PENSCO Insights:

2015 PENSCO
Crowdfunding ReportUpdate: June 2015
Since this report was published, the U.S. Securities and Exchange Commission has created new rules thatmake it easier for private companies to offer the public (not just “accredited investors”) the opportunity toinvest in their securities. The SEC acted as a result of Title IV of the Jumpstart Our Business Startups (JOBS)
Act, which mandated this expansion of “Regulation A.” The new rules took effect on June 19, 2015 and are
now being called “Regulation A+.”
Under Regulation A+, any investor could conceivably participate in a private equity offering by “self-certifying”
their net worth and income. No supporting documentation is necessary. This is a far cry from the sometimes
onerous and expensive process for certifying accredited investors.
Within Regulation A+ there are two tiers:• In a “Tier 1” offering, issuers can raise up to $20 million and they still have to apply for clearance fromeach state in which they sell securities. That used to be a deal breaker for most companies, but now
they can use a coordinated review program to submit a single application to 46 states (through the North
American Securities Administration Association).
• The “Tier 2” option is completely new. Often referred to as a “mini-IPO,” this option allows issuers toraise up to $50 million nationally by making a single application to the SEC. The reporting requirements
are much greater for Tier 2 offerings and include audited financial statements. There are also limits on
how much self-certified (non-accredited) individuals can invest in a Tier-2 offer: up to 10% of their net
worth or 10% of their net income, whichever is greater.
The new provisions mean equity crowdfunding has become a real possibility for many more companies
and investors. However, Regulation A+ is too new to have affected the market yet so this report focuses onwhat is available today for accredited investors. As issuers begin to take advantage of Regulation A+, similar
opportunities are likely to become available for non-accredited investors. Regulation A+ offerings may even
begin to replace broker dealers, bank loans, venture capitalists and hedge funds as a source of funding insome cases.
PENSCO works with both sides of the market – issuers and investors. We help individuals invest in
non-traded alternative assets using their retirement accounts. And we help those trying to raise capital –including entrepreneurs, private fund managers or private businesses – to make their offering eligible forindividual retirement investors through an IRA.

2

Table of Contents
Crowdfunding Redefined....................................................................................................4
The new wave of capital raising in 2015

Strong Finish.......................................................................................................................6
Quality drives success in sports and entertainment deals
Andy Brusman, Alchemy Global Holdings, LLC

New Wings for Angels........................................................................................................9Accredited platforms and other innovations create opportunity
Marianne Hudson, Angel Capital Association

Local Money......................................................................................................................12
Community financing for the 21st century
Kim Kaselionis, Breakaway Funding

Welcome to the Private Capital Markets.........................................................................15
Rory Eakin, CircleUp

The Future of Investing is Now........................................................................................18
The evolving private market is poised for growth
Heather Schwarz-Lopes, EarlyShares

Act like a Public Company................................................................................................21
How to create greater demand for Rule 506(c) offerings
Thomas Carter, Equity Round

Strong Pulse......................................................................................................................24
A booming sector fuels healthcare crowdfunding
Scott Jordan, HealthiosXchange

Blockbuster Alternatives.................................................................................................27
Film financing finally opens its doors
Gregory Parker, IndieCrowdFunder.com

Game Changer..................................................................................................................30
Crowdfunding opens unprecedented access to real estate
Carolann Dekker, LendZoan

Less is more......................................................................................................................32“SPVs” unlock startup opportunities
Alejandro Cremades, Onevest

A Modern Portfolio...........................................................................................................35
Diversification through early stage investing
Kevin Smith, SEEDCHANGE

The Institutional Crowd....................................................................................................38
Real estate crowdfunding offers institutional investment opportunities
Jon K. Haahr, Robert E. Lee, Jon K. Haahr Jr., Silver Portal Capital

Closing...............................................................................................................................41
Endnotes............................................................................................................................42
This publication is being provided for informational purposes only and PENSCO does not endorse any viewpoints contained therein.
Participants of this publication submitted content on their own volition, without solicitation from or compensation by PENSCO.
See full disclosure, on pg 40.

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PENSCO CROWDFUNDING REPORT

3

Crowdfunding Redefined
The new wave of capital raising in 2015
Crowdfunding. Equity crowdfunding. Crowdinvesting. Peer-to-peer lending. What do theseterms mean? How do they help investors locate and access opportunity? These are two of
the questions that we hear regularly from clients who are looking to diversify theirtax-advantaged retirement portfolios with high-quality alternative assets.
The answers are a work in progress. Less than
three years ago, private placements could not be
advertised, on the web or otherwise. Today, we areable to create an entire report about using websites,
social media and other Internet-based technology toconnect investors with private placements.
The rapid evolution of “crowdfunding” means there is
still debate over basic terminology (see page 4), butmore importantly the opportunities to participate inprivate equity and debt offerings continue to grow andexpand, aided by a favorable regulatory environment,
lower investment minimums and technology.
We created The PENSCO Marketplace™ tohelp self-directed investors research theseopportunities. Many IRA holders do not realize thatin addition to traditional exchange-traded assets
like stocks, bonds and mutual funds, they can also
invest in assets that traditional financial institutions
don’t offer, such as limited partnerships, private
equity and real estate.
The goal of this report is to help investors research
the evolving landscape of opportunities that meettheir investment goals and risk profile. Offered here
are the perspectives of participants in The PENSCO
Marketplace™ along with insight from one of thepreeminent angel investing industry organizations.
There are a few key trends to keep in mind as you
explore this material.
First, investment in and access to private equity are
growing rapidly. A watershed moment was September

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2013, when the Securities and Exchange Commission(SEC) released new rules for accredited investors
under Title II of the Jumpstart Our Business Startups(JOBS) Act. This began “equity crowdfunding” toaccredited investors and inspired new funding models
for early stage companies, angel investors, and local
businesses. Existing laws also allow for private equity
investing by unaccredited investors under certain
conditions as well as peer-to-peer lending for all
investors, and the SEC is working now on Title III, which
could eliminate the last barriers between unaccredited
investors and private placements.
Second, the variety of opportunities available toinvestors is increasing. Through online platforms,
accredited investors now have access to a myriad ofassets and sectors, including consumer products,
filmed entertainment, healthcare, commercial realestate, residential real estate and sports.
Third, popularity and interest are putting pressure
on issuers to provide a level of transparency andcommunication that is more like a public company
than a traditional private placement.
Fourth, the combination of transparency andaccess means that online platforms are beginning
to provide individual investors with institutional
grade information and deals, allowing thoseinvestors to use private equity and debt to diversify
their portfolios.
Crowdfunding has grown out of its first phase,when most people were still learning the word andunderstanding the concept. Today, online platforms
PENSCO CROWDFUNDING REPORT

4

are making it much easier for more people toparticipate in private investments offered online.
PENSCO created The PENSCO Marketplace™ tohelp investors do just that. In the next few years,
we expect the rules for unaccredited investors
will change and potentially take crowdfunding
through another major evolution. Fortunately,
investors don’t have to wait until then. There are
already numerous opportunities for accredited
investors, such as real estate and lending, in which
unaccredited investors can regularly participate.
When we consider that $146 billion is currently

held in self-directed IRAs1, it is easy to see that thisnew course of investing is only just getting started.
Regulatory and technology changes are also shifting
lending activities -- like small business and personalloans -- from traditional banks to peer-to-peer lenders
or other non-bank competitors like alternative asset
managers. The two largest peer-to-peer loan issuers,
Lending Club and Prosper, grew 65X from 2009 to2014 ($26M to $1.7B)2. Clearly, both investors andborrowers would be interested in tapping into the morethan $7.3 trillion that is sitting in retirement accounts.3“Crowdfunding” or Not?
“Crowdfunding” has become an umbrella term for a new wave of fund raising for startup businesses,
working its way into Merriam-Webster’s dictionary in 2014. Even so, there is disagreement andconfusion around the term. For example, most private equity offerings are still limited to accredited
investors, so some question whether this is really a “crowd,” and the market currently views peer-topeer lending separately. Whatever moniker is applied, the most important thing to understand before
putting money behind a “crowdfunding” campaign is what you can expect to receive, if anything, forhanding over your money. This question divides crowdfunding into three main categories:
Rewards-based
This is the original “crowdfunding” and is now
also referred to as “peer-to-peer investing.”
Participants pledge money online to support
a fledgling business or project, and theyreceive a reward, such as the right to buy a
product first when – and if – it hits the market.
Well-known players include Kickstarterand Indiegogo. Individuals do not receive anownership stake and if the endeavor fails,
there is typically little recourse. This categorycontinues to attract investors, and we believe it
is poised for continued growth this year.
EquityA quickly growing subset of crowdfunding
offers ownership in private enterprise with thepossibility – though no guarantee – of a payoff
through an initial public offering (IPO), merger
or acquisition. This “equity crowdfunding,”“crowdfinancing,” “securities crowdfunding,”
or investing through “accredited platforms”
brings eligible investors together throughtechnology for a private placement. It can

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require long holding periods and significant due
diligence, and investors can expect to complete
a purchasing document and agree to terms
and conditions. Often only accredited investors
can participate, although new legislation for
unaccredited investors is moving through thestates. At the federal level, the SEC is still
reviewing Title III of the JOBS Act and will likely
not implement new rules for unaccredited
investors until 2016.4
Peer-to-peer lending
Not to be confused with peer-to-peer investing,peer-to-peer lending matches investors
with individual borrowers who are looking torefinance personal loans, such as credit card
debt. The sector started with small-sized loans
to well-qualified investors, but is now expanding
to include larger loans, like mortgages, andsecuritization. We expect peer-to-peer lending
to gain more popularity this year.

PENSCO CROWDFUNDING REPORT

5

Strong Finish
Quality drives success in sports and entertainment deals
ANDY BRUSMAN, ALCHEMY GLOBAL HOLDINGS, LLC

According to PitchBook, 2014 was the third consecutive year that business-to-consumer
companies raised more than $90 billion through private equity in the United States.5
Within the sports and entertainment sectors specifically, we have seen a healthy pipelineof deals over the past four years and the category continues to expand. For example, newopportunities have emerged in recent years with endurance sports and consumer products
related to health and wellness, such as wearables.
Private Equity Financing for B2C Companies
$200
$180

USD BILLIONS

$160
$140
$120
$100
$80
$60
$40
$20
$0
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: Pitchbook Data, Inc.

