Woodie Neiss - Co-founder at Crowdfund Capital Advisors
Celebrating Crowdfunding 10 Years On
Woodie Neiss - Co-founder at Crowdfund Capital Advisors
Sherwood "Woodie" Neiss co-authored the "Crowdfunding Exemption Framework," which became the basis of Title III of the U.S. JOBS Act to legalize equity and lending-based crowdfunding. He is in the forefront of the crowdfunding industry, as the co-founder of Crowdfund Capital Advisors ("CCA").
He is the chief architect of the CCLEAR Regulation Crowdfunding Database that tracks and monitors online security transactions for investors, regulators, platforms and the media. Woodie was selected as a recipient of the Crowdfunding Visionary Award as well as Crowdfund Beat's 2017 Person of the Year.
Prior to CCA, Woodie co-founded FLAVORx, Inc., acted as its chief financial officer, won Ernst & Young's Entrepreneur of the Year award, as well as the Inc. 500 award three years in a row.
What You're Going to Learn
- How crowdfunding legislation was started
- How the JOBS Act energized economic ectivity
- How crowdfunding gives access to capital for business growth
- How the JOBS Act has 3 key parts that affect online investment
- How to get educated raising money using crowdfunding
- The consolidation of the crowdfunding industry
- How the pandemic boosted growth for crowdfunding
- How $15 billion was raised via crowdfunding for real estate
- Why non-real estate crowdfunding grew to $1.2 billion in 2021
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How Crowdfunding Legislation Was Started
Adam Gower: Technically, Sherwood Neiss. But I hope you don't mind if I address you as Woodie.
Woodie Neiss: Go for it.
Adam Gower: I'm dying to hear. Just give me the - you are one of the key people that changed the world of capital formation in America. Tell me the story, just briefly, and tell everyone the story of how you were instrumental in getting the JOBS Act passed before we start talking about your latest report.
Woodie Neiss: Well, I'm an entrepreneur. I had started a company by the name of FLAVORx. Flavored medicines for children. So to be more compliant, raised three rounds of financing, but tried to raise money from non-accredited investors. Mothers loved our product and they always called after their kids took their medicines - said how do I invest? And I said, you can't. You have to be an accredited investor. I was very frustrated with the fact that there were all these people that wanted to invest in my startup, but they couldn't because of laws that were written 80 years ago. So after we sold that, I sat down with two friends of mine from Silicon Valley and we wrote a framework, very much like an exemption to registration, about how you can raise money online as long as you follow a prescribed route. And then we went to Washington, DC. Naively enough, we went to the SEC and we presented it to them.
Woodie Neiss: They thought it was cute. They said, there's a big building with a white dome over it. They pointed in the direction of the Capitol. We went over there and oddly enough, we started walking the halls of Congress as well. And we were able to build by bipartisan support, by just walking straight down the middle of the aisle. We didn't care if you were a Democrat or Republican. We were there to talk about jobs. And at the time, that's what Washington was buying. So, we got a hearing called. The White House, had someone at that hearing. They reached out and the ball just started rolling from there. We did -testified five times in front of the House and Senate, and then we were invited to the White House by President Obama for the bill signing ceremony.
Adam Gower: For the JOBS Act. Really extraordinary - 2012. When did you start that journey actually? How long before the Act was passed?
Woodie Neiss: Believe it or not, it 460 days only. 460 days from when we went to Washington, to sitting at the White House. It was one of the fastest pieces of legislation to go through Congress that had nothing to do with naming a street or road, holiday, that fundamentally changed the securities laws of the United States of America.
The JOBS Act Energized Economic Activity
Adam Gower: What do you think was - what really drove that at the time? Because this was right after - this was as the economy was pulling out of the Great Recession, isn't it?
Woodie Neiss: I mean, you have to go back in time. You know, local economies were really decimated and the government was trying to figure out, how can we get our hands, at the local level of the United States and they realized they couldn't. So, this allowed them to think, well if we can create legislation that will let capital get flowing at the community level, then we've accomplished a few things. We've solved the bottleneck for, how do we create jobs at the local level. We helped re-energize economies, at community level. We've updated these securities laws that people have been complaining about for decades, and we've done it in a way that's prescribed and is a regulatory pathway so we're not going around the regulations. We're working within it.
Crowdfunding Gives Access to Capital for Business Growth
Adam Gower: Now, your focus has been on small business. What has been the impact on small and medium businesses over the last 10 years? How have you seen crowdfunding really impact that sector of the economy?
