t have any kind of convention or places for their small-business owners to learn the ins and outs of everything that’s involved.
EQ: What is the format for the bootcamp and conference? Does it deal with all types of crowdfunding?
Hedges: It actually covers everything. We have panels and speakers on equity, rewards, and others in real detail. We take a deep dive into the actual steps of a crowdfunding campaign and give people the tools to do it. We don’t just say things like, “You need to build up social capital, so go set up a Facebook and Twitter.”
We actually walk you through these platforms and show you exactly how to use them to your best benefit. It doesn’t matter what type of crowdfunding people end up doing, if they don’t have a crowd to actually talk to, then all this effort will be for not.
And this is historically what’s been the problem. There’s been sort of a set-it-and-forget-it mindset among people starting crowdfunding campaigns. They put up a video, add some text, post some photos, and then walk away. They think that they can just come back 30 days later and there’s going to be hundreds of thousands of dollars sitting in their crowdfunding platform.
The truth is there’s a very high failure rate even on the most popular platforms like Kickstarter and IndieGoGo. The failure rate is anywhere from 50% to 90%.
EQ: So entrepreneurs attending the conference will get a reality check, if you will, to how crowdfunding actually works and what it takes to successfully use it?
Hedges: Right. if we want that to improve, and we want security-based crowdfunding to be successful once it’s legal, then we’re going to have to do a better job at educating people on how to do all of this. So that’s really the motivation behind this convention. It’s to educate everybody.
Then you also have the service providers like lawyers, accountants, financial advisors, and broker-dealers. No one has been educating them either, and obviously, they need to know the rules in order to be in compliance and to keep their clients out of trouble. For them, we provide that very high level of education by the smartest securities lawyers, brokers and crowdfunding JOBS Act experts in the country. We spend three concentrated days going through all this.
EQ: The event has assembled a very impressive list of high-profile speakers, panelists, and keynotes for attendees. Some of the speakers include Kevin Harrington, one of the original Sharks on Shark Tank; Doug Ellenoff from Ellenoff Gossman & Schole; and many others. What are some of this year’s highlight topics or main themes that attendees can be excited about?
Hedges: Well, we’ll be covering a lot of relevant topics. One example is The Anatomy of Crowdfunding. So what is crowdfunding really? We’ll break it down for the audience. Then we’re going to talk about why it needs to be taught at schools and college institutions, and how important it can be for the long-term success of so many people who graduate without any chance of a real career in today’s economy.
We have representatives from AARP who will do a panel on baby boomers and crowdfunding, because more people over the age of 45 start businesses today than younger people. There’s a myth that every successful, scalable business is started by a 20-something. And obviously, baby boomers have a lot of money that they can invest in crowdfunding.
We also have the Worldwide Council of Crowdfunding Industry Leaders coming. We’re going to have a fireside chat with them, and we’ll talk about government, who shapes their policies, and expand the awareness of crowdfunding. There’s 7 billion people, and half of them have smartphones, so they can be crowdfunding in the donations space right now. So we’re going to have a fireside chat with them onstage and then we’re going to have some private meetings to come up with a strategy.
EQ: What about sessions directly affecting entrepreneurs?
Hedges: One of the exciting things that we’re doing is a live Google Hangout to show them how to pitch to investors. When you think about security crowdfunding versus reward-based crowdfunding today, people can send out a tweet, and they might be able to get a bunch of strangers to give them $5 or $10. But nobody is going to give you $1,000 to $5,000 just based on a tweet. You’re going to have to actually write a business plan, and be willing to really provide a value proposition, exit strategy, valuation, and all kinds of financial documents.
Then investors will want to talk to the management team. Since we’re doing this all virtually, the way that all happens is by using things like Skype, GoToMeeting and Google Hangouts. We can actually have a face-to-face meeting with a group of investors without having to do so physically. So we’ll have a demo of that and show people how it actually works.
