REGULATION CROWDFUNDING:

1 Year In Force

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 Regulation Crowdfunding: 1 year In Force

1. Introduction3

2. Small Business Economy..5

3. Everyone Can Be An Investor..9

4. Regulation Crowdfunding Performance...13

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 1. Introduction

The first generation of crowdfunding platforms were reward-based such as Kickstarter

and Indiegogo. They opened doors for everyone to participate in small business
funding in a similar manner as Kiva started micro-lending for entrepreneurs in
developing countries and AngelList created syndicates for angel investors. May 16th,
2016 was a historic moment and the beginning of a new era for crowdfunding - an
inclusive crowdfunding economy where investing in private companies would no longer
be exclusive to the rich. Title III - the new addition to the Jumpstart Our Business
Startups Act (JOBS Act) - gives the opportunity to every single US Resident to invest in
private companies.

Numerous predictions were made about the JOBS Act Title III, after one year, the
Regulation Crowdfunding is actually looking pretty good. According to Woodie Neiss,
the father of the JOBS Act, things are only going to get better, especially since:
There is already a fix that passed the US House of Representatives. This may ease the
cost of putting one of these offerings together which includes accountants and lawyers
to social media experts and videographers.

Regulation crowdfunding still has a long way to go - but an industry that started from
zero on May 16th and which has now raised more than $35 million in capital should be
viewed as a win, especially given that this type of capital raising has yet to catch on
with mainstream Americans and founders alike. Trends are encouraging and over time
we will see the crowdfunding industry become the go-to funding channel for
companies and investing channel for majority of investors.

Under Title III, companies can raise up to $1 million. Acknowledging that $1 million
doesn't go as far as it once did, this phase is seen as the connective tissue that will
make the whole crowdfunding system come alive. All signs point to an unstoppable
momentum for crowdfunding to reach its potential as a game-changing financing
mechanism.

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 Small Business Economy
A small business: a company with 500 or less employees

28.8M Small Businesses 99.7% of all US Businesses

in the US
Outnumber corporations by

1162 to 1

Improved Employment
56.8M Small Business Employees

48% of US Employees

Generate income for nearly 120 Million of Americans

Small Business Funding 2016

Other Got bank loans

26% 28% have never explored
87% alternative funding options

$35,000,000
Regulation Crowdfunding
investments into startups and
Friend & Family small business in just 1 year
21% Used credit card
25%

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 2. Small Business Economy

We live in the world of innovation driven by small companies. Crowdfunding has been
an alternative solution for both startups and small businesses. Understanding the
differences between startups and small businesses can help identify the best type of
crowdfunding - equity or debt/revenue sharing - to fund it.

Startups and small businesses are not smaller versions of large corporations. According
to serial entrepreneur and Silicon Valley legend Steve Blank, a startup is a temporary
organization designed to search for a repeatable and scalable business model. Their
purpose is to prove the business model and do so quickly. Startups are supposed to
find a solution that will have a significant impact on the current market and the industry.
Small businesses are the ones driving and sustaining the market and industry itself.

The other differentiation between startups and small businesses is the vision of the
owner. While both types of owners want to be their own boss, the startup founder has
a big vision to take over the world. From day one of the startup existence, the team is
aiming to grow into a large company that has come across the next big idea, that will
shake up the industry, take customers from existing companies, create a new market
and change the world forever. Small businesses on the other hand are independently
owned and operated entities which, according to the U.S. Small Business
Administration (SBA), are not dominant in its field.

What does that mean on the risk side? Startups have to find the market fit for a new
concept which includes ensuring that the market and consumer are ripe enough for the
solution. Small business has to enter the existing market, usually highly saturated, and
secure its niche and customers.

To sum up, the driving force behind the two types of small companies is different. The
startup founder has the intent to disrupt the market with a scalable and innovative
business model. The intent of the small business owner is to be his/her own boss and
secure a place in the market.

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What unites both types of entrepreneurs is the growing funding gap. Before startups
were going after VC and angel money and business owners were funding their
companies by credit cards and bank loans. So why is the gap growing? The
entrepreneurial boom led to a tremendous number of new startups popping up, while
the number of exits and funds didnt manage to catch up. In the end, the success rates
are low: 9 out of 10 startups fail while requiring a high amount of capital and high
number of trials and errors. For small business capital things became more rigid after
the financial crisis of 2008. The lack of funding doesnt allow these companies to
sustain the growth and keep up with expenses what leads to nearly 50% of them failing
by year 5 of their existence.