Sports and entertainment deals benefit fromfamiliarity. Investors know many of the products,
personalities and brands involved, either as fansor consumers. At Alchemy Global Holdings,
we estimate that approximately 95 percentof consumers have ties with the sports andentertainment sector.
Given the wealth of investment opportunities, thekey question for companies seeking funding is,

VISIT WWW.PENSCO.COM OR CALL 1-866-818-4472“How can we bring investors to the table?” One newanswer to this old question is “general solicitation,”
which the U.S. Securities and Exchange
Commission defines as offering an investment
in securities through “advertisements publishedin newspapers and magazines, public websites,
communications broadcasted over television andradio, and seminars where attendees have been
invited by general solicitation.”6

PENSCO CROWDFUNDING REPORT

6

Quality versus quantity
General solicitation is also sometimes called“equity crowdfunding” in the United States, butthat is something of a misnomer in the sports
and entertainment sector. The majority of these
deals are not available to the general public but toaccredited investors. Still, the online marketplaces
that facilitate general solicitations are building thefoundation of what may become true crowdfunding,if the current regulations change (as some expect
they will).
In sports and entertainment, Internet platforms
are competing to build networks of investors that
may be able to fully fund a significant volume ofdeals in the coming years. This is putting many
new opportunities in front of investors, who now
have the additional option of using their individual
retirement accounts to invest. In this environment,
deal quality is very important.
It’s important to remember that general solicitation
has not changed investing fundamentals. To
identify quality deals, investors need to be familiar
with the sector and conduct thorough research.
The drivers of quality for sports and entertainment
investments are similar to those for many othersectors. Two examples are a large total market
opportunity and being in a vertical that is growing
quickly. Wearable technology is one sector thatcurrently has both. In golf products, on the other
hand, market share is not currently growing and it
hasn’t in the past several years.

This is putting many new opportunities in frontof investors, who now have the additional optionof using their individual retirement accounts. In
this environment, deal quality is very important.

In addition to understanding the issuer’s businessback to front, investors should ask questions about
the Internet funding platform and the issuer’s
capital raising plan. With Internet marketplaces
still nascent, issuers usually need to supplement
online efforts with other fundraising strategies inorder to meet their goals. If the issuer’s only plan isonline marketing, it’s worth noting.

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Good Communication
As the investor base expands, issuers haveto get used to more transparency. Some areuncomfortable supplying all the information
required for general solicitation. Internet platforms
have responded by guiding issuers through investor
communications, including providing ways tokeep information confidential and manage nondisclosure agreements.
Companies sometimes worry that the simple
fact of raising money “in public” may be seen asa sign of failure or weak finances. The opposite
is true: capital raising signals that a company isin growth mode, and closing a successful roundis a strong validation of future prospects. Thatmeans transparency is a win for both investors andcompanies seeking their interest.

PENSCO CROWDFUNDING REPORT

7

General solicitation is not a passing fad. It iscurrently a supplemental funding strategy for
sports and entertainment companies because
the model is really in its infancy. All signs point toit becoming a game-changing means of raising
capital for companies that will significantly expand
investment opportunities for accredited investors.
It is also one step closer to true crowdfunding in the
United States. The U.S. Securities and Exchange
Commission is currently considering how to open
access to private equity beyond accredited investors,
and if the United Kingdom is any guide, growth could
be explosive. In April of 2014, the UK changed therules around private equity, establishing certain
limits and protections for non-accredited investors,
so that any individual could conceivably invest.
This opened the gates to crowdfunding in the true
sense of the word, and by the end of 2014, equity
crowdfunding in the UK had grown 201%, with anaverage deal size of more than USD $300,000.7
One of the ingredients of success in the UK has been
good education for non-accredited investors on thebenefits and risks of private equity and particularly
the risk of failure for early stage companies. There
are still areas to be worked out, such as how toinclude the appropriate disclaimers and warnings
in social media promotion,8 but overall the UK may
serve as a model for the United States’ next step
towards open access to private equity.
At the end of the day, general solicitation andcrowdfunding will succeed in the United States
through quality deals and good communication.
Both help issuers finish strongly with successful
funding rounds that can ultimately lead to profitable
exits for their investors.

ALCHEMYG LO B A L

THE GREAT FINISH STARTS HERE

About the Author
In his role as the Founder and Chairman/
CEO of Alchemy Global Holdings, LLC, Andy
Brusman is responsible for guiding thestrategic growth of the company, fundraisingand business development. Prior to Alchemy,
Andy was the founder and Managing Partnerof SAE Advisory Group. In this role, he worked
with notable clients such as Great White
Shark Enterprises/Greg Norman, Legend 10(the acquirer of the global IP of internationalsoccer legend Pele) and Montel Williams
Enterprises. Previously, Andy was a Managing
Director with Cortview Capital Securities,
where he oversaw the firm’s activities in
sports and entertainment. Andy graduatedwith a BA in Communications from LynchburgCollege. He and his wife, Chris, are theparents of two sons and reside in Charleston,
SC. Andy currently maintains the Series 82
and Series 63 securities licenses.
About Alchemy Global Holdings
Alchemy Global Holdings, LLC is aninvestment banking and advisory services
firm focused on sports and entertainment.
Backed by investors who include Greg
Norman, Jim Courier, Boris Becker and Sir
Elton John’s Rocket Sports agency, the firm
works with emerging growth companies tohelp them raise capital and assist with theimplementation of their growth plan.
Alchemy Global Holdings, LLC (“Alchemy”) is
not a registered broker dealer. Securities offered
are through Merriman Capital Inc, a registeredbroker dealer and member FINRA/SIPC.

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PENSCO CROWDFUNDING REPORT

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New Wings for Angels
Accredited platforms and other innovations create opportunity
MARIANNE HUDSON, ANGEL CAPITAL ASSOCIATION

The landscape for early-stage investing haschanged more in the last few years than it has incenturies. The result is exciting new opportunities
for investors and entrepreneurs. Just look at theevolution. For 200 years angel investing was done
only privately on an individual basis. In the last 20
years, major events created an evolutionary leap.

More big changes will undoubtedly come as themarket continues to innovate and adjust to rules
and regulations that will help the Jumpstart Our
Business Startups (JOBS) Act become a reality.
So what do accredited investors need to know tocapitalize on new opportunities?

Tracking the Evolutionary Leap in Angel Investing

1995

Individual angels invest together with otherangels in formal groups

2009

Entrepreneurs use social media to connect topotential investors

2000

Number of angel organizations passes 100

2010

Innovative angels connect investors and startup
deals over the Internet, developing new ways to“curate” interesting deals for private investment

2005

Y Combinator launches

2006

Angel groups co-invest together, helping
diversify angel portfolios; TechStars launches

2011

Accelerators proliferate to develop interesting
startups for angels to support

2007

Super angels: Top angels raise funds withinstitutional investors to fund hundreds ofstartups per year2012

Congress passes the JOBS Act, which allows forprivate offerings to be “generally solicited” and creates
new financing paths, including equity crowdfunding

500
450

40% Annual Growthin Angel Organizations

Total Number

400
350
300
250
200
150
100
50
0
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: Center for Venture Research & Angel Capital Association

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PENSCO CROWDFUNDING REPORT

9Different Kinds of Crowdfunding
To start, it is important to understand that there aredifferent kinds of “crowdfunding.” It has become apopular term, but it is often misunderstood - andconfusion could result in problems for all parties
involved in a deal. Currently the crowdfunding
world can be divided into two categories: equity
crowdfunding for accredited investors andcrowdfunding for any investor. The reason for the
distinction is that securities rules are different for
deals involving accredited investors than they are forthose that include investors who are not accredited.
Accredited investors benefit from “Regulation D”(Reg D) by the Securities and Exchange Commission(SEC). This establishes rules for entrepreneurs whowant to raise capital without having to register with
the SEC. It saves considerable money and red tape,and a portion of the Regulation, “Rule 506,” allows
for an unlimited amount of capital to be raised fromaccredited investors. The combination of thesebenefits has made Rule 506 of Reg D the vehicle forthe vast majority of private offerings in the UnitedStates. American angels invested an estimated$24.8 billion in 2013 under this rule.9
Regulation D and Rule 506 are also the rules underwhich some top angels formed today’s equity
crowdfunding platforms for accredited investors,
aided by changes from the JOBS Act. Examples
include AngelList, FundersClub, Onevest, and
SeedInvest, with a growing number coming online.
More than 50,000 angels are members of theseplatforms and more deals are being done on
them. The largest platform, AngelList, helped 243
startups raise $104 million in 2014.10 The platforms
are also increasingly sophisticated, applying bestpractices and attracting stellar deal flow.
The big difference with unaccredited investors is
the limit placed on equity investment. The rules doallow for reward- or product-based crowdfunding11
by unaccredited investors, and a $5 billion
worldwide market has sprung up, with players
such as Kickstarter and Indiegogo. Also permitted
are “peer-to-peer” lending or credit sites, suchas LendingClub, which help connect borrowers
with lenders over the internet for personal or
business loans. Entrepreneurs cannot, however,seek unlimited equity investments through national
offerings to unaccredited investors.

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Title III of the JOBS Act requires the SEC toreconsider the rules for unaccredited investors but
it looks like any changes will be stalled throughmuch of this year, with national unaccredited
crowdfunding not getting started until 2016. In themeantime, several states have passed their own
rules to allow equity crowdfunding for offerings toinvestors located within one state.
Beyond the regulations, the bigger concern isthat a lack of sophistication among unaccredited
investors could decrease their chances of successin the risky world of startup investing. Additionally,
it is likely that unaccredited investor dollars willflow only to industry sectors that the public canmore easily understand, excluding many techand life science companies due to their inherent
complexity.

Opportunities on Accredited Platforms
Many funding websites aimed at accredited
investors don’t consider themselves“crowdfunders” because of the current limitations
on working with unaccredited investors
and because they are associated with moresophisticated accredited investors. The Angel
Capital Association (ACA) and others in the field
use the term “accredited platforms.” Today, theseoffer exciting opportunities to accredited investors
in the following areas:• Access to deals outside your region – Manyangels like to invest in their communities, but
a growing number are becoming interested indeals they are seeing from other regions on

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10

accredited platforms. These platforms may
also offer deals in an angel’s sector specialty
or in “hot” markets such as Silicon Valley(perhaps led by a famous super angel). Some
deals on these platforms have a low minimum
investment (as little as $1,000), increasing
the opportunity to diversify a portfolio throughmultiple investments, which can help improvethe chances of a good return.
• Access to new investors to help fill out
investment rounds – At ACA, we have seena new trend emerge in the last nine months:
angel groups are posting deals on accredited
platforms to access new investors in order tocomplete investment rounds. For example, agroup might offer a vetted deal with strong term
sheets and due diligence that may need another$200,000. So far, we have seen a handful ofdeals, but we expect this number to growquickly.
• Connections to like-minded investors and deals– As accredited platforms innovate, investors are
gaining access to a broader swath of deals andcompanies. This presents them with more ways
to network with other like-minded investors andinvest in the kinds of companies they care about.
For example, Portfolia is a new accredited
platform for women investors to invest in
women-led companies, and HealthiosXchange
focuses on health industry investments. Other
affinity type platforms are likely on the way, as
crowdfunding continues to grow.
Innovations by accredited platforms provide a whole
new set of opportunities for accredited investors.
This means more options to help each investor findthe best fit for them – as long as they understandthe rules and language in the rapidly evolving worldof early-stage investing.

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About the Author

Marianne Hudson is executive directorof the Angel Capital Association andco-founded the organization in 2004.
Her career is based in entrepreneurial
support, including leadership ofentrepreneurial growth and mentoring
programs at the Kauffman Foundation,
creation of organizations to support
small manufacturing businesses, andworking in multiple state technology
economic development organizations. Asan angel investor, she supports startups
in her hometown of Kansas City and also
belongs to two accredited platforms forinvestments in other U.S. locations.
About the Angel Capital Association

The Angel Capital Association (www.
angelcapitalassociation.org) is the leading
professional and trade association
supporting the success of angel investors
in high-growth, early-stage ventures.
ACA provides professional development,
industry voice, public policy advocacy
and an array of benefits and resources to
its membership of more than 220 angelgroups and platforms and more than
12,000 individual accredited investors
throughout North America.