We also have something on real estate crowdfunding. That’s really popular right now because it’s giving people the opportunity to own pieces of things they would never be able to own in their lifetime, maybe like a bed and breakfast or a piece of a hotel or part of a nursing home. It also changes their neighborhood and the towns they live in because you cut out the banker in the middle of this transaction. Historically, the banker was the one who made almost every decision on Main Street USA. They decided which business got a shot and which ones didn’t. Now with crowdfunding; that’s a game-changer.
EQ: The crowdfunding concept became popular when artists and novel businesses were able to raise donations for their campaigns to fund their ideas or aspirations. That’s reward-based crowdfunding. What has it evolved into today and how much further does it have to go?
Hedges: In 2012, when I did the first convention, there was $1.7 billion of what they called reward and donation-based crowdfunding. In the second year we did it, it was $2.7 billion. Last year, it was $5 billion. That’s really exciting growth, but you also have to understand that seven years ago, social media was very different. All we had was MySpace and Friendster, and nobody really knew what social media was. If you think about where this is going—the projections indicate that at its current growth rate, the crowdfunding industry is expected to add over $3.2 trillion to the economy by 2020.
Just as important, it will create more than 2 million new jobs during that time. That’s really what this is all about, because when you think about the gatekeepers and the people who have historically decided on whether you got money based on your credit and collateral, or whether you got a shot at meeting an angel or venture capitalist, too many motivated and passionate entrepreneurs have not gotten the capital they needed. That’s prevented them from being able to create the jobs or generate the tax revenues that the economy needs.
Now we potentially have access to over 300 million Americans and their free will to exercise how they want to spend their money. We’re going to see a lot more of the things that we desperately need, which is job creation and a level playing field for access to capital.
EQ: The signing of the JOBS Act over two years ago was a major milestone for Crowdfunding, but we still haven’t seen Title III take effect yet. In your opinion, do you believe this will become a reality soon?
Hedges: We’re still waiting on the SEC on Title III.Title II of the JOBS Act is legal, which is what they call “the rich person’s crowdfunding.” That’s crowdfunding for accredited investors, meaning people who have over $1 million or that make over $200,000 a year for two or more years. There’s approximately 8.7 million of those people in the country.
But there’s 300 million of the rest of us, and the rest of us control trillions of dollars that has sat on the sidelines, not being able to be utilized. So now we’re waiting on the SEC to complete the rules, and they have actually broken the law. In the JOBS Act, which is a legal binding document voted on by Congress and signed by the President, they’re given a mandate to pass these rules by the end of December 2012. We’ll, it’s now September 2014. They’re breaking the law.
We are all incredibly upset and frustrated that they can get away with this. Unfortunately, I’ve spoken to many government officials and they don’t have any way of creating any kind of consequence to the SEC’s actions. How they got a government agency situated this way is really beyond comprehension.
But if you look at Dodd-Frank, that’s been running through the mill of the SEC’s rule-making process for years. They’ve been spitting out little bits and pieces here and there. So they’re going to have to get Title III done, but we just don’t know when.
EQ: So even though it’s taking significantly longer than expected, it isn’t to say that this won’t eventually happen. In the meantime, what should people in preparation for this law to take effect?
Hedges: The amount of work necessary to raise $1 million in Title III crowdfunding is a long process. So even though the SEC has taken a long time, it’s still important for entrepreneurs to start preparing now because all of this time is a gift.
It gives you more time to build a larger crowd of potential investors, and to nail a great video, all the text, write a good business plan, get the right audit and certified financial statement, and all the other pieces that will be required of you once it’s legal. Then when it’s legal, you’ll have the first-mover advantage to get a jump on the crowdfunding portals. You can be one of the first companies in the U.S. to actually be able to take advantage of crowdfunding for equity, which will also give you a lot of publicity.
EQ: Crowdfunding has been described as the democratization of capital. How do you think crowdfunding for equity will change the way the current capital markets work?