Woodie Neiss: Well, there's two ways in which it's had an impact. So keep in mind that the JOBS Act passed in 2012 but it took four years for SEC to come out with the regulations, particularly because the first chair, after this passed, Chairwoman White, did not want the legislation to go into effect, and so she delayed. And so we had to wait for a new chair to come in to actually take over. So it took four years for the rules to come out. And when it came out, we thought this was going to be instrumental for startups and small businesses locally across the country. And we've seen that. But it's been fascinating to see a couple of things. One - so we built this database that collects information on all companies raising money online, particularly through regulation crowdfunding. It went live when the industry went live, and I'm publishing an annual report that's coming out at the end of this month as well. So I can see what's happened with over 4,100 issuers across the United States, almost 5,000 offerings. There's been over a billion dollars that has been invested. And we thought that, you know, small businesses and main street ones would be some of the biggest beneficiaries but when you look at the data - and it's fascinating because the data is like a magic ball. Like I sit, and my team, and we sit in front of this, you know, these offerings that come in every day.
Woodie Neiss: And I - we literally like - oh my gosh, we can see what the future is going to be like in 7 to 10 years because we see the seeds of all of these future companies that we're mostly going to be using as products and services down the road. These are all the future VC-funded companies that are getting their start now in equity crowdfunding. So it's been fascinating to see the small businesses, your main street type of retail businesses, leverages, as access to capital, particularly when it comes to pandemic. You know, the banks weren't financing with the pandemic. It's become very hard for you, as a small business, to access traditional capital. So why not go to your customers? Well, this turns out to be a great way in order to do that. So, this has solved the problem there. But with startups, what we're seeing is, Silicon Valley, just sort of disappearing, in terms of its priority. You know, you don't have to be there anymore to start a company that can get funded and then raise VC capital later on. So you're having all these great startups, that are launching these businesses, from Omaha to here in Colorado. Colorado is actually turning out to be a huge place for startups to raise money online. And it's just great to see the democratization of capital across United States.
The JOBS Act Has 3 Key Parts That Affect Online Investment
Adam Gower: Now you mentioned regulation crowdfunding is your focus. Just help me understand the distinction between regulation crowdfunding and some of the other components of the JOBS Act like, 506(c), Reg D 506(c) and Reg A, etc. Just, kind of, paint that picture a little bit.
Woodie Neiss: So there's three parts of the JOBS Act that affect online investment. One's called 506(c), one's called regulation crowdfunding and the other one's called regulation A+. 506(c) takes place of 506(b), and 506(b) says you can raise money from an unlimited number of accredited investors and there's no cap on how much you can raise. You couldn't do general solicitation, meaning you couldn't go out and actively say to people, Hey, we're all on the internet, on radio and newspaper. I'm raising money for my company. Come invest. 506(c) lifts the ban on general solicitation and you can now go out and raise money online from accredited investors. Regulation A+ takes place of regulation A. Regulation A says that you have to have a qualified offering that is approved by each state, so nobody was using it because you've got 50 different states. It's very cumbersome and costly. What Regulation A+ said is, you can do an offering and raise up to $75 million dollars, provided that is qualified by the SEC. So you have to go through quite a costly process. It's cumbersome, in terms of the bureaucracy that you have to go through with the SEC but once you're offering is qualified by the SEC, you can go out and raise money online from both retail and accredited investors, for your company. Regulation crowdfunding, sort of, falls in the middle ground. It allows for retail and accredited investors. You can only raise up to $5 million. There's an unlimited cap that you can raise, but you have to have disclosures. You have to tell people about the company, the stock itself, what it's valued at. There's certain things that you have to have in there that are not necessarily prescribed in like, a 506(c) offering.
Raising Money Using Crowdfunding - Get Educated
Adam Gower: One of the things that you mentioned was education. You've got to educate people. So, just explain that to me a little bit more. What does somebody who is contemplating raising money, using regulation crowdfunding, Reg CF. What are the most important things that they must keep in mind when they get started down this path? I'm pointing at education, but tell me more about that.
Woodie Neiss: I mean, I think the best way for someone that's interested in raising money online is just spend time on the platforms themselves. You know, go to Wefunder, go to SeedInvest, go to Republic, got to StartEngine. They're the biggest. They do about 80 percent of the volume. See the deals that are on there. Study what success looks like by seeing who's raising the most money on there. Look at their disclosures and their disclosures are, their business summary, their offering documents. You know, how they do market sizing. It's really important. You know, you can spend a lot of time learning by taking courses on this stuff, but I think the best way to learn is replicate success. So see what the million dollar campaigns are doing. Take note of how they compare and differ. See what you like about the ones that are doing it right and raising the most and translate that into, you know, what you need to do for your offering.
