This blog post was written by Alec Miller, Manager, Measured Innovation at TechAlliance.
Crowdfunding is a new and constantly evolving space. Not only are there new crowdfunding portals and tools popping up regularly, there are also significant research and regulatory developments too.
On the research front, a new report by a group of researchers from France titled “Launch Hard or Go Home!” argues that it is possible to predict (with 76% accuracy) whether or not a Kickstarter campaign will be successful within the first four hours after launch. Using a formula that combines momentum towards a campaign’s funding goal as well as social media traction (measured via Twitter activity), researchers were able to improve the forecast accuracy of previous measures which were based purely on static attributes of a campaign (i.e. attributes available at the time the campaign launches).
There were also some interesting stats compiled by the study (using Kickstarter data from September 2012 – May 2013) which I’ve excerpted below:
It’s important to note that this research only applies to Kickstarter. The findings would not apply, for example, to a site like IndieGoGo which does not have an “all-or-nothing” funding model, but rather a flexible funding model which does not create the same sense of urgency that a Kickstarter campaign does.
This study shows that there is a lot of work an entrepreneur needs to do before they launch their campaign. Kickstarter (or any crowdfunding site for that matter) should not be seen as a panacea for entrepreneurs who have been unsuccessful raising funds elsewhere, but rather, as a competitive fundraising platform where social engagement and effective communication are just as important as the “wow factor” of the product or service being pitched.
On the regulatory front, the U.S. Securities and Exchange Commission (SEC), last week released their proposed regulatory framework for equity-based crowdfunding. Equity-based crowdfunding is different from sites like Kickstarter or IndieGoGo in that these latter two sites target prospective customers, whereas the former model targets prospective investors/owners.
Because the stock market is such a highly regulated industry and equity-based crowdfunding such a new trend, it’s not surprising that the SEC has taken almost two years to release these proposed rules. Although the new rules will surely generate criticism, the fact that the SEC has clarified its position on the issue improves regulatory visibility which allows start-ups and their supporters to plan more effectively.
Rather than create my own summary of the proposed regulations (of which there are many), I wanted instead to focus on one particular stipulation that could be relevant to Canadian companies. In a recent post on the National Crowdfunding Association of Canada’s (NCFA) website, lawyer John Wires wrote:
“Page 216 of the SEC proposal opens the door to permit “non-resident funding portals” (read Canadian portals) to have their issuers (read Canadian companies) solicit equity investments from US investors. However, in order to do so, the SEC is calling on foreign regulators (read the Canadian Securities regulators; OSC, FCAA etc.) to enter information sharing arrangements (I suppose a form of joint regulation). A call that should be acted upon by Canadians.”
Whether or not this call for joint crowdfunding regulation between Canada and the US materializes, it seems apparent that securities regulators in Canada will be under increasing pressure to pass some kind of comparable legislation that reduces barriers to capital formation for small businesses.
Additional Crowdfunding Links/Resources: