Wefunder Dominates Equity Crowdfunding
Published on May 24, 2016
By David M. Freedman
¶ When “true” equity crowdfunding launched on May 16, 2016, Wefunder led the new asset class with 10 Title III offerings. Within a few days it added 11 more offerings. No other funding portal that I know of has half as many Title III offerings as Wefunder.
At the end of the first week (on May 21), all 21 issuers had received investment commitments, ranging from 5 to 310 percent of their funding goals, based on the low end of their goals. (All but one offering listed a funding-goal range, typically from $25,000 or $50,000 at the low end to as much as $100,000 or $1 million at the high end, rather than a single dollar amount.) The median on May 21 was 14 percent of the funding goal reached.
Deal Flow: Industries
Based in San Francisco, Wefunder managed to attract a diverse group of issuers with respect to industries and securities. The industries included consumer products (7 offerings), food and beverage (4), health tech (2), entertainment (2), education (2), and biotech, fintech, telecom, and retail (1 each). The offering with 310 percent of its funding goal already met was in the health tech industry.
I was surprised because I expected the typical Title III offerings would be restaurants, community-based retailers, fitness centers, salons, clubs, and other gathering spots that would love to have hundreds or even thousands of loyal customers as investors.
Deal Flow: Securities
The securities offered included common stock (3), preferred stock (1), straight debt (2), LLC units (2), profit sharing (1), and “simple agreement for future equity,” known as SAFE (12). The overwhelming preference for the SAFE, created in 2010 by tech accelerator Y Combinator, is a significant development.
The SAFE is kind of like convertible debt without the debt. Created especially for seed-stage startups, it is essentially a warrant entitling investors to shares in the company (typically preferred stock) if and when there is a future valuation event, i.e., if and when the company next raises “priced” equity capital, or is acquired, or files an IPO. Here are some authoritative articles that cover the basics:
- Y Combinator’s Startup Documents page, which introduces the SAFE, with links to four different versions of the document (with or without caps and discounts).
- The “SAFE Primer,” published by the Cooley law firm. (Click on the “Safe Primer” link from the “Documents Generator” page.)
- “Better SAFE than Sorry?” published in January 2015 by the McCarter & English law firm.
- An April 2015 Wall Street Journal article.
- A 2016 National Law Review article by lawyers Stephanie Zeppa and Andrew Kreider.
Minimum Investment Amounts
Also significantly, the minimum investment amount for 16 of the 21 Wefunder offerings was a mere $100. That certainly makes equity crowdfunding affordable for moderate-income investors. The other minimums were $250 (1), $500 (1), $1,000 (2), and $2,000 (1). The latter was in the entertainment industry.
By comparison, minimum investment amounts for Title III offerings on the SeedInvest portal ranged from $500 to $2,000.
The Pivot to Title III
Before May 16, WeFunder (a Y Combinator alumnus) was strictly a Regulation D platform, i.e., it listed securities offerings for accredited investors only. Over the last three years, the platform helped 110 startups raise $16 million, says president Mike Norman. That includes Zenefits, which raised $2.1 million from 13 investors in May 2013.
Wefunder’s pivot from Reg D to Title III was natural. Founders Norman and Nick Tommarello (CEO) were among those who helped to shape the “crowdfunding exemption” in 2011 and lobbied Congress to pass the Jumpstart Our Business Startups Act, which folded the CF exemption into Title III.
Investing on Wefunder
I registered on Wefunder and made a commitment to invest in an offering of common stock. It went pretty smoothly. A minor glitch was resolved quickly after I called Wefunder and talked with none other than the friendly president.
Income & Net Worth
When I registered, I had to disclose my income and net worth, and Wefunder calculated my annual investment limits for both Title III and Reg A+ offerings. Neither Title III nor the SEC’s rules under Regulation CF require portals to collect such information, as portals may rely on investors’ representations that they are complying with the limits established under Reg CF, unless the portal has some reasonable suspicion that an individual is failing to comply. You might perceive Wefunder’s annual-limit calculation as a service for investors, or you might resent the intrusion on your privacy. I can’t tell you yet whether any other Title III portals collect personal income and net worth information.
Step 1 of the 7-Step Crowdfunding Investment Plan provides a simple worksheet for calculating your annual investment limit, based on your net worth and income.
One thing I did not expect is Wefunder’s policy regarding over-subscriptions. If an offering is over-subscribed, i.e., the issuer raises more money than it wants to accept, earlier investors may be kicked out if there are later subscribers who invested more money. It’s not first-come-first-served. It’s totally up to the issuer to decide who to kick out.
In Title III offerings, Wefunder gets compensated by charging issuers up to 3 percent of the raise; and charging investors a percentage on a sliding scale as well. The more money you invest, the lower your fee percentage. For a $100 investment, you may be charged as much as 10 percent, and that slides down to 5 percent for a $200 investment, and down below 3 percent as you increase the investment amount. I don’t know yet if other portals charge investor fees.
If you’re curious why Wefunder was able to attract so many issuers to its platform, read Amy Cortese’s May 4 interview with Mike Norman on the Locavesting website. Preview: it involves Wefunder founders traveling to 12 cities across the USA, coast to coast, by train over two weeks.
About the Author
David M. Freedman has worked as a financial and legal journalist since 1978. He is a coauthor of Equity Crowdfunding for Investors, published in 2015 by Wiley & Sons.
Categories: Portals & Platforms