PENSCO CROWDFUNDING REPORT

11

Local Money
Community financing for the 21st century
KIM KASELIONIS, BREAKAWAY FUNDING

Crowdfunding has created new opportunities for individual investors and community banks
to profit by strengthening local economies. While the concept seems new, crowdfunding has
been used to capitalize local businesses for hundreds of years. If you had an idea, you pitched
it to the elders. If they liked it, they pooled their money and showed up regularly to make sure
you were running it right.
Today, town elders have been replaced by peers
who connect through the Internet and social media.
Crowdfunding has democratized the investment
arena by broadening the base of individuals who canlegally invest in virtually any business they choose.
This, in turn, is changing the roles of individuals andbanks in funding local businesses. A new financing
model is emerging. We call it “Community Capital.”

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RS
TO
S
VE
N

I

This pause could have dire consequences for the
economy. There are approximately 28 million small
businesses in the United States. They are the rootof job creation, generating some 65% of net new
jobs13, while propelling innovation and keeping

NS
TIO
TU

When Congress passed the Jumpstart Our
Business Startups (JOBS) ACT, it brought equity
crowdfunding into the mainstream. It also
conceded that bank financing for small businesses
would not be available in sufficient quantity to fuelour economy. In the last decade, bank failures,consolidation and new regulation have taken a toll
on lending. As of February 2015, 530 banks had
failed, another 6,000 had been consolidated, andthe number of community banks dropped morethan 14,000 to less than 5,900.12 The continuing
battle to understand, much less integrate, the Dodd
Frank Act has also helped push community banks
to take a “time-out” from financing.

COMMUNITYCAPITALFINANCIALI
NST
IWe Need Community Capital

TREPRENUERS
EN

those jobs local. They help local communities
thrive but are having increasing difficulty securing
funding from the banks that traditionally supported
them.
As the former chief executive officer of acommunity bank, I see an opportunity to bringbanks, investors and entrepreneurs together
to create a powerful funding mechanism. If
crowdfunding can shore up the balance sheetsof small businesses, banks would have a flow of
viable customers for commercial loans. Investors
will benefit too because the loans can fuel growth
without diluting their ownership positions.

PENSCO CROWDFUNDING REPORT

12

Fixing the Funding Highway
When banks lend to small businesses, they
inevitably seek a state or federal small businessloan guarantee in order to reduce their risk. Oneof the requirements of the guarantee is that thebusiness owner has current “skin in the game.” Forexample, if a business needs $1 million, the owner
may have to bring $200,000 in cash to the funding
table. Experience tells us, however, that earlystage businesses and businesses in an expansion
mode generally do not have that cash at the timethey need to borrow, because they have alreadyinvested their liquidity back into the business. For asmall business this can be true even at later stagesof development.
As a result many small businesses missopportunities to grow, expand and mature. Boththe Small Business Administration (SBA) and U.S.
Bureau of Labor Statistics say that most businesses
fail because they lack adequate capital and planning.
Without adequate funding, no business can afford
the luxury of planning. Startups are particularly
vulnerable: 30 percent fail in the first two years andonly 55 percent are in business after four. 14

Crowdfunding Can Bridge Gaps
Equity crowdfunding can solve this dilemma and canbe utilized by businesses to bridge gaps in the funding
highway. Equity financing is an alternative to loans15,

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but in the past, small businesses have had difficulty
obtaining equity investment beyond what friends andfamily were able to provide. So how does it help?
Historically, access to private equity investments
was reserved for the wealthy, and even they lacked
access to certain investment opportunities due tosolicitation restrictions in federal securities laws.
As a consequence, a significant percentage ofthe potential investing population was excluded
and many business owners were precluded fromconnecting with willing and able investors.
The JOBS Act changes that dynamic. First, Title
II of the JOBS Act removes the ban on advertising
restrictions, thereby making it possible for any
accredited investor to have access to all types ofprivate equity investment through readily available
crowdfunding web sites. Secondly, Title III of the
JOBS Act, which has yet to be implemented by the
Securities and Exchange Commission, will give
similar access to unaccredited investors. This willallow all Americans to invest in private equity andcould fundamentally change the way innovation andjob creation are funded.
While everyone awaits Title III, we must keep inmind that existing state and federal regulations
already permit business owners to engage withinvestors of all financial capacities, using bothonline and offline capital raising systems. Now,

PENSCO CROWDFUNDING REPORT

13

more than ever, investors can exercise theireconomic power to support businesses and owners
whose projections show promising returns, whose
mission is aligned with their values, and whose
owners or operations they know personally.
But where will the money come from? One
potential source is retirement savings. The total
assets in individual retirement accounts (IRAs)
reached $7.3 trillion in 2014,16 and investments
can be made from self-directed IRAs throughcrowdfunding portals with alternative asset
custodians.

A Model that Works
As with many other community banks, theinstitution that I ran, Circle Bank, was fundedwith seed capital exclusively from the community.
In those days, $3 million was raised by “opening
the Rolodex.” Crowdfunding is a derivative of thatmethod – the secret sauce, aided by a dash of
regulatory change and a pinch of technology. It isan opportunity for local entrepreneurs to convert
their social capital into financial capital by seeking
out investors among the professional and personal
relationships they have developed over time, from
customers to suppliers to their faith communities
and hobbies.
And that’s how it works. Investors find newopportunities. Companies tap new sources ofcapital. Banks start a steady stream of qualified
businesses with whom to build relationships. And
local economies see a clear path to sustainable,
economic growth. Community capital is acollaborative, crowd-based financing model for the
21st century.

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About The Author
With more than 25 years of experience in thebanking industry, Kim Kaselionis founded
Breakaway Funding in 2013. She recognizedthat a fully-integrated crowdfunding platform
should serve to match investors withbusinesses requiring capital to strengthen
their balance sheets and position themfor funding by traditional banks and credit
unions. Kaselionis has held several banking
leadership positions, most recently as Chief
Executive Officer and Chairman of Circle
Bank, leading it to 53 consecutive profitable
quarters, and has proven experience
packaging significant financial deals,
including the sale of Circle Bank to Umpqua
Bank for an over-book-value price.
About Breakaway Funding LLC
Breakaway Funding connects growthready entrepreneurs with investors
seeking alternatives to conventional equity
investments. Breakaway provides businessowners with the tools, technology and training
they need to conduct successful financing
campaigns, and investors with the opportunity
to invest in ventures they have personal
interest in. Breakaway’s technology portalbrings together investors and businesses
in an environment where both benefit fromBreakaway’s due diligence, managementtransparency policy and post-investment
progress updates.

PENSCO CROWDFUNDING REPORT

14

Welcome to thePrivate Capital Markets
RORY EAKIN, CIRCLEUP

Despite the array of retail investment products that experienced investors
can include in their portfolios—ranging from CDs and bonds to stocks, funds,
and options—the menu is far more limited than it may seem. That’s because
private equity investing, which represents a $426 billion17 market in the U.S.,
has never been broadly accessible to individual investors.
Consumer & Retail Private Equity Returns

Pooled Gross IRR Since Inception

45%
40%
35%
30%

Average

25%

18.5%

20%
15%
10%
5%
0%
1997

1998

1999

2000

2001

2002

The traditional retail investment advisory industry
may steer you away from private equity (“PE”)—it
does, after all, limit their control and the fees
they can charge. But PE deserves consideration
as an allocation in a well-diversified portfolio, as
institutional investors have known for decades.
As of late 2013, Cambridge Associates data18 showoutperformance for the US Private Equity Index
over public equities in 1-yr, 5-yr, 10-yr and 20-yr
periods. In Consumer and Retail, CircleUp’s areaof focus, the data show average gross company

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2003

2004

2005

2006

2007

2008

2009

2010

2011

returns above 18% Internal Rate of Return, or
IRR, in both Private Equity and Venture Capital
investments for companies receiving investmentsin the last three years.
With so many opportunities to invest in alternative
assets now available to investors following the passageof the JOBS Act in 2012, where should investors begin?
At CircleUp, we’re fortunate to sit at theintersection of private equity investing and data,
giving us exceptionally rich insight into the

PENSCO CROWDFUNDING REPORT

15

private markets. More than 100 Consumer &Retail companies are currently raising capitalon CircleUp; moreover, we’re capturing metrics
and indicators from thousands of companies that
apply for funding, and more than 15,000+ investors
in our network. (We curate deal flow, accepting
less than 5% of applications.)
How can investors benefit? Here are three trends
we’re monitoring closely; trends that will shape
the market not just over the next few quarters, but
years. These are the kinds of trends that can create
tremendous wealth for investors who understandand know how to play them.
Rapid growth of smaller brands: The“personalization” of the consumer isaccelerating.

needs and are voting with their wallet. My wife
doesn’t wear the same makeup her mother wore,
and we don’t feed our dog, Tucker, the same foodmy parents fed their dog.
As the demand for products that meet more uniqueneeds increases, those companies that are able toprovide innovative products will win. We’re seeing
small brands capitalizing on this changing consumer,
as large, public brands increasingly lag behind.
The data says it all: Large brands lost share tosmall brands in 42 of the top 54 most relevant foodcategories in the last five years, according to a reportby investment banking firm Jefferies, which is aptly
titled, “Food: The Curse of the Large Brand.”

Rapid growth of smaller brands

Opportunities
Two publicly-traded companies that are well
positioned to benefit from this trend are Whole
Foods Market (NASDAQ:WFM) and United Natural
Foods (NASDAQ:UNFI). But most of the pureplay opportunities to invest in the small-brandwave are in private markets, which is one reason
why investment firms are steadily increasing
their allocation to private consumer and retailcompanies.

The “Personalization” of the consumer isaccelerating, as consumers increasingly
opt for small brands.

Make it easy

‘Make it easy’: Consumers are overworked,
tired and stretched for time.
Ethnic spice: Ethnic foods moving
mainstream.

Consumers are over-worked, tired and stretched
for time.

Increasingly, consumers are demanding more
personalized offerings. Gluten-free foods, natural
skincare, and freeze-dried, human grade pet food.
Essentially consumers, more than any point inhistory, are expressing their individual, unique

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We’ve reached a tipping point where consumers
are demanding solutions from the products theybuy. Consumers want healthy snacks in simple
consumable forms. Snacks for babies and kids are
ground zero for this trend. Just a few examples:
Plum brand acquired by Campbell (NYSE:CPB)
after reaching ~$100 million in sales; Danone’s(OTCQX:DANOY) acquisition of the Happy Family
brand of organic baby food; and The Hain Celestial
Group’s (NASDAQ:HAIN) deal for Ella’s KitchenGroup Ltd., known for organic baby food in flexible
pouches. This phenomenon is playing out in private
markets as well. In just nine years privately-held
Chobani has grown from $0 to become the leading
Greek yogurt brand with an estimated $1.5 billion
in annual sales and a $5 billion valuation.