The lack of funding for private companies led to a solution by entrepreneurs

themselves - crowdfunding. Enables by the Jumpstart Our Business Startups Act in
2012, everyday people are now enabled to help finance the companies. To compare
the numbers, only 1% of US population is represented by accredited investors and
venture capitalists (so those who have an annual income of at least $200,000 were
legally allowed to invest in startups and small businesses). On top of that, only approx.
10% of those actually made investments into the small companies. Most of the early
stage startups and small businesses are actually funded by friends and family. The ratio
of angel funding to Friends & Family is approximately 20% to 80%.

Since its start, crowdfunding has evolved from donations to rewards to lending and
now equity. According to numerous researches and industry statistics, the following
ways of crowdfunding fit different stages and types of businesses:

Donation is for non-profits and social causes;

Reward is for arts, charity and new products and services;
Debt is for small and medium businesses and product startups (B2C);
Equity is for idea stage and B2B startups.

Why are people ready to support the entrepreneurs? The reason is because small
businesses and startups drive the economy and change. Small businesses make up for
99.7% of all US businesses and employ 48% of the US workforce. Chances are, you and

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most people you know might be either running or working for a small company. On top
of that, these companies generate income for nearly 120 million of Americans. Small
businesses are the ones driving the innovation as well, since it is easier to test and
iterate and test again when you are a small startup as compared to a big corporation.
As the result, small businesses create 13x more patents per employee than large
patenting companies.

Small businesses and startups also drive diversity. In fact, immigrants founded 51% of
the US billion-dollar startups. Most of the small businesses and startups have a diverse
founding team and are more open to hiring people with different cultural backgrounds.
The number of businesses ran by women has been growing as well. There are
approximately 9 million women-owned companies registered in the United States.

Startups and small businesses are also more connected to their community and tend to
solve real-life problems. A lot of them are now transitioning into a new type of ventures
called benefit corporations which focus to creating positive impact on the world and
community before caring about generating high revenue. This impact includes hiring
those who are hard to hire, donating product and profits to the causes and community
as well as creating environmentally friendly solutions and products.

The love to local and small business is quite simple - they tend to build their vision and
mission to reflect their values with are shared by their consumers. And turns out that
consumers tend to reward conscious businesses, and crowdfunding becomes the
solution to the business funding gap.

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Investing Is A Right, Title III
Not A Privilege JOBS Act

BEFORE: Only 1% of US population could invest in private businesses

AFTER: Now nearly 240 Million people can finally invest

On average, a millionaire
has 7 sources of income

MAKE MONEY WORK FOR YOU You don't need much money to start

A regular latte or cappuccino costs around $4. Investing that coffee money even
at a regular return rate of 8% could give you a tangible win.

* return of 8% over 5 years = $584 extra

$4 per day = $1,460 a year
* return of 20% over 5 years = $1,460 extra

What is the best strategy to follow when you want to put money
into crowdfunding deal?

Use investment structures you understand and feel comfortable with

Invest in business owners you trust and believe in
Invest in products or services you would use yourself
Invest in companies which get you excited to be a part of
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 3. Everyone Can Be An Investor

We live in the age where personal freedom is highly valued. We want to take control of
our work and time as well as of our finance. People believe in people, not banks. This
led to creation of the shared economy. The spread of web technologies, which foster
mass collaboration, is creating a variety of new tools. These tools enable individuals to
work together online in huge groups to achieve mutual goals. There are approx. 1,250
crowdfunding platforms worldwide and their number will dramatically increase with the
JOBS Act Title III fever. Crowdfunding and other forms of alternative finance are quickly
redefining capital market as we know it, by granting investors unprecedented access to
previously exclusive markets. And Title III expands the crowdfundings reach even
further to include non-accredited investors.

Now everyone can try to make money by investing into the startups and private
businesses. To protect the new and less savvy investors from losing all the money, the
regulations set clear limits, balancing the maximum amount that can be invested in a
12-month period by each investor. Both accredited investors and non-accredited
investors are allowed to invest in Title III crowdfunding offerings - subject to limits
based on their income and net worth. Individual investors, over a 12-month period, can
invest in total across all crowdfunding offerings up to:

If the lesser of your annual income or net worth is less than $107,000, than you
can invest the greater of $2,200 or 5% of the lesser of your annual income or net
worth.
If both your annual income and net worth are equal to or more than $107,000,
you are allowed to invest up to 10% of the lesser of your annual income or net
worth.
No one can invest more than $107,000 in the 12-month period across all the
Regulation Crowdfunding deals.

When it comes to investing, there are two main options: equity and debt. In equity-
based crowdfunding, investors fund a business in exchange for ownership shares in the
company. In this case, they usually get a return only when and if the business is

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acquired or goes public. Unfortunately, statistics shows that only 1 out of 10 companies
get acquired or go public - in investment slang it is called an exit. On top of that,
there is always the chance that the value of purchased price could be below the
investment price. In this case, even if the company gets acquired you might get less
than your original investment.