Adam Gower: Are issuers dependent on the platforms for their raises or are they also doing their own marketing
Woodie Neiss: Oh, this is a self marketing machine. I mean, the platforms play a role. Yes. I mean, think about it. You know, they've got hundreds of thousands of investors now. And so, once you invest in an offering, you're going to get a mailer - an email about some other offerings that are similar to the one you invested in. So, you might invest. But the reality is, when you put one of these offerings up there, you need to actually have a team that's going to be doing marketing for you. So, you need to have a cadence related to that marketing. It has to be social media marketing. It has to be email marketing. You have to be communicating with your current customers about what you're trying to achieve. If you've lined up a roster of investors, you need to circle them before your campaign goes live and be like, listen, the reality is, is the more viral this campaign is, is from the get go, the more likely I'll hit my minimum funding target or hit my maximum amount and I need you to come in from the get go. So there's a lot of education awareness that needs to go into the campaign before it even launches and just planning of that entire, sort of, marketing message throughout the lifecycle of the campaign.
Adam Gower: Yeah, it's a lot of work, isn't it? It's really all about marketing, at the end of the day, successfully marketing.
Woodie Neiss: That's right.
Consolidation of the Crowdfunding Industry
Adam Gower: Now you mentioned that there was no consolidation. One of the challenges for investors is you've got to go to this platform and then to that platform and to this platform. I don't know how many Reg CF funding portals there are these days. Somebody just asked me and I sent them the FINRA list. It gets longer every day, it seems to me. So, is there no consolidation of all this information? And I ask that, in parentheses. What does crowdfund capital advisors think? It seems like this would be a really good opportunity for you.
Woodie Neiss: We have a data feed that we provide to institutional organizations like Bloomberg. And it allows them to see what's going on in the space. Yes, they haven't really started covering it with with any interests yet, but we think we're on the precipice of that. We are also building out an entire platform that allows people to check out valuations and see how valuations compare. So if you're putting one of these offerings together, you can price your company in an area where it would be most likely funded. But you don't want to price the company too high or you'll turn off investors. The consolidation itself, there are a few platforms that are trying to be consolidators for the industry.
Woodie Neiss: I think we'll get there. Everyone says they want to be the kayak of the industry. But, the industry hasn't evolved yet, to get to that. And like I said, if the marketing itself is what drives success of these campaigns, it's not going to be the platforms itself. It's going to be the individual campaign issuers that drive the success. There's an opportunity for people to build the fund so that investors can invest in the fund. And if you don't have time to look across all deals, you can then invest in the fund and the fund will make those calls for you. We might be working on something similar to that. I don't know. You've got to think - what has the traditional public markets done, or the traditional capital markets, better, that haven't been applied to this segment of the market yet? And if it hasn't been applied, who's going to be the one to do it? And so funds, yes, they're coming. You know, consolidators in this space. Yes. They will grow in prominence.
How the Pandemic Boosted Growth for Crowdfunding
Woodie Neiss: So I think as the industry grows, one of the things that we're going to see in 2022 is, last year, there was half a billion, over half a billion that was raised, by over half a million investors. By the way, that half a billion, was more than was raised in the four years prior to that. Okay? In just one year. So this year..
Adam Gower: Why do you think that is? Why did the pandemic have that impact, do you think?
Woodie Neiss: You know, the pandemic was great for online investment. When it hit, we saw a dip. So the markets - the online investment markets slacked. In March and April, it dropped. But then in May, we started to see it go up and it's gone up and up ever since. And there's a couple of reasons why. One - traditional capital markets weren't available for companies to raise money, so you had to look for alternative needs. And that's what investment crowdfunding allowed. Two - you had more people that were trying to figure out, you know, is my company going to be around or do I want to do something else? We've seen this whole, you know, distributed workforce now leaving the workforce altogether to start their own businesses. I think, this is the beginning seeds of a lot of those people that are creating businesses that are going out and getting funding now. So, you know, I think it all plays into the pandemic. Created an opportunity for people to go out on their own. For businesses to look for capital where they couldn't get it before. And this is all leading to more investors coming in, more issuers coming in and the market growing overall.