PENSCO CROWDFUNDING REPORT

16

Opportunities
The public market play on healthy convenient
foods may be to invest in the companies acquiring
the emerging private brands, companies such as
Danone, Campbell and Hain. Private investors may
also find innovative brands that are addressing
consumers’ desire for convenience, including,for example, companies such as Cooksimple, acompany raising capital on CircleUp that provides
healthy, easy-to-use meals and other products. It
has grown sales 60% year-over-year.

About the Author
Rory Eakin is Founder and COO of CircleUp.
CircleUp is an online private equity platformthat enables accredited investors to invest in
high-growth consumer and retail companies.
Learn more at CircleUp.com.

Ethnic Spice

About CircleUp:

Ethnic foods moving mainstream.

We launched CircleUp in 2012 to solve theproblem of access to private markets forindividual investors. We’ve built an online
marketplace that connects accredited
investors with high-growth consumer andretail companies, and allows investors
to invest in and receive equity in thosecompanies. By lowering the cost to makethese investments – plus networking timeand minimum investment – we are expanding
participation in the market. On CircleUp,
accredited investors can build a portfolio of
early stage private companies with an initialinvestment as low as $1,000. What’s more,unlike traditional private equity funds, there
are zero fees.

One of every seven dollars spent on groceries is in
ethnic foods. Surprising, right? Sales now exceed$2.4 billion annually, as a growing immigrant
population and increasing interest among
American consumers in new flavors is driving asurge in ethnic eating options - whether it’s in
the “International Aisle” of the supermarket, or inrestaurants. Mexican, Korean, Chinese, Thai andIndian cuisines, among others, are growing rapidly
in both packaged foods and fast casual dining.
Opportunities:
Perhaps the most visible public-company
benefiting from this trend has been Chipotle
Mexican Grill (NYSE:CMG), which is adding storesand steadily innovating its product line to satisfy
the needs of health-conscious consumers. In
the private markets, there are emerging andfast-growing private companies such as Sukhi’s
Gourmet Indian Foods, in the packaged space, orKosofresh, a company growing in the healthy fastcasual Korean food category.

Consumer and Retail are going throughphenomenal transformations, and companies large
and small are identifying and capitalizing on thesechanges. At CircleUp, we spend a lot of our time
combing through the massive amount of data we
capture through our platform, and we’re excited tosee our companies riding these massive shifts.

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PENSCO CROWDFUNDING REPORT

17

The Future of Investing is Now
The evolving private market is poised for growth
HEATHER SCHWARZ-LOPES, EARLYSHARES

It’s been three-and-a-half years since I co-founded
EarlyShares, one of the first market entrants in“equity crowdfunding.” In less time than it takes
to finish high school, a brand new industry has
emerged, found its footing, and begun to change
the “old way” of doings.
EarlyShares’ story follows that of the industry
at large. My co-founders and I incorporated inlate 2011, amid the first whisperings about theJumpstart Our Business Startups (JOBS) Act. Our
vision was to build a business based on the Act’s
Title III – a platform where entrepreneurs could
raise equity capital from non-accredited investors.
Alas, we all know how that has turned out. The
promise of Title III has yet to come to pass. Whathas, however, is the Act’s Title II. We, along with ourpeers, have seized this opportunity wholeheartedly
and learned a lot along the way.

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The biggest lesson thus far: Title II may not be the‘promise’ we wanted, but it is the exemption theprivate markets needed.

Takeaways from an Emerging Industry
The exemption for Title II – Regulation D, Rule506(c) on general solicitation – took effect in
September 2013, creating a new market for“online private investing” or “accredited/equity
crowdfunding” or “crowdfinance.” While theindustry hasn’t yet agreed on what to call itself,
there are a few key trends that epitomize it.
Evolution (not revolution) and education
By lifting the longstanding ban on the advertising(i.e. general solicitation) of private investment
opportunities, Title II has finally enabled the private
investing and capital raising processes to moveonline. Powered by technology, the private market
has become more accessible to a broader array of

PENSCO CROWDFUNDING REPORT

18

investors – marking a long-overdue shift from its
traditionally closed-door, offline nature.
Yet because the general solicitation ban was in placefor 80 years, the shift to web-enabled processes andthe use of a new private placement exemption is adifficult adjustment for many. Even some securities
attorneys conflate Title II with Title III or remain
confused about what requirements are involved.
Likewise, some investors are simply wary of change.
Platforms at the forefront of the Title II market
have had to accept this reality in order to movethe industry forward. We’ve tackled resistance andconfusion in two ways:
1. By embracing a commitment to education(serving as a thought leader in the media andproviding quality informational resources tohelp people understand new opportunities), and2. By adapting to the preferences of individual
users for combining online and offline
processes (using our platform to ‘bridge thegap’ between them).

Investors are the core
There are two key parties involved in a private
market transaction: the capital raiser and theinvestor. The essential role of a funding platform is
to connect those two parties in the smartest, mosteffective way possible.
Each platform brings a different approach to thatrole. Some function like online venture capital
firms, investing alongside “crowd” investors ineach deal. Others conduct little or no due diligenceor vetting on investment offerings, functioning
more like listing services. Still others operate as
registered broker-dealers.
No matter how a platform positions itself, it has
to serve both the investor and capital raisers (i.e.,
issuers), but the investor remains the core user.
Why? Without investor participation, no successful
Title II transaction can take place. Capital raisers

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provide the products (investments) that investors
consume. Investors should look for platforms
that have built their businesses around appealing
to investors and providing them with the bestexperience possible.

The old rules still apply
So what creates the best investor experience?
While they make for nice add-on features, the‘bells and whistles’ of a tech platform – dashboard
capabilities, deal tracking and monitoring,
communication tools – don’t compel investors toinvest.
Simply put, investors have always been drawn
to quality investment opportunities, and thathasn’t changed. Platforms need to select issuers
carefully, and investors should consider whether
and how a platform has vetted the investment
opportunities for viability and potential.
No platform can guarantee investors returns, but
it’s become clear over the first 18 months of Title
II that the top-performing platforms gravitate
toward high-potential alternative investments, likereal estate, which investors can’t access throughtraditional brokers or financial advisors.

Platforms need to select issuers carefully, andinvestors should consider whether and how aplatform has vetted the investment opportunities
for viability and potential.

It’s also critical for capital raisers to present
themselves with integrity. Inflated market-size
estimates and outlandish return projections don’t
fly – investors see right through them. The traditional
private placement process was built on relationships,
personal introductions, and face-to-face meetings,
not on hype. Even as Title II moves that process
online, issuers must build trust with investors in orderto make investment transactions happen.

PENSCO CROWDFUNDING REPORT

19

2014 Venture Capital Investment by Total Value
Annual Total

Online in Q4

Information Technology

28%

32%

Financials

16%

15%

Healthcare

16%

6%

Real Estate

11%

24%

Consumer Discretionary

9%

11%

Other

8%

0%

Energy4%4%Consumer Staples

3%

3%

Industrials

3%

3%

Materials

2%0%

Telecommunications

1%

1%

Utilities

1%

1%

Annual
Total

Onlinein Q4

Source: Dealflow.com

2015 & Beyond: Trends to Watch
With some “growing pains” now over, Title II funding
is moving into a more mature phase in 2015. We
expect three themes to dominate the year:
1) Real estate will continue to be popular
The U.S. market is rebounding and EarlyShares isseeing expanded interest in real estate investmentsfrom a variety of audiences, including international
investors. Ranked by deal value, real estate tends to
be one of the largest sectors both for total venture
capital investment and funding through Rule 506(c).19

About the Author
Heather Schwarz-Lopes is co-founder and chief
strategy officer of EarlyShares. In addition to
spearheading strategy for EarlyShares, Heather
has been an active advocate for private investment“crowdfunding” since 2011 and is EarlyShares’
primary liaison with Washington regulators. As

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2) Variety will increase
The types of deals and investment vehicles
offered will keep expanding according to investor
preferences. Look for more ways to invest (e.g.
institutional investment funds and self-directedindividual retirement accounts).
3) As more players play, more stakeholders will
benefitAs institutions enter the Title II action, they arebringing a wide variety of partners with them. Thisis an important validation of the market and helps
increase investor interest and opportunity.
an experienced executive with a 16-year trackrecord in financial services, Heather also served
previously as senior vice president and seniorprivate banker at Wells Fargo-The Private Bank.
She is a Certified Financial Planner™ and holds
the FINRA Series 7 and 66 licenses. Follow her
on Twitter @EarlySharesCSO.
About EarlyShares
EarlyShares is the trusted platform that gives
accredited investors direct access to private
opportunities in commercial real estate.

PENSCO CROWDFUNDING REPORT

20

Act like a Public Company
How to create greater demand for Rule 506(c) offerings
THOMAS CARTER, EQUITY ROUND

As a result of the Jumpstart Our Business Startups(JOBS) Act, the U.S. Securities and Exchange
Commission added a new paragraph (c) to Rule506, which governs private placements. This
regulation for “general solicitation” came into
effect at the end of 2013 and was intended to“democratize” early stage investing.

under Rule 506, paragraph (b). At present, Rule506(c) offerings represent less than 10% of all 506
fundraising campaigns.20
One reason for the low use of 506(c) is that it requires
issuers to verify accredited investors. As it stands
now, there is very little that issuers and investors can
do to ease this part of process, but they can address
another important reason for the low interest in 506(c).
Issuing companies have too frequently underwhelmed
investors with their level of transparency about
key material facts. Knowledge of those facts is thefoundation of creating investor comfort and conviction.

Since then, individual investors have gained accessto opportunities that had previously been controlled
by venture capital and institutional investors;
however, the market for 506(c) offerings does not
yet rival that for traditional private placements

Dollars Sought in New Private Placements

Q4$11.50 Billion

2014

Q3

$3.94 Billion$15.56 Billion

2014

Q2

$5.04 Billion$18.43 Billion

2014

0

$5B

Source: Dealflow.com$10B
Rule 506(b)According to industry data, the observed medianinvestment size of Rule 506(c) offerings isabout $1,000.21 Given the stringent disclosure
requirements, it seems ironic that qualified,accredited investors are not writing larger checks.
We believe this has to do with a general lack of

VISIT WWW.PENSCO.COM OR CALL 1-866-818-4472$5.67 Billion

$15B

$20B

$25B

Rule 506(c) and others

confidence in the offerings themselves. Investors
might be concerned about the completenessof information provided. They might also beconcerned that the issuing company will notcomplete the full offering amount due to the “new”
nature of the Rule 506(c) format.