The second investment option is debt. This type of investment can take different forms
including loan and revenue sharing, providing alternative to the investor. Instead of
owning a share of the company's stock, investors receive regular payments. In a
standard loan structure, those payments amounts are usually fixed. In revenue sharing
however the repayments are based on the company's revenue. In other words,
investors lend money to the business owner in return for a percentage of the revenues
that the company makes.

Smart investors tend to diversify their portfolio. This means to make multiple
investments to spread the risk. This also includes investing in not just more than one
company but also in different structures, including both equity and debt in your
portfolio. While equity gives you a chance to participate in the one-time big win
payout if the company ever has a big exit, the best part of debt investments is that
there is no need to agree on a valuation of the business and the returns come in
sooner in multiple payments.

So how does investing affect your budget? The truth is, you dont need a lot of money
to start making money work for you. For example, majority of us love coffee. A regular
latte or cappuccino costs around $4. Buying one cup of coffee per day will cost you
$1,460 each year. Just from investing your coffee money into a regular return of 8%,
you will be able to turn it into nearly $22,000 in 10 years. And the earlier you start
investing, the more you will be able to save for the retirement. Dont be afraid to make
your money work for your comfortable future.

What is the best strategy to follow when you want to put money into a crowdfunding
deal?
Use investment structures you understand and feel comfortable with;

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 Invest in business owners you trust and believe in;
Invest in products or services you would use yourself;
Invest in companies which get you excited to be a part of.

Why is crowdfunding getting so popular? It is quite simple: because people want to

gain financially, to influence the products and services they consume and support
solutions that change peoples lives. Potentially, the financial returns from investing into
crowdfunding deals can be above your savings account at the bank. On top of that,
you get to help by creating more jobs and having a positive impact on your community
and countrys economy. Comparing to other investing options, crowd investing gives
individuals an opportunity to take control over the decision-making process. They can
see information about the business itself, including the past performance and plans for
growth, they also get the opportunity to learn more about the business owners to
whom they are about to give money to.

The Regulation Crowdfunding rules also require every platform to provide investors
with a channel for discussion. This helps create a community and active communication
which plays a vital part in helping investors not only get answers on specific questions
from the business owners but also to exchange opinions and expertise around specific
deals.

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 Crowd Investors Trending
Crowdfunding
Timeline Investors give on average $833
per deal
Average number of investors per
deal is 331
2005 As of May 1, 2017, crowd
Kiva starts committed $37,560,642
2006
micro-lending Top Investing States:
Michael Sullivan
pens the word
CA $14,777,990
2008 "crowdfunding"
Indiegogo starts Lending Club and
reward Prosper start debt
TX $5,314,579
crowdfunding crowdfunding

2009
Paul Spinrad MA $2,922,430
2010
introduces the
GoFundMe
concept of business NY $2,084,080
starts donation
crowdfunding
crowdfunding

2011
Crowdfunding
Regulation D
Campaigns Success
2012 Equity Crowdfunding
President Obama Average campaign raised
signs the JOBS Act $227,000
into law 2013 Out of total 265 campaigns, 138
already closed the round
Title II of the JOBS
Top funded campaigns:
Act - accredited
- Hopsters $1,223,908
2015 investors crowdfunding
- Gold Board $1,200,726
Title IV of the JOBS - Legion M $1,158,451
Act (Reg A+ or Mini - Beta Bionics $1,145,905
IPO) 2016 Top Fundraising States:
Title III of the JOBS
Act - accredited
CA 108 NY 21
investors crowdfunding

*The JOBS Act - Jumpstart Our Business Startups

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 4. Regulation Crowdfunding Performance

According to the recent Small Business Credit Survey, approximately 50% of small
businesses didn't receive any financing they applied for in the first half of 2014. This
number keeps growing and the funding amount is growing at a far lesser pace and this
causes the small businesses to be underfunded. This is partially happening because
banks have retrieved from this segment because issuing loans to small businesses using
the traditional underwriting model is expensive, especially after the 2008 crisis. The VC
and Angel investment industry is also moving towards the later stage companies due
to the overpriced startups that failed to generate money and have an exit. This leaves a
massive amount of unfulfilled companies both in the small business and startup space.
The missed loan opportunity is estimated at $96.5 billion in Q4 2015.

Small companies made for 99.7% of the US businesses, they generate jobs and drive
the economy. So how much funding comes from Wall Street and the 1% of wealthy
individuals into the small business economy? Of the roughly 8 million of people who
could be accredited investors, there are only 370,000 that are actively investing in
startups and small businesses. The Regulation Crowdfunding enables the 240 million to
finally be able to invest and support the businesses they believe and the potential to
get a financial return. From exclusivity of Wall Street to every street in America.