Hedges: It’s not going to change how the current capital markets work. It’s going to add additional ways for people to sell securities if their business or startup, which will then create a larger pool of quality deal flow in subsequent rounds with angels investors, VCs and more IPOs. We see this in the reward space with companies like SmartThings. They wanted to raise $250,000 last year and ended up raising $1.2 million. They then went on to get $10 million from VCs, and last month, they were purchased by Samsung for $200 million. That was just a crowdfunded company with an app and some other things. But had they not been able to crowdfund, this whole thing potentially would not have happened.
You could also look at the Coolest Cooler, which was just crowdfunded. It’s basically an ice chest that they decided to spruce up by putting a blender on it to make a margarita. They also put a speaker on it so you can hook up your smartphone to play music. They just put all kinds of fun little gadgets on it and it resonated immediately, and successfully raised $3.2 million in the first four days. By the end of their campaign, they raised $13.2 million with over 60,000 backers.
Now you can be absolutely sure that every single corporation that sells ice chests like Target, Home Depot, and so on is knocking on their door at this very moment. Everybody’s knocking on their door, including VCs, trying to figure out how they can get a piece of it.
EQ: That raises the question of how additional rounds of capital will affect crowdfunding investors. Do they stay around to an IPO or acquisition, or do they get bought out by the VCs or angels?
Hedges: Every deal will be individually structured because it’s not like there’s a blanket rule for that. That really comes down to the terms for each offering. But it’s important to remember that eight out of every 10 investments that VCs make, they’ll lose all their money. They just spread their money around so that the two that they do make money on are big enough to compensate for the losses on the other ones.
But investing in startups is very risky, and I like to tell people that if they don’t have the stomach for it then they shouldn’t do it. But don’t keep the rest of us who do have the stomach for it from legally being able to do it because the real money is made at the beginning. If you look at Facebook’s story, people who got in at 50 cents or $1 were obviously better off than the people who got it at $39 when it went public. Then you look at the Google (GOOG) stock today, I mean who can afford to buy those shares of stock? Only wealthy people.
EQ: The same principles of investing apply to crowdfunding. There’s going to be risks involved, and investors need to understand that.
Hedges: Absolutely, and the government has actually stipulated certain levels that you’re allowed to put in based on your income, and for most Americans, that comes out to about $2,000 to $5,000 a year total for any combination of crowdfunding campaigns. It’s not like you can just put all your money in and do whatever you want.
But with that said, any investment does carry risk, but over five or 10 years of putting a few thousand dollars in your portfolio, the idea is that one or some of these are going to pay off. The exit strategy is going to be the experience of being part of those companies and doing things in your life with those companies, watching them grow and supporting them and encouraging them in ways you wouldn’t have had a chance to. You would have to come up with hundreds of thousands of dollars to have that experience any other way.
The other side is it is going to change things in every city and town that we desperately need. For example, Nevada has a lot of senior citizens and we don’t have a lot of nursing homes or assisted living facilities, but we can crowdfund all of those. Then all the seniors can own a piece of the nursing home that they eventually end up in. That’s an example of what you can do by crowdfunding.
EQ: You mentioned your role in writing the framework for Title III of the JOBS Act. Can you talk about your background and how you became a leading voice in the Crowdfunding industry?
Hedges: My background is in software development and I invented a product that’s a platform for business plans and due diligence reporting called Crowdfunding Roadmap. It is a deal-flow screening tool, and it’s also a planning tool so that entrepreneurs can compile all the different moving parts that they will need to have answers to, and can be used for themselves internally. It also allows them to showcase to investors the marketing, sales, scalability, customer acquisition plan, as well as due diligence information such as patents or trademarks or any strategic partnership agreements, employment contracts, and all those kinds of things that they need to provide and organize. So that’s all compiled and stored on the cloud.