PENSCO CROWDFUNDING REPORT

21

Issuers Should Act like a Public Company.
Investors Should Avoid Those that Don’t.
Issuers can do a lot to boost interest in 506(c)offerings. Generally, companies that capture theimagination and interest of conventional Wall Street
investment banks are packaged, positioned andscripted for success. Their financials are in order.
They are prepared. There is a commitment fromsponsor placement agents to use their resources to
get a deal done.
In short, they act like a public company. Today,
this kind of offering typically doesn’t use generalsolicitation, but the traditional path in accordancewith paragraph (b) of Rule 506. That means
individual investors rarely get access.
The companies that stand to benefit the most fromthe Rule 506(c) format are not likely candidates
for 506(b) sponsorship. Their offering may be too
small. Their business may not promise enoughgrowth. The value proposition may not be sexyenough.
These companies don’t have a network ofinvestors in their “Rolodex.” They don’t haveexperience planning and executing road shows.
They don’t have experience preparing and scripting
presentations. As a result, they aren’t clear about
what to disclose about their business to makeinvestors feel comfortable.
All of this makes online marketplaces appealing
because they were created to connect thesecompanies to qualified, accredited investors.
But marketplaces face their own challenge:
namely, how do they attract and retain interest
for a significant and growing base of accredited
investors?
Providing access to interesting and exciting growthcompanies is a necessary condition. But investors
also need to feel confident that the information
they review about these companies is accurate andcomplete.

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To address this (and help issuers and investors
alike), online private offering platforms should set
the following conditions for listing on their site:•R equire the offering company to provide thetwo most recent years of financial statements,
prepared according to generally accepted
accounting principles (GAAP).
Some companies may argue that thisinformation would put their business and ability
to compete at risk. As a compromise, offering
platforms should, at least, insist that thisinformation be available to qualified, actionable,
and vetted investors in a secure environment
with oversight.
• Require the offering company to support thesefinancial statements with a thoughtful anddetailed “Management Discussion and Analysis.”
The value of a good MD&A section accompanying
financials can’t be understated. It provides
the offering company with the opportunity toarticulate, in plain English, what the numbers
mean and how investors should consider
them. It provides investors with a much needed
understanding of the underlying economics ofthe prospective investment. This understanding
is critical to making an informed decision.

PENSCO CROWDFUNDING REPORT

22

Online Marketplaces Should Encourage
Well-Rounded Offerings
The marketplaces should encourage companies tothink about online fundraising as just one piece of acomplete strategy. They should provide companies
conventional offering resources, including road showplanning and execution, syndication capabilities, andintroductions to investors and investment groups.
These resources, along with others including “carveouts” to additional registered broker-dealers andaccess to strategic distribution resources such as
PENSCO’s alternative investment marketplace,are in place to help the issuer raise the maximum
amount possible.
At the same time, the offering platform andissuing company should inform investors about
these complimentary capital raising efforts.
The offering strategy is an often overlooked
consideration, but it is material to determining therisk in investing. The more issuers and platforms
can reduce risk for investors, the more willing
they will be to invest.
The best practices I just discussed could result inthe median investment size for online offerings moreclosely aligning with conventional capital raising.
Providing complete financial data and leveraging
sales channels to complete an offering are consideredbasic techniques among public companies. They are
universally adopted. Online offering platforms andissuing companies need to utilize these techniques aswell (and investors should vote with their business toensure that they do). In doing so, they can create anenvironment that attracts greater participation into
Rule 506(c) offerings.

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About the Author
Thomas Carter is a pioneering, multi-faceted
entrepreneur with successes over the past 25
years in start-ups and early-stage companies.
He has founded several entities and has taken
companies public. Specializing in corporate
finance, financial services technology(FinTech), marketing, multimedia and new
product innovation, Mr. Carter is the founding
partner of Capital Services Group, Equity
Round and CapValue. These financial services
platforms are designed to prepare andpackage companies to access capital more
efficiently through Reg D private placement,
as well as registered offerings. For more
information see www.capservegroup.com.
About Equity RoundFounded by Capital Services Group, Equity
Round (equityround.com) is an online
marketplace that connects many of today’s
most exciting growth companies seeking
capital to qualified, accredited investors.
We have designed Equity Round to provide
investors with optimal transparency witha powerful investor relations platform that
includes the offering company’s narrative,
financial statements and a powerfuldashboard (VentureTarget) supported by acomprehensive data room. The end result is amore informed investor and a better preparedissuer. Equity Round is wholly-owned by
Capital Services Group, Inc., a capital advisory
firm dedicated to help emerging and earlystage companies prepare and ultimately tap
the capital markets.

PENSCO CROWDFUNDING REPORT

23

Strong Pulse
A booming sector fuels healthcare crowdfunding
SCOTT JORDAN, HEALTHIOSXCHANGE

There’s little doubt that this is an exciting time for healthcare private equity in the UnitedStates. 2014 was a record year. Funding for healthcare startups hit $4.1 billion, a 125% jumpover 2013.22 The biotechnology sector alone posted the most venture-backed initial public
offerings in the last 20 years, and merger and acquisition activity was strong as well.23
Venture-Backed Biotech IPOs by Year
60

59

50

47

NUMBER OF IPOs

42
40
33
30
26
21

20

20

16

15

13
10

7

9

16
13

4
1

0
1996

1998

12

7
4

1994

11

2000

2002

2004

2006

2008

2
2010

2012

2014

Source: National Venture Capital Association & Thomson Reuters

There are good indications that growth may
continue. The outlook for the public markets isgood this year, which generally encourages IPOs,
and fundamentals suggest a continued appetite foracquisitions and partnering. The current forwardyear price-to-earnings ratio of the Standard &VISIT WWW.PENSCO.COM OR CALL 1-866-818-4472

Poor’s Healthcare Index24 is above 17, implyingthat the market expects growth of 13% or more;
however, the three-year organic revenue growthrate of the top 25 healthcare companies is just 6%.
The only way to close that gap would be throughmergers, acquisitions and partnering.

PENSCO CROWDFUNDING REPORT

24

Active Verticals
For accredited investors looking to diversify
their portfolios, the healthcare sector may offer
untapped opportunities that meet their risk profiles
and investment goals. Research can help identify
categories that have the most growth potential
in the future. To name just a few more examples
in addition to biotechnology, some of the top
performing sectors in 2014 were the following25:
Health information technology
Investments in data mining, analytics and mobile
technologies continue to grow. By some estimates,
50% of hospitals will use advanced analyticalsolutions by 2016.
Urgent care
In the last four years, the number of urgent
care facilities has grown to more than 9,300
nationwide.26 Growth in this segment is expected tocontinue as more and more hospitals face pressure
to lower costs and outsource patient treatments.
Medical Devices
The aging U.S. population is fueling developmentof new medical devices; in fact, new companies
continue to form in order to keep up with consumer
demand in this area. Orthopedics, telehealth andmobile health are experiencing the most interest
from investors.

Crowdfunding Basics
Early stage healthcare companies have traditionallyraised capital from angel investors, broker-dealers,
registered investment advisors, institutions(including strategic investors) and friends or family.
But that changed in September of 2013 with newrules under the Jumpstart Our Business Startups(JOBS) Act. Since then, accredited investors havebeen able to invest in health care private equity
through crowdfunding platforms.
Crowdfunding is ideal for early-stage private equity,
an asset class that most accredited investors do notcurrently hold in their portfolios. In the healthcare
sector, equity crowdfunding platforms eliminate
the friction for investors and issuers that is createdin traditional forms of capital raising. They provide
issuers an efficient way to increase their investor
base, while also protecting confidential informationand valuable intellectual property.

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For investors, these platforms increase access topremium deal flow and make it more cost effective
to invest using capital from a variety of sources,
including funds from an individual retirement
account. They also include education and tools toallow investors to diversify across multiple types ofcompanies and vehicles. Tools may include social
media forums where they can meet other investors
and then transact offline.
Some platforms also have investor syndicates,
which offer access to leadership and industry
expertise, as well as oversight of the investment.
Established investors with a steady track record offunding companies (referred to as “lead” investors)
raise capital from the “crowd” or “syndicate
investors” in return for fees or a percentage of any
profits from the investment (known as “carry”).
The major providers of crowdfunding syndicates
today include AngelList, CircleUp and
HealthiosXchange’s “The Champions Program.”
With these platforms, investors have the opportunity
to diversify their investments across multiple leadsyndicators. When evaluating a syndicate, investors
should consider more the speed at which thesyndicate is taking on money, which is sometimes
called “funding velocity.” There is an element of
a popularity contest in the metric, and while itdoes indicate a degree of validation, it does notnecessarily translate into investment returns.
PENSCO CROWDFUNDING REPORT

25

The Money Pipeline
Institutions, angel groups, and friends and family
already provide a healthy money pipeline into earlystage healthcare companies. Crowdfunding has
the potential to open these existing channels evenwider, while breaking down barriers in others,
such as broker-dealers and self-directed individual
retirement accounts (IRAs).
In the past, high minimum investments of at least$25,000 discouraged interest in private equity.
Access was also limited outside the major hubsof San Francisco and Boston, and fees could behigh, for example, in some packaged products
sold through brokers and registered investment
advisors.
Crowdfunding makes it possible for accredited
investors to efficiently access private equity deals
regardless of where they live and at minimum
investment levels as low as $5,000. Platforms bringa world of due diligence including lead investor
ratings, capital flow data, online and offline events,
and direct communication with existing investors
and company management. At the same time,
regulated communications and privacy are handled
by technology that covers every stage of investment
from identifying deals and investors, to subscription
agreements and term sheets, to electronic
signatures and payments.
The bottom line: accredited investors now have theability to tap into private equity deals using secure,online capital raising platforms. Healthcare presents
a tremendous opportunity for entrepreneurs andinvestors to get started in changing the landscapeof the industry by bringing new and innovative
companies and products to the market.

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About the Author
Scott Jordan is the Founder of
HealthiosXchange, the leading healthcare
crowdfunding portal. Scott is anaccomplished life sciences businessdevelopment and investment banking
professional with over 25 years of corporate
experience in negotiating strategic
corporate alliances, securing international
licensing agreements, building nationalsales teams, and contributing to successful
product development, approval, andlaunch. Previously Scott held businessdevelopment and commercialization roles
with Neopharm, Akorn Opthalmics, and
Abbott Laboratories. Scott graduatedfrom the Kellstadt Graduate School ofBusiness (MBA) and he holds a BA from
Michigan State University. Scott is a Level
II Candidate in the Chartered Financial
Analyst (CFA) Program and holds Series 7,
66, 63 & 31 security licenses.
About HealthiosXchange
The HealthiosXchange is the premiere
investment marketplace dedicated exclusively
to the global healthcare industry. Employing
crowdfunding as the cornerstone of anew paradigm in healthcare investing, theHealthiosXchange offers direct access tothe broadest investment opportunities ona “Fee Free, Carry Free” basis in the mosttrusted online environment. The mission of
the HealthiosXchange is to “unify the promiseof medicine with the fortunes of those who
invest in it.”