$15 Billion Raised Via Crowdfunding for Real Estate
Adam Gower: When you were lobbying for the JOBS Act, the concept of real estate - I want to talk about real estate for a few minutes, if you don't mind, and then I do want to talk about your study, your report. It's coming out. It's very interesting. We'll talk about some of the highlights for everybody. But real estate was not a part of the discussion, was it? When you were in Washington. It just never came up. It's fascinating. You know, when you talk about unintended consequences, you usually talk about the negative impacts. But in this case, because every real estate deal starts with a start - basically, you form a company in order to be able to run a real estate deal. By accident, your work allowed real estate developers to also crowdfund their deals. I mean, it has changed, fundamentally changed the real estate industry. So I'm going to ask you something. Would it surprise? What you do with Reg CF, we do with 506(b) and (c), and Reg A. Strictly real estate. It's all we do, is we just look at the real estate deals. We filter for real estate. That's what we analyze. Half a billion in Reg CF. Would it surprise you to know that in 2019, not Reg A crowdfunding, 506(c) plus, actually 506(c) and Reg A was relatively minor, actually.
Woodie Neiss: Sure.
Adam Gower: There's only a few major players that are using it. But in 2019, $7 billion was raised using 506(c). And in 2020, $15 billion, for real estate. That's - thanks to what you did in part over there. Would that surprise you? Isn't that an extraordinary number.
Woodie Neiss: I mean, it's a huge number. Yes. It doesn't surprise me only because real estate has been the asset that people have loved since the beginning of time, it seems. And you know, there's a lot of security in the fact that, you know, if the deal goes under, you liquidate the asset. You can do that a lot easier with real estate than you can with a startup or a software technology company. You know, so I get that. Yeah. You know, and I love it. I think, you know, there's a bunch of rundown homes all over America that we could just turn around right now if we just get everyone focused on building these local community rehab centers that are funded by the local community and we fix up all these, you know, bad real estate areas and flip it. Yeah.
Report Shows non-Real Estate Crowdfunding Grew to $1.2 Billion in 2021
Adam Gower: Tell me some of the highlights. I've actually got this wonderful email that you sent me. It's what stimulated me to give you a call. It's amazing. You've got all these what, you've got all these charts and maps. Give us some of the highlights of what you've discovered and what folk can discover if they buy your report. In fact, I'm just noticing now. I should have bought it before. I've noticed the price keeps going up. So you've got to move quickly if you want the bargain price. Otherwise, it's going to be, you know, it's going to cost you more money. Tell me some of the highlights of what the report has revealed.
Woodie Neiss: I mean, I think the biggest highlight is, its past a billion dollars in funding. About $1.2 now, billion, altogether since it launched. Half of that was raised last year. And next year we're going to raise a billion more. So you can just see - last year I said that we were at the tipping point. So, we're in the tipping point. You know, we're past it now, and I think we're going to benefit from that. We've had about 1,400 offerings last year. I think there'll be 2,500 this coming year. What's fascinating is the success rate in investment crowdfunding. Its higher than you're going to find anywhere else. So success rate is measured by companies that exceed their minimum funding target. It is, last year, it was 72%. So almost 3 out of every 4 offerings was successful in hitting their funding target. So if you're an entrepreneur and you're like, I need money, well you can sort of feel confident knowing that if 3 out of 4 are being successful. You can might be one of those three.
Woodie Neiss: Now here's the reality. The 1 out of 4 failed miserably because when you look at the capital that's committed, last year of the, you know, all the money that was raised, I think, you know, 96% or 97% of it, went to the funded deals. So the bad deals, that were out there, that 1 out of 4, hardly had any money committed to them. So they were poor at marketing. They were poor at execution. It was probably a poor company to begin with. You don't want to fall into that bucket of companies when you're out there. So, you know, I think that's a fascinating thing about it as well. Average raises last year jumped to an all time high of 450,000. Yes, you can raise up to $5 million, but you need to be realistic. You're not going to raise five million. You have to scope out what it is that you need the money for and let your investors know that. You know, and I just think we're going to see more intermediaries come into the space. The million dollar plus offerings. We had more of that last year than we ever had. Now we've got several $5 million companies raising money online. I think, you know, we touched on it earlier, we talk about it in the report. Valuations are a key thing. In the report, we dig into valuations by industry. We dig into valuations by region and by state. And so, when you're looking at pricing your company, your stock, you need to take all these variables into account because you don't want to be an outlier.
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