When the recession hit in 2009, a lot of my clients couldn’t go to a bank with this software because nobody was lending. That led me to start researching into the whole flow of capital in this country and I realized that there was this imbalance. It wasn’t that we didn’t have capital. We just didn’t have a level playing field for the access to capital. So while I was looking into this, I came across other people looking into this too. I found a blog post by Sherwood Neiss, one of the co-founders of Startup Exemption, and so I called him and told him, “I think you’re my brother from another mother.”
We started to have this brainstorming conversation where we were both saying the same things. He told me about some of the things that he was doing with his partners, and so I joined forces with them, along with a bunch of other people and off we went to try to have this 80-year-old securities law removed. At the time, we wanted to try and incorporate the reward-based crowdfunding, like the Kickstarter and IndieGoGo model into a securities model. So we wrote this framework and along the way, obviously, I started to acquire a lot of knowledge because I was studying this all the time.
EQ: You’ve also done a lot to try to standardize the industry by establishing recognized associations, certification programs, and more. Can you tell us more about that?
Hedges: After the JOBS Act was signed, we launched the Crowdfunding Professional Association (CFPA) and Crowdfund Intermediary Regulatory Advocates (CFIRA), which is a regulatory organization that writes letters and advises different regulatory agencies to try and figure out how to make the rules workable for entrepreneurs and investors once they do come out.
Last year, I got together with my business partner Scott Pucell and we launched Crowdfunding College. We wrote curriculum that could be used to educate financial advisors, broker-dealers, lawyers, accountants, university professors, and other professionals. Entrepreneurs can also take the class. It’s all based on the JOBS Act, specifically focused on Title II and Title III. We have a class that’s seven hours long as well as an online course where you can take a 125-question test. You have three hours to complete it to become a Certified Crowdfunding Professional (CCFP). I also taught a class last year at UNLV, which is the first university in the U.S. to teach a security-based crowdfunding class.
EQ: There’s obviously a lot of excitement in the industry right now, especially because of the potential of what it could mean for the future. But what are some common misconceptions that you’ve observed in the Crowdfunding space with all this excitement flying around?
Hedges: People need to understand that they’re in a competition. When you log on to a crowdfunding website, there are hundreds of other campaigns staring right at the people you’re trying to get to invest in your campaign. They’re not just looking at your story and value proposition. They’re looking at all this other competition as well. So if you don’t absolutely nail them in the first 15 seconds, you’re going to lose them and they’re just going to shop somewhere else. That’s the big difference between how crowdfunding works and how regular investing in startups work.
Normally, an investor would receive a business plan and they would decide whether or not they would invest in the company. That’s how it worked for the last 50 or 60 years. There wasn’t all this noise sitting next to that business plan going, “Hey! Look at me!” “No, look at me!” That’s what happens on a crowdfunding website. So all these entrepreneurs need to recognize the fact that they’re are all in a competition and really need to understand what that means.
EQ: The dynamic certainly changes as well when there’s expectations of profit and return of investments.
Hedges: Well, the other part of this is you can never have enough fans, followers, and friends because you have no idea how many are going to convert into investors. You have to be able to articulate your value proposition and really hone in on why people should invest in you. You have to be able to convince them that you’re going to be able to build this business and be there for the long term, and that you’re going to be able to return their investments. That’s a very difficult thing for most people because they really don’t know how to do that.
We have a very high failure rate in startups in this country. Three out of four startups fail in the first three-to-five years, and that’s not going to change with crowdfunding. That’s why investing in startups is very risky, and startups really need to get more educated before they even attempt to start a business, especially if they’re going to try to take money from the public to fund it.
EQ: Do you have any additional closing comments?
Hedges: I just want to encourage everyone to come to the 3rd Annual Global Crowdfunding Convention and Bootcamp. We’re very happy to say that equities.com is a sponsor this year and happy to have you guys as a part of this. We really feel that there’s a desperate need to educate everybody in the space for it to be viable long term, and this is the time to do it.
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