PENSCO CROWDFUNDING REPORT

26

Blockbuster Alternatives
Film financing finally opens its doors
GREGORY PARKER, INDIECROWDFUNDER.COM

The future for the film and television industry is bright. In its Global Entertainment andMedia Outlook 2014-2018, PricewaterhouseCoopers predicts that global revenues willrise at a compound annual growth rate of 4.5%, topping $100 billion by 2018. The fastest
growing segment of the market is streaming services, such as Netflix and Amazon, which
are on track to exceed the revenue from physical sell-through by 2018. Until recently,
opportunities to invest in this market were not widely available to individual investors, but
crowdfunding is opening doors that once said, “Members Only.”
Global Filmed Entertainment (US$Bn), Total and by Segment
$120

50

$105

$75

30

$60
20

$45
$30

10

Segment Revenue (US$Bn)

Total Revenue (US$Bn)

40
$90

$15
0

$0
2009

2010

2011

Source: PwC

2012

2013

2014

2015

2016

2017

2018

Total global filmed entertainment revenue
Box officePhysical home video

Electronic home video

AdvertisingElectronic home video’s increasing popularityand box office’s continuing strength will drive filmed
entertainment revenue over $100 billion (US) in 2017

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PENSCO CROWDFUNDING REPORT

27

What Should I Look For When Using
Crowdfunding?
Alternative investments30 in entertainment assets
are inherently risky and may have lower liquidity
and longer time horizons than publicly tradedsecurities. This is why it’s important for investors toseek out crowdfunding platforms that offer support
for evaluating and managing risk, including:

For film and television, crowdfunding took off whenweb sites began helping independent filmmakers
reach their funding goals through donations. Usinga model made popular by telethons, donors were
offered incentives, such as a DVD of the completedfilm, for different contribution levels. Highprofile successes followed, such as the Veronica
Mars movie, which raised more than $5 million,
according to Kickstarter. Some have claimed thisdemonstrates the potential of crowdfunding asa financial vehicle for the commercial film andtelevision industry. Others see crowdfunding
fatigue, as many projects struggle to meet goals.
The truth is that both are right. The competition
for donors has exploded along with the number ofprojects. At the same time, despite the popularity ofthe model, it is difficult to see how donations alone
can meet the demand from commercial projects.
A 2012 analysis of 732 campaigns showed 80% of
incentives were offered for contributions of $100 or
less27. In contrast, the production budgets for studio
projects routinely top $100 million for film28 and $2
million per episode for one-hour television.29
Put more simply, many investors are looking for
more return potential than a free DVD. Equity
crowdfunding has stepped into the gap between thedonor-driven model and the needs of investors andproduction companies. It offers ownership sharesin film and television projects. In other words, it’s aform of private equity.

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1. Project Slates
The projects that a film production company isplanning or producing are known as its “slate.”
Entertainment financing has adopted this term torefer to a group of two or more projects that arebundled together into a single offering to investors.
A slate spreads an investor’s risk across multiple
entertainment investments. Looked at another way,
this creates multiple opportunities to achieve a
positive return in single investment.
2. Verified Investments Opportunities
To maintain quality, entertainment investments
should be screened by experts before being
offered to investors. A crowdfunding platform
should offer not only licensed securities
professionals but also experts in film andtelevision production to prudently evaluate eachentertainment project. That includes performing
broker-dealer level due diligence and backgroundchecks on each issuer.
3. Lower Minimum Investments
Crowdfunding has helped lower the highminimum investment thresholds that once madeentertainment equity available only to high-networth individuals. Lower minimums also allow
investors to risk less of their allocated capital.
4. Key Investment Metrics
As with traditional asset classes, metrics can giveinvestors insight into growth potential and viability.
Investing platforms should estimate key metrics foreach opportunity, such as return on equity, priceto-earnings ratio and earnings per share, and thenprovide them at a glance to potential investors.

PENSCO CROWDFUNDING REPORT28

Next Stop: Retail Investing
Today, the existing regulations around equity
crowdfunding often limit access to deals. Issuers
who want to market to the general public, as
opposed to accredited investors, need to getapproval from regulators in every state where theyplan to seek investment. In practice, this means
many issuers stick with accredited investors or
single state offerings. The good news: This is
likely to change as a result of the Jumpstart Our
Business Startups (JOBS) Act of 2012. The SEC is
now considering new rules that may tear down thelast remaining barriers between retail investors
and entertainment private equity.
Equity in film and television projects can help
diversify an investment portfolio by creating
sources of return that have not historically shownstrong correlations with cash, publicly-tradedstock, and fixed-income (bonds). Add to this thetax benefits of investing through an individual
retirement account (IRA) and many investors may
be interested in these opportunities as part ofa retirement portfolio. Crowdfunding sites likeIndieCrowdFunder.com are prepared for the day
when this kind of diversification will be widely
available to all investors.

About the Author
Gregory Parker is currently Co-Founder &Chief Executive Officer of IndieCrowdFunder.
Gregory Parker has worked as a public policy
analyst, director of software development
and most recently an elected and appointed
government official. Gregory, a graduate ofColumbia Southern and Walden Universities,
holds a bachelor’s degree in businessadministration, a master’s degree of public
administration (MPA); and has completed
OpenCourseWare from Massachusetts
Institute of Technology (MIT) in economics.
He has more than 17+ years of management
experience, including managing large
multi-million dollar governmentorganizations. Gregory’s passion led him to
the entertainment industry where he has
directed music videos, TV pilots and film
shorts. Gregory currently holds Series 82 andSeries 63 securities licenses. Gregory is also
an optioned writer.
About IndieCrowdFunder
IndieCrowdFunder.com, headquarteredin Beverly Hills, facilitates equity-based
crowdfunding for feature films, television andnew media projects conceived by Hollywood
professionals. IndieCrowdFunder.com –bringing investors and Hollywood
professionals together.

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PENSCO CROWDFUNDING REPORT

29

Game Changer
Crowdfunding opens unprecedented access to real estate
CAROLANN DEKKER, LENDZOAN

Equity crowdfunding continues to grow in popularity
as an alternative investment vehicle. More andmore accredited investors are exercising their
newfound ability under the Jumpstart Our BusinessStartups (JOBS) Act to invest in people, real estateand even companies without an intermediary.

For accredited investors generally, equity
crowdfunding delivers a greater degree of control
and, some would argue, reduces risk. But for
accredited real estate investors specifically, the riseof equity crowdfunding has transformed investing.
Now, these investors are able to directly invest in
the kind of real estate deals that have historically
been closed off to most individual investors.

Crowdfunding has grown at a staggering rateworldwide. According to a 2014 report from thefinancial market research firm TABB Group, it
could reach $17 billion globally this year, with morethan 1,000 funding platforms available.31 Anotherrecent study by The World Bank estimated that the
global market for crowdfunding will be between$90 billion and $96 billion by 2025.32

Residential Market Outlook
It is a great time for savvy investors who arefamiliar with real estate investing to diversify theirportfolios and possibly increase returns using
online crowdfunding portals. In the United States
last year, median home prices rose to their highest

PwC and ULI’s 20 Cities to Watch in 2015
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VISIT WWW.PENSCO.COM OR CALL 1-866-818-4472

Projected 1-year change in median home prices

PENSCO CROWDFUNDING REPORT

30

level since 2007, though total sales decreasedslightly (3.1 percent) from 2013.33
One headwind in 2015 may be rising interest rates,but overall strong demand is expected to continue
as the economy strengthens and job and wage
growth remain healthy.34 A survey of more than
1,000 real estate experts found that the 20 cities
with the most positive outlook for 2015 highlighted
economies in the Southern states in addition to anumber of the usual suspects.35

promoted through social media promotions,investors may be able to see and follow the level ofinterest surrounding a project before investing.
Real estate represents a tangible investmentthat can be used as an income generator andportfolio diversifier. Crowdfunding has put theseopportunities in the hands of a much larger
network of accredited investors and by doing so,changed real estate investing forever.

Crowdfunding vs. Tradition
Through equity crowdfunding, accredited investors
are able to locate viable real estate deals with
unprecedented speed and efficiency. Compared
to traditional banks or lending houses, online
marketplaces allow more people to participate indeals, which can shorten the time to reach funding
goals.
Traditional lenders making large investments inselect projects may also want to avoid more “outof-the-box” projects because of perceived risk.
Through crowdfunding platforms, private lenders
are proving more willing to think creatively as they
spread their investments over multiple projects.
At a basic level, creating a portfolio of different
projects can spread risk. If one project fails, aninvestor may have several others in place that
could succeed. Real estate can also diversify thesources of potential return in a portfolio that may
rely mostly on traditional assets classes, such asa retirement account. Investors are increasinglyinterested in using individual retirement accounts(IRAs) to invest directly in real estate, and niche
projects in particular may present opportunities
for return that are even less correlated to sometraditional asset classes than real estate overall.
Over time, an investor may also use a portfolio
approach to gain confidence by testing different
types of projects, regions, and even funding
mechanisms. Information provides anotherconfidence boost. Using educational tools available
online through crowdfunding portals, investors
can research investments and gauge the levelof market interest based on the funding successfor similar projects or Internet chatter.36 Since
crowdfunding campaigns are public and often

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About Carolann Dekker, CMO, LendZoan
Carolann Dekker is Chief Marketing Officer ofLendZoan. She joined the real estate lending
marketplace after more than two decades ofexperience in marketing, developing online
and off-line communities, new products andrevenue streams working with some of themost high-profile entrepreneurs and renowned
sporting events and enterprises. Chief among
them are Tony Robbins, noted world authority
on leadership; Vistage International, a
17,000-member CEO networking organization
established more than 50 years ago with
offices in the US, UK and China; andCollegeClub.com, the first online community
to connect over 15 million college students
from around the globe. In addition, she also
served in marketing executive capacities for
the America’s Cup and Super Bowl.
About LendZoan
LendZoan (www.LendZoan.com) is the only
real estate lending marketplace that connects
investors to buyers through local real estateexperts. These certified experts provide
investors with local knowledge of local projects,
and the platform allows them to compare
projects with similar criteria or features. Our
mission is to leverage all the advantages of realestate crowdfunding to provide borrowers withcapital on better terms and deliver investors
better deals with greater flexibility.

PENSCO CROWDFUNDING REPORT

31

Less is more
“SPVs” unlock startup opportunities
ALEJANDRO CREMADES, ONEVEST

Private equity investments in early stage companies are on the rise. In the fourth quarterof 2014, they topped $5.6 billion, the highest quarterly total since the year 2000, according
to PricewaterhouseCoopers. To access this opportunity, startups are increasingly turningto equity “crowdfunding”, using online tools and lower minimum investments to generateinterest.
Investments in Early Stage Companies$18$16

USD BILLIONS

$14
$12
$10
$8
$6
$4
$2
$0
2009

2010

2011

The trouble with crowdfunding
The typical minimum investment for an angel
investor can be $25,000 or more but at Onevest we
see many deals with $10,000 minimums and someas low as $5,000. In theory, the minimums could goeven lower. This creates opportunities for a muchlarger pool of investors than ever before. It opens
the possibility that individual investors can accesshigh-quality early-stage deals without needing “toknow someone.” And this street runs two ways. For
company founders it means an even better chancetheir business will win backers based on merit.

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2012

2013

2014

The prospect of more, smaller investors can bedaunting. As a company’s list of investors, also known
as its capitalization table, expands, so too does the timeand effort required to communicate with them. At thesame time, smaller investors have different needs andmotivations and should have access to information that
addresses them. After all, equity investors are owners.
That’s a different relationship with the company thana “crowd” that gives money in exchange for a productor a perk. To fully unlock the opportunity in equity
investing, early-stage companies have to find ways tomanage a larger, more diverse investor base.

