Participating in Crowdfunding Hasn’t Been Fun (or Profitable)

Is Regulation CF Relevant Today?

When I pitched Nik on writing a piece on Reg CF, his response was, “I wasn't aware crowdfunding was still much of a product these days.”

He’s not wrong that the extensive discussion of Reg CF by and among venture-capital-backed start-ups has dried up considerably. While many startups were once counseled to do it and enabled by a host of platforms (such as Wefunder, StartEngine, and Republic), you rarely hear of it today.

However, as a general citizen of the Internet, I am constantly being hit up. I’ll buy a product from a company, end up on their mailing list, and be asked to invest in a Reg CF campaign. I’ve been approached by a weather station company, a whiskey company, and a sleep device lately (now you know I snore).

A Brief History of Equity Crowdfunding

Way back at the start of the fintech boom, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law, including its Title III, which created an exemption (Regulation CF) for crowdfunding and enabled startups to sell securities online to the general public. The startup world rejoiced.

After three slow years of rulemaking, the SEC adopted the Regulation CF rules. This led to the first legal crowdfunding, which occurred on May 16, 2016, with an initial limit of $1 million raised per year.

In March 2021, Regulation CF was expanded, raising the cap to $5 million in a 12-month period and expanding the amounts various classes of investors could invest. By August 2023, a milestone of more than $2 billion was reached in seven years.

Notable Wins Were Notched

Mercury* a fintech providing banking services for startups and founders, raised $4.91 million from 2,453 investors on a Reg CF campaign via Wefunder. This crowdfunding round was done in parallel with a major VC-led Series B round (Mercury simultaneously raised $120 million from institutional investors). 

Replit, an online coding platform, turned to Regulation CF to involve its user community as investors. In May 2022, Replit raised $5.24 million from 2,589 investors on Wefunder (hitting the then-maximum cap) . At the time of its campaign, Replit had impressive user growth – reaching 10 million users – and had recently closed an $80 million Series B from top-tier venture capital firms.

Levels, a health and wellness startup offering a glucose monitoring app and device, leveraged Reg CF to accelerate its development. In February 2022, Levels raised $4,999,989 (nearly $5M) from 1,440 investors on Wefunder. Notably, the campaign reached the $5M max in just 6 hours, showing strong investor demand. Following this community raise, Levels achieved significant milestones: it successfully launched its hardware product. Then it secured a $38 million Series A round led by top VC firm Andreessen Horowitz, along with a $7M extension thereafter.

Whether investors writing checks into Reg CF rounds will achieve venture capital-like returns remains an open question. It can take 10 or more years for a venture capital fund to be fully settled (all companies acquired, public, or dead). Knightscope, which makes security robots conducted multiple rounds of crowdfunding and went public on the NASDAQ in 2022. The company is down 99.40% from its all time high, recently closing at $4.36 per share with an $18MM market cap.

Analysts Say There Is More to Come

Reg CF’s growth from its 2018 baseline still outpaced the growth of venture capital – a KingsCrowd analysis showed that from 2018 to 2021, Reg CF investment volume grew ~5.6x while VC grew ~1.4x. Going forward to 2024, Reg CF was projected to retain about a 4.4x increase over 2018 levels (versus 1.3x for VC). This suggests that despite year-to-year fluctuations, the long-term trend is a widening of crowdfunding’s role. Crowdfund Capital Advisors (CCA) reported that the second billion dollars in Reg CF funding came much faster than the first – indicating an accelerating adoption curve. If that momentum continues, the annual Reg CF funding could climb back above $500M and toward $1B per year in the next decade. Some optimistic observers even speculated that equity crowdfunding might one day rival traditional venture capital in scale, though that remains a distant goal.

The Investor Experience is Not Good

Maybe I’ve made bad choices in my Reg CF investments, but I haven’t had the same bad luck in traditional angel investing. While many of my angel investments don’t provide frequent updates (thanks to those who do!), at least I have a line to the CEO or the syndicate lead. I receive my K-1s from fund investing, and I generally have some idea of what is going on. 

With crowdfunding, updates usually slow to a crawl and then … nothing. I was an investor in Southern California’s Modern Times brewery, which went bankrupt. Sad, but worse was when I couldn’t figure out how to get documentation to book the loss on my taxes! Wefunder’s position on my investment is: Once it’s made we have nothing to do with it. (At least it was only $1,000.)

While there are exceptions, such as those I highlighted above, that are effectively traditional venture-backed startups using Reg CF for marketing or a top-off, many Reg CF companies are, let’s say, a bit less professional and don’t appear to understand the duty they owe to their investors. The sums are smaller, given the limits, and the investors are, by definition, less sophisticated.

Moves to Improve the Reg CF Experience

I’ve sworn off Reg CF investments, preferring to make direct investments and invest via syndicates, although I acknowledge many consumers cannot do so. (That might be a good thing.) Should companies want to do crowdfunding, I have a few key suggestions to improve the investor experience (not legal advice):

Many of my angel investments don’t provide all the updates I’d like either, but the intermediaries seem more reliable than the Reg CF platforms, which tend to take the position of “once the deal is done, we have no responsibility.” This does not serve them well as investors will shy away from those platforms, just as a VC fund or syndicate that isn’t communicative will lose its investors, too.

A Path Forward?

Reg CF is a grand experiment that starts looking a lot like a loser for everyday folks, rather than access to high-growth companies. Most Reg CF startups I encounter have had trouble raising from traditional venture funds. While I wouldn’t say that professional investors are always right, they do have more knowledge than your average person and may be right to pass on these investments.

All isn’t lost, however. Reg CF provides a compelling path for consumers who love a company's product, or love taking wild bets, to connect with early-stage companies and for those companies who cannot get a traditional VC to say yes to have a path to funding. Opportunities for leveraging blockchain technology for clear, public ownership records, and increased communication, plus a good outcome or two, could revitalize the sector.

I’ve decided to swear off crowdfunding and refocus on traditional investing: public markets, and accredited venture capital, because of the total lack of communication and infrastructure. I know I might lose money, but I also want to make money (and have a sense of what’s going on). The big platforms need to find a way to better serve their investors, or the demand will dry up.

Matthew Goldman is a regular contributor to TWIF Signals, the Founder of Totavi, a boutique fintech product & marketing consulting firm, and the publisher of CardsFTW & ProductFTW.