The average crowdfunding donation was around $88.22 per person. Interestingly
enough, the Regulation Crowdfunding investors started of, according to the WeFunder
co-founder and CEO Nick Tommarello, with 80% of the investments being under $250.
The average daily capital commitments were trending at about $96,000 per day
already in the first 3 months. By the end of 2016 and through the first months of 2017 it
grew to the average crowdfund investments of $833 per person. Total contributions are
reaching $40 million.

The prediction in Goldman Sachss report last year seems right on point by labeling
crowdfunding as "potentially the most disruptive of all the new models of finance.
Experts say that the volume of crowdfunded capital will keep growing over the next

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years and according to the World Bank, crowdfunding investments will be a $96 billion
a year market in developing countries alone by 2025.

Regarding deal flow, as of May 1, 2017, there were 265 Regulation Crowdfunding
campaigns by the companies. The types of companies offering securities under Reg CF
are impressively diverse: from high tech startups to fashion and sports. Food &
Beverage ($5,109,653) and Wine & Spirits ($5,481,975) are capturing the most money
so far. When looking into the data regarding the team size, you can see that the bigger
the team, the bigger is the fundraising average. 79% of the successful companies were
founded by teams of 2 or more. Teams of 5 founders had the highest average raise at
$408,000 while individual founders raised $353,000.

The interesting trend around who can attract investment was discussed in a recent
study from a UC Berkeley-led team that found that women tend to do better when it
comes to crowdfunding. Online fundraising settings pose an interesting empirical
puzzle: women are systematically more successful than men, an outcome contrary to
offline gender inequality," the authors explain. "We propose that this outcome is
partially explained by linguistic differences between men and women in terms of
language they use, and results support our theory, suggesting a link between micro-
level linguistic choices and macro level outcomes: the institution of crowdfunding may
reduce gender inequalities in the fundraising arena by benefitting the communication
style of women. When looking at success percentages, campaigns run by women-only
founders had an 87.5% success rate compared to 41% for men-only founders. Minority-
only founders also had a higher success rate (46%) than men-only founders.

The surprising fact though is that over 80% of small businesses have never considered
alternative funding options. This is a new way to do an old thing, said Sherwood
Neiss, a principal at Crowdfund Capital Advisors. Neiss had helped lobby Congress for
passage of the JOBS Act and is a leading advocate for crowdfunding. Entrepreneurs
have always raised money from people they know, usually based on pre-existing
relationships. If to choose the new options wisely, it can definitely offer not just
business capital but also boost sales and help build loyalty relationships with people

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supporting the business. For business owners willing to look beyond traditional sources
of capital, crowdfunding can offer another strategy to growth.

Alternative funding platforms are in a position to capitalize on small business

underfunding and replace the existing traditional sources like banks. These platforms
are not scared to find solutions using the new legal opportunities and innovative tools
like machine learning to provide more financial freedom to a wide array of small
businesses and individuals quickly and efficiently. The alternative lending companies'
share of the small business lending market in the US is estimated to reach 20.7% by
2020.

Bright Future
The exciting part about the Regulation Crowdfunding space is that it is still shaping up.
In addition to the Crowdfunding Fix proposal which is aimed on changing the
fundraising limits from $1,070,000 to $5,000,000, there is also a new Invest In America
Act Bill under review. The new bill is aimed to reward the individuals investing into the
small business and startup economy and to give the crowd investors a tax credit equal
to 15% - 50% of the aggregate amount of crowdfunding investments made. On top of
that, investors might even be able to deduct the entire amount of their investment in
the event such investment becomes worthless. All this might reduce the risks of
investing into early stage startups and small businesses using the Regulation
Crowdfunding rules. The tax deductions will be connected to investments into
companies that demonstrate the potential for increasing jobs and capital investment
within the US.

It is clear that the new rules need a wider support framework and some edits to the
regulations based on the real statistics we are seeing. But for only 1 year in action, the
current traction is encouraging. It also helps build a new type of relationship between
businesses and consumers - individuals can finally feel as a part of the businesses they
support. This also incentivizes the business owners to listen to the customers and build
a trustful relationship with them.

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Sources:

1. https://blogs.wsj.com/digits/2016/03/17/study-immigrants-founded-51-of-u-s-billion-dollar-
startups/
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challenges-accessing-working-capital-according-to-can-capitals-small-business-health-
index-300316283.html
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in-2016/
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crowdfunding-portals/

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21. https://venturebeat.com/2017/01/11/heres-how-regulation-crowdfunding-performed-
in-2016/
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