PENSCO CROWDFUNDING REPORT32

Is the answer SPV?
Two years ago I was having lunch with a friend who
worked in the alternative investment group of a large
investment bank. He and his team administeredand marketed special purpose vehicles (SPVs) for
already established companies that wanted to raise
additional money. I wondered then why SPVs were
only a niche financing vehicle and the investment
minimums generally high. For example, $250,000
was a common minimum at that time.
A lot has changed in two years. SPVs have beenused to purchase equity from early investors incompanies like Pinterest and Twitter and startups
are beginning to turn to SPVs as a way to attract
more investors at lower minimums than havegenerally been the norm in private equity.
What is a special purpose vehicle exactly? An SPV
is a legal entity that can own debt or assets such as
equity, trademarks, brands, copyrights or patents.
This flexibility offers two ways to raise capital. The
first way is through debt financing. A company
seeking a loan can put assets in an SPV as security
for a loan from investors. A patent, for example,
would offer investors a potential income stream

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that could be used to pay the loan back over time. If
structured properly, the SPV would continue to holdthe patent and pay investors, even if the startup
went out of business.
The second way is equity financing. This seems likea perfect fit for equity crowdfunding. All investors
in the SPV are pooled in a single entity which canmake life for a young startup company a lot easier.
Management deals with one point of contact, the SPV
organizer, who represents all the SPV’s investors.
(Onevest currently accommodates up to 99 investors
per SPV.) A startup can meet its funding minimum bygathering smaller sums from more individuals while
requiring less time communicating with them, leaving
more time and space to focus on the business.
Likewise, the SPV organizer can be the main pointof contact with investors for communications about
the company and questions about their investment.
This can be particularly important for individual
investors, who may have used private savings,
such as an individual retirement account (IRA).
As a result, they may be more risk averse than a
traditional angel investor who has experience instartup funding and its risks.

PENSCO CROWDFUNDING REPORT

33

Tell me you’re tenacious
For early stage companies, there is high probability
that investors could lose their entire investment.
Accordingly, all potential investors should
understand the level of risk before investing
and consult with a lawyer or financial advisor
before becoming involved with an SPV. From ourexperience at Onevest, when performing due
diligence on these opportunities, investors should
pay close attention to the following factors:• A seasoned founding team with a track record ofsuccess and knowledge in the industry;• A product or service that solves a real problem
in a unique manner, thus setting the company
apart from the competition;• Momentum in the investment offering,
evidenced by other investors, and clear terms
for the offering;• Validation for the company, sometimes known
as “traction,” in the form of revenue, key
partnerships, signed agreements indicating
future revenue, or other concrete indications of
its future prospects; and• A tenacious founder who will finish the
marathon to the exit strategy.
Central banks around the world and several roundsof quantitative easing have held interest rates
low and helped to lift stock markets to record
highs. In this environment, finding sufficient,
diversified investment returns remains a challenge
for investors. Early stage private equity offers apotential source of yield. SPVs can unlock the fullpotential of crowdfunding to bring this opportunity
to a broad base of investors.

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About the Author
Alejandro Cremades leads the vision andexecution for Onevest, an equity crowdfunding
platform that focuses on early stage
companies. Previously, Alejandro was CoFounder and CEO at RockThePost, one of thelargest startup investing platforms. Prior to
RockThePost, Alejandro was an attorney atKing & Spalding where he was involved in oneof the biggest investment arbitration cases inhistory, Chevron v. Ecuador (with USD $113
billion at stake). Alejandro guest lectures
at NYU Stern School of Business and The
Wharton Business School.
About Onevest
Onevest is an online network andtransactional platform which supports
founders and investors in building successful
businesses. Through our curated startup
investment marketplace, our accredited
investor community gains access to highquality, pre-vetted investment opportunities.
Founders on Onevest are introduced toaccredited investors after deep consultation
with fundraising specialists to prepare theircompanies for due diligence and pitching.

PENSCO CROWDFUNDING REPORT34

A Modern Portfolio
Diversification Through Early Stage Investing
KEVIN SMITH, SEEDCHANGE

Investing in early stage companies offers the opportunity of decreasing a portfolio’s overallrisk profile while increasing expected returns. According to modern portfolio theory, the key tomaximizing returns is efficient diversification. Investment standards have evolved dramaticallyin line with this belief over the past 20 years, as investors have added new exposures to diversify
portfolios that were once concentrated in large cap stocks and bond funds.
US VC Index Pooled Returns Net
40
33.42
30.9

30

Barclays Agg

Venture: Expansion & Late

S&P 500

Venture: Early Stage

27.47

21.86

20

13.54

12.67
10
7.42

10.04

9.30
6.89

4.41
0
-0.26

-10
1-Year

10-Year

25-Year

Source: Cambridge Associates

An increase in investment opportunities has helped
this trend. Widespread access to foreign stock
markets came with Morgan Stanley’s launch of theWorld Equity Benchmark Series (WEBS) in 1996.
Eight years later, exchange traded funds (ETFs) madeprecious metals and commodities easily and cheaply
available. Since then individual investors have seen
new opportunities in emerging and frontier markets,
real estate, private equity and hedge strategies. All ofthese are asset classes or investment strategies thathave long been used by institutional investors.

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Not Just for Silicon Valley Anymore
It used to be difficult to invest in early stage
technology companies. Few investors outside
Silicon Valley, New York and Boston had regularaccess, and venture capital was dominated by large
funds seeking large fees from large institutions. As
a result, early stage investing has rarely been partof a systematic approach to portfolio management
for most investors. That includes institutions andfamily offices as well as individuals.

PENSCO CROWDFUNDING REPORT

35

The passage of the JOBS Act in 2012 catapulted
startup investing into the financial news and 2013
and 2014 were the best years for initial public
offerings (IPOs) of technology companies since theend of the last century. The deal value of technology
mergers and acquisitions also spiked to reach $161
billion in 2014. Innovation has not slowed in 2015and high levels of “dry powder” in private equity,
combined with cash and securities hoards at top
technology companies, are expected to fuel anotheryear of active deal making.37
Not surprising, the majority of investors havecontinued to focus on the handful of high-profile
companies (such as AirBnB, Lyft and Palantir) thathave drawn huge investments from venture firms, oron recent IPOs like Alibaba, ZenDesk and GoPro. In
most cases, only major institutional investors haveaccess to these kinds of investments before they are
publicly traded. By the time the general population
purchases shares on the public markets, the highest
returns have already gone to earlier investors.

Efficient Diversification
Dr. Christopher Geczy, professor of finance at the
Wharton School, noted that “modern portfolio
theory did not fail during the [2008] credit crisis—

portfolio construction did. Many investors did nothave exposure to enough different asset classes.”38
For decades investors attempted to create
diversified portfolios by combining stocks andbonds in a proportion that weighted bonds moreheavily as an investor approached retirement.
Investors sought geographical, sector and style(e.g., growth versus value) diversification within
their equity and bond holdings. However, thesefactors often proved to be correlated. Over thelast 25 years, for example, market shocks led tosignificant, simultaneous declines in indices that
represent large capitalization US stocks (S&P 500),
small cap US stocks (Russell 2000), international
equities (MSCI EAFE), and US technology andgrowth stocks (NASDAQ Composite).
True diversification can help a portfolio approachthe “efficient frontier” where potential returns are
the highest for the given level of risk. That means
investors need to hold asset classes that are nothighly correlated. Early stage companies may havehigher volatility than traditional investments but theytend to have low correlations to other asset classes.
As a result, the addition of early stage assets to aportfolio as part of a thoughtful portfolio management
strategy can improve its overall risk-return profile.

Major Equity Indices During Market Shocks
October 1987,
includingBlack Friday

March 2000 to March 2002,
including September 11th
Terrorist Attacks

December 2007 to
February 2009, including
Global Financial Crisis

0%
-10%
-20%

Return

-30%
-40%
-50%
-60%
S&P 500

MSCI EAFE

Russell 2000

NASDAQ-70%-80%
Source: Yahoo! Finance, MSCIVISIT WWW.PENSCO.COM OR CALL 1-866-818-4472

PENSCO CROWDFUNDING REPORT36

Early Stage Returns
By combining asset classes that have different
responses to market changes, efficient
diversification can reduce the level of overall
portfolio risk. Unfortunately, in the last five years,
the cost of diversification through fixed income
and cash instruments has been steep. As interest
rates have dropped to zero (and below), investors
have seen the returns on these assets fall behind
inflation.
In contrast, venture investments—particularlyin the early stage—have provided diversification
while generating long-term returns. For example,
the total pooled returns of Cambridge Associates’
Venture Capital Index39 were higher than the
widely tracked S&P 500 stock index and the
Barclays Aggregate Bond index. In fact, early stage
investments outperformed middle- and late-stage
private investments too.

Removing Barriers
Now we’re back where we started: Consistentaccess to high quality investment opportunities inearly stage companies remains elusive for mostinvestors, despite the fact they can now invest
directly or even use individual retirement accounts toinvest in early stage companies. With crowdfunding
in the mainstream, the question is, “Why?”
There are multiple reasons: sourcing opportunities
is time-consuming; there is no standard process or
method for analyzing early stage opportunities; due
diligence is difficult and tedious; private securities
are subject to considerably less regulation and fewer
disclosure requirements than public securities; andlegal costs can eat into performance long before
returns begin to appear.

About the Author
Kevin Smith is the Chief Executive Officer andFounder of SEEDCHANGE. Most recently,
Kevin was a Director at Barclays Global
Investors/BlackRock, and he previously
worked as a lawyer at Davis Polk & Wardwell
LLP in Menlo Park. Before law school, Kevinco-founded a management consulting firm,
CBSD, in Moscow and worked as a consultant
for Levi Strauss & Co. and Xerox.
About SEEDCHANGE
SEEDCHANGE (www.seedchange.com)
combines rigorous analysis with an innovative
platform to transform the way investors
access, analyze and invest in early-stage
companies. We employ an intensive 90-stepprocess to identify and develop the mostpromising opportunities and before listing,every company passes through a rigorous
analysis conducted by our team of analysts andlawyers. SEEDCHANGE: Invest in what’s next.

Nothing contained herein should be considered
an investment recommendation. No investment isrisk-free and the performance of securities is notguaranteed. Investing in early-stage assets carries
additional risks and is suitable only for accredited
or sophisticated investors. An investor may losemoney including all of his/her principal.

A reputable broker dealer that focuses on earlystage opportunities can remove these barriers,
allowing individual as well as institutional
investors to access the potential for more efficient
portfolio diversification. That, in turn, transforms“crowdfunding” into serious investing.

