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An Exploratory Analysis of Title II Crowdfunding Success Proceedings of the 50th Hawaii International Conference on System Sciences | 2017 An Exploratory Analysis of Title II Crowdfunding Success Abstract rules amending existing exemptions from registration The passage of the Jumpstart Our Business and creating new exemptions for certain types of new Startups Act (JOBS Act) ushered in a new wave of venture fundraising [33]. Title II of the JOBS Act equity crowdfunding in the United States. Title II of the “directs the SEC to remove the prohibition on general JOBS Act aims to make it easier for new ventures to solicitation or general advertising for securities raise funds from accredited investors. The number of offerings relying on Rule 506 provided that sales are Title II crowdfunded projects is growing rapidly. limited to accredited investors and an issuer takes Based on data for U.S. online 506(c) offerings across reasonable steps to verify that all purchasers of the 17 leading platforms, more than $1.27 billion in securities are accredited investors. By requiring the capital was committed to Title II projects through SEC to remove this general solicitation restriction, 2015. Our analysis of Title II offerings from these Congress sought to make it easier for a company to platforms reveals that real estate ventures are the find investors and thereby raise capital" [34]. single largest category with more than $316 million in Accredited investors include individuals with income committed capital, yet only ~34% of the crowdfunded in excess of $200,000 per year for the last two years or real estate offerings receive the full amount of capital net worth (excluding the primary residence) over $1 sought. Text mining of the real estate project million [15]. descriptions reveals the critical facilitation role The SEC’s final rules under Title II of the JOBS played by the successful crowdfunding platforms in Act became effective on September 23, 2013. Based reducing the information asymmetry between the on the data we examined from 17 leading platforms, entrepreneurs and investors by performing due more than $1.27 billion was raised under Title II diligence on the potential Title II investment through 2015 [13]. This is a rapidly growing area of opportunities. finance, yet there is very little published research on Title II crowdfunding [37]. This is the research gap that we begin to address with the present study. The broader goal of our study is to understand how 1. Introduction Title II crowdfunding fits into the larger crowdfunding landscape. We seek to understand the types of business Crowdfunding is commonly defined as “an open ventures that have been successful in raising capital call, essentially through the Internet, for the provision under Title II. To address these questions, we explore of financial resources either in the form of donation or a dataset containing 6,234 Title II crowdfunded in exchange for some form of reward and/or voting projects aggregated across 17 crowdfunding platforms rights in order to support initiatives for specific between September 23, 2013 and December 31, 2015. purposes” [5]. Crowdfunding is a natural outcome of Our analysis reveals that real estate projects are the the convergence between microfinancing and single largest category among Title II ventures, both in crowdsourcing, but the development of crowdfunding terms of the number of offerings as well as amount of in the United States was stymied by the legislature that capital commitments. While real estate is the dominant imposed strict rules on public fundraising for business category, only ~34% of the crowdfunded real estate ventures. The Securities Act of 1933 and the Securities projects reached their target. We report the results of Exchange Act of 1934 (Securities and Exchange Acts) text mining performed on the project description data forbade public solicitation by new ventures without a that provide insights into the factors that might affect prior registration of the securities being offered and real estate project crowdfunding success. the provision of detailed audited financial statements The remainder of the manuscript is structured as [17]. follows. First, we present a brief introduction to The Jumpstart Our Business Startups (JOBS Act) crowdfunding and explain the key regulatory changes was passed in 2012 in response to the financial crisis introduced by the JOBS Act. Next, we discuss prior of 2007-2008, which made it even harder for new crowdfunding research related to our effort. We ventures to raise capital. The JOBS Act was designed address the methodology of our study, and we present to address this challenge by requiring the SEC to adopt the emergent insights from the analysis. We conclude URI: http://hdl.handle.net/10125/41684 ISBN: 978-0-9981331-0-2 CC-BY-NC-ND 4314 with the discussion of our contributions to theory and register the securities and file extensive financial practice. disclosures prior to the fundraising effort [17]. The securities laws and rules also impose periodic 2. Crowdfunding overview reporting requirements on the publicly-traded companies, creating a significant compliance cost and The core function of crowdfunding is to solve the burden for these companies and erecting a barrier to common need for capital among new business public funding of certain entrepreneurial ventures. ventures and existing small businesses. Crowdfunding In the next section, we highlight the key themes in as a term covers a very broad spectrum of practices crowdfunding research and focus on prior studies that that allow entrepreneurs to raise capital. Four distinct shed light on certain factors that may positively types of crowdfunding projects are generally influence success in debt and equity crowdfunding. recognized, based on what the investors or donors receive in return for the funds that they provide to the 3. Crowdfunding-related research entrepreneurs: donation-based, reward-based, loan- based, and equity- or securities-based [25]. To One common goal of crowdfunding-related illustrate the differences among the four types of research is to understand the various factors that crowdfunded projects, we will discuss some influence crowdfunding success. Given the relatively prototypical examples of the crowdfunding platforms recent emergence and rapid evolution of equity corresponding to each type. crowdfunding as a phenomenon, the body of research GoFundMe.com is an example of a donation-based remains relatively limited [6]. Much of the research on crowdfunding platform. The GoFundMe platform success in equity crowdfunding has been done outside facilitates charitable donations to causes, projects, or of the United States. Australia was a pioneer in equity people in need, with GoFundMe serving as the crowdfunding. The Australian Small Scale Offering intermediary in the transaction. The donors who Board was established in 2005 as the first platform of provide the funding have a choice of which projects to its kind brokering fundraising by small businesses fund. GoFundMe campaigns include fundraising [32]. The United Kingdom legalized equity support for: individuals struggling with disease, crowdfunding in 2011 which led to the emergence of disaster relief, memorials, and various educational several equity crowdfunding platforms [3]. initiatives. Importantly, the funds provided are A study of factors that affect successful donations and are not paid back to the donors. crowdfunding in the Australian Small Scale Offerings Kickstarter exemplifies reward-based Board showed that human capital (number of board crowdfunding. Entrepreneurs and artists alike can post members) and the size of the equity offering (negative their projects on Kickstarter and solicit funding. The coefficient) were significantly correlated with the rewards available to potential backers vary by project amount of funding received. Social capital (non- type. The backers of an independent film may be executive board members), intellectual capital invited to a private screening. The backers of a new (granted patents), number of staff, government grants, electronics device or idea may be rewarded by getting and number of years in business did not have a discount and an early delivery of the planned new significant relationships with the amount or speed of product. Some reward-based crowdfunding projects the capital raise [3]. The negative relationship between may also include royalty-based crowdfunding of the amount of requested funding and the likelihood of artistic ventures. For example, BandBackers.com meeting the funding objective is consistent across allows investments in music projects with a royalty on equity- [3] and reward-based platforms [11]. The the proceeds as the reward to the backers. higher the amount sought by the entrepreneurs, the less Peer-to-peer (P2P) lending exemplifies loan-based likely they were to receive the full commitment of crowdfunding. LendingClub, SoFi, Prosper, Karrot funds. and many other platforms in the P2P lending space Focusing on the dynamics of fundraising, a study connect potential investors with individual borrowers. that followed 492 projects on a crowdfunding platform The unsecured personal loan space is growing rapidly. in Switzerland showed that the first days after a project LendingClub reports having issued over $8 billion in is announced serve as a good indicator of the project’s unsecured personal loans in 2015 [21]. chances of success. Successful projects gather support Equity-based crowdfunding is a relatively new quickly, and the early support translates
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