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PENSCO CROWDFUNDING REPORT

37

The Institutional Crowd
Real estate crowdfunding offers institutional investment
opportunities
JON K. HAAHR, ROBERT E. LEE, JON K. HAAHR JR., SILVER PORTAL CAPITAL“It’s a dangerous business, Frodo, going out your door. You step onto the road, and if you don’tkeep your feet, there’s no knowing where you might be swept off to.” It may seem silly to starta discussion of real estate crowdfunding with a quote from J.R.R. Tolkien’s Lord of the Rings,
but in fact, as many real estate professionals would tell you, they have oftentimes felt like
Frodo, standing on the precipice of the unknown, squinting against the darkness, trying todetermine whether or not it is safe to step out into the rushing wind and driving rain.
Backstage to Red Carpet
The dynamic evolution of capital raising within thereal estate industry over the past two decades,
both in the public and private markets, has often
made us feel as if we have been swept off ourfeet. But ultimately, that evolution has enabled
us to reach the point we are today: through equity
crowdfunding, real estate professionals are putting
control and information into the hands of a broadgroup of investors, providing transparency andaccess to high-quality opportunities in a sector that
historically has been reserved for institutions andultrahigh-net-worth investors.
The industry has leveled the investment playing fieldby taking advantage of the Jumpstart Our BusinessStartup (JOBS) Act, which, among other things, allows
for general solicitation to accredited investors. Realestate projects can now be marketed to prospective
investors directly through publicly accessible websites
and even television and radio advertisements.
Crowdfunding platforms take unique advantage ofthis new general solicitation freedom by employing
technology to do much of the “heavy lifting” in investor
communications, including data dissemination andverification of accreditation/suitability. The result,investor empowerment - individuals now have ready

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access to detailed information and investment
opportunities and the ability to make informed
decisions without having to depend solely on
traditional investment professionals.

Institutions to Individuals
Historically, real estate has been widely
accepted as an attractive investment product byinstitutions, such as pension funds, foundations
and endowments. More recently, high-net-worth
individuals have begun to understand the same –that direct real estate investing offers the potential
to generate current and future income, decrease
the volatility of returns in a portfolio and hedge
against inflation.
Equity crowdfunding will enable many moreaccredited investors to own real estate directly,
including in their individual retirement accounts(IRAs), as well as diversify their overall holdings.
Instead of committing capital into a single property
in a single market, individuals can invest acrossmultiple assets, property types, and geographies,
which may reduce the overall portfolio risk.
Investors interested in equity crowdfunding in thereal estate sector should consider the history,
focus and model of the sponsor platform to ensure

PENSCO CROWDFUNDING REPORT38

it matches their needs. Some good questions to
consider include:• Do the sponsors have a deep expertise in realestate? At Silver Portal Capital, for example,
the principals have decades of experience anda track record of advising on and raising over
$17 billion of capital, both public and private,exclusively for the real estate sector.
• Is the firm an experienced broker-dealer(B-D)? Working with a registered B-D with the
Financial Industry Regulatory Authority (FINRA),
which Silver Portal has been for over 14 years,
investors are protected through FINRA’s
oversight of the firm as well as requirements
for transparency and net worth.
• What types of investments are being offeredand do they fit your objectives? You could
make an equity investment and share in thegain/loss of and asset’s value, or a loan thatprovides a return based on the rate of interest
being charged. You may invest directly into anindividual property or portfolio, into a fund being
marketed by the sponsor which then invests
directly into the real estate, or partner with athird-party operator and its capital.
• What is the sponsor’s overall investment
philosophy and the breadth of investment
opportunities being offered? By way of example,
Silver Portal focuses on a range of property
types, both traditional and non-traditional (coreand non-core), as well as strategies from corestabilized to value-add/opportunistic and tax
deferred 1031/DST. We also create alignment
by investing as principals or funding alongsidenationally recognized, vertically integrated realestate operating partners.
The key in all of these is to clearly outline yourinvestment objectives and ensure the crowdfunding
sponsor has the track record and demonstrated
history to be successful on your behalf.
The continuing evolution of the industry can be
expected to result in a number of related trends,
including a growing interest among traditionallyinstitutional sponsors, like Silver Portal, to use
crowdfunding platforms for larger, higher profile
investments. In 2015, we expect that several
properties valued in excess of $100 million will

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successfully tap into an online network. We also
believe that the type of opportunities sponsors
allocate to crowdfunding platforms will broaden –from basic debt and equity offerings to preferredand mezzanine capital. Finally, larger funds, private
REITs and other national operators will be attracted
to the lower cost of raising capital and streamlined
investor relations that web portals provide, as
well as the expanded access to private accredited
investors and family offices.

High Net Worth Individuals* in the US
50000
Wealth in US$ Billions
Number of People (’000)
40000

30000

20000

10000

0
2008

2012

2017
(estimated)*Net assets of $1 million or more excluding primary residence
Source: WealthInsightOver time we anticipate that equity crowdfunding willconsolidate into a smaller number of platforms those with the most real estate industry experience,transparency and institutional-quality opportunities.
Investor networks, on the other hand, are likely to
expand dramatically as the crowdfunding businessmodel is refined and recognizable brands emerge.
The sheer size of the accredited investor basemakes growth a virtual certainty. According to a
recent WealthInsight report, by 2017 it is estimatedthat there will be more than 9.5 million high-networth investors in the United States, an increaseof 68% from 2012, with the total wealth of thisgroup increasing by 83% to just under $40 trillion.
Similarly, the number of ultrahigh-net-worth
investors — those with net assets of $30 million ormore – is projected to increase by 67.7% to $39.6
trillion by 2017. Clearly, we are only in the first stageof the crowdfunding lifecycle.

PENSCO CROWDFUNDING REPORT

39

About the Authors
Jon K. Haahr
Mr. Haahr is the Founder of Silver Portal Capitalwith over 25 years of experience in real estate
investment/merchant banking, advising and capitalraising for both private and public companies. He
has been managing underwriter, placement agent
and advisor in over $17 billion of equity, debt andfinancial advisory transactions for the real estateindustry from 1992 to the present, involving morethan 140 transactions. Mr. Haahr was Co-Headand Managing Director of Real Estate Investment
Banking for Wachovia Securities from 1999-2001,prior to which he founded and ran the Real Estateand Lodging Group at Kemper/Everen Securities.
He is a past and present member of multiple
corporate boards and speaks regularly at a variety
of industry events.
Robert E. Lee
Mr. Lee is the Director of Capital Markets for Silver
Portal Capital. He has over 15 years of direct
experience in real estate and capital markets andextensive capital raising and real estate investment
knowledge. Prior to joining Silver Portal Capital,
Mr. Lee served as Senior Director of Private Equity
for Bainbridge Private Equity and was the Founderand Managing Partner of SIG Equity Partners, LLC.
He began his real estate career in brokerage with
Sperry Van Ness, Colliers International, and Realty
Capital Partners.
Jon K. Haahr Jr.
Mr. Haahr is an Associate at Silver Portal Capitalwith previous investment banking and commercial

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real estate experience. He handles most of thefirm’s analytic and financial modeling work as wellas market research and presentation drafting.
Mr. Haahr previously interned as an analyst for
RedHill Realty Investors and Westcore Properties,
private real estate investment firms that specialize
in raising institutional capital and acquiring multifamily and office/industrial assets. Mr. Haahr
has a B.A. in Economics from Cornell University
as well as minors in Spanish and Science andTechnology Studies.
About Silver Portal Capital
Silver Portal Capital, a registered broker-dealer
and FINRA member founded in 2001, is a realestate investment and merchant-banking
boutique traditionally focused on institutional
investors. The platform is owned and managed
by a team of professionals with a track record ofadvising on and raising over $17 billion of capital,
in both the public and private markets, exclusively
for the real estate sector. We focus on identifying,underwriting, and financing only high-quality
properties and portfolios in which we invest as
principals or fund alongside nationally recognized,
vertically integrated operating partners.
Silver Portal Capital operates the crowdfunding
platform, Silver Portal Direct (SPD, www.
silverportaldirect.com), which combines ournationwide relationships and real estateexperience with a best-in-class technology
platform. We believe our depth of experience,alignment of interest and history of working withthe country’s most sophisticated investors in an
accountable, transparent way, set Silver Portal
Direct apart – as an institutional quality realestate crowdfunding platform designed to provide
superior risk-adjusted returns to our investors.

PENSCO CROWDFUNDING REPORT

40

25

YEARS

PENSCO Makes It Possible

TM

PENSCO Trust Company has been helping investors use their retirement account funds to invest in realestate, private equity and other non-exchange traded assets since 1989.
As the trusted custodian of over $10 billion in assets on behalf of more than 45,000 clients, PENSCO works withasset sponsors, financial institutions, and financial advisors, as well as self-directed investors who typicallyhave a point of view about alternative investment opportunities based on their own knowledge or expertise.
Early on, PENSCO recognized the potential opportunities for using retirement funds to invest in crowdfunding
platforms. To help our clients, we created The PENSCO Marketplace™, which connects providers, products, andservices with alternative asset investors who want to invest in private placement opportunities using their IRA.

To learn more about PENSCO services and investing in non-traded alternative assets,
please visit http://www.pensco.com/marketplace or call:

1-866-818-4472
This publication is being provided for informational purposes only and PENSCO does not endorse any viewpoints contained
therein. It is not intended as a recommendation or advice. PENSCO is not affiliated with any financial professional,
investment, investment sponsor, or investment, tax or legal advisor; including any who are listed in The Marketplace.
Crowdfunding opportunities are generally only available to accredited investors. It you do not meet this requirement, or you
are not sure, please consult with your financial, tax or legal advisor. Participants of this publication submitted content on
their own volition, without solicitation from or compensation by PENSCO. This publication is copyrighted by PENSCO andmust be distributed, or transmitted in its full form and not excerpted in any way by third parties, including photocopying,recording, or other electronic or mechanical methods, except in the case of brief quotations embodied in critical reviews,
media stories and certain other noncommercial uses permitted by copyright law. Clients or potential clients are advised toperform their own due diligence in choosing any investment opportunity as well as any professional to assist them with aninvestment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal.
The PENSCO Marketplace should not be considered a complete list of individuals, firms, or crowdfunding sites and is being
provided for informational purposes only. It is not intended as a recommendation or endorsement and every investor isencouraged to perform their own due-diligence before engaging with any financial professional/site.

©2015 PENSCO Trust Company - 2015 PENSCO CROWDFUNDING REPORTPENSCO Trust Company performs the duties of an independent retirement custodian, and, as such, does not provide investment advice,sell investments or offer any tax or legal advice. Potential clients are advised to perform their own due diligence in choosing an attorney,
tax advisor, or any investment opportunity.
Alternative investments are not FDIC insured and are subject to risk, including loss of principal.
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PENSCO CROWDFUNDING REPORT

41

Endnotes
1	Investment Company Institute, “Retirement Assets Total$24.2 Trillion in Third Quarter 2014,” press release,
December 17, 20142	LendingClub.com, Prosper data estimated from company filings3	Americans held approximately $7.3 trillion in IRAs as of Q3
2014, according to the Investment Company Institute.
4	Kevin Harrington, “Will JOBS Act Equity Crowdfunding Ever
Happen?” Forbes, February 3, 2015.
5	PitchBook Data Inc., 2015 Annual US PE Breakdown

21	Ibid.
22	CNBC, “Healthcare startups rake in record money in 2014”23	National Venture Capital Association and Thomson Reuters,“Venture-Backed IPO Exit Activity Keeps Momentum withBest Full Year for New Listings Since 2000,” Press Release,
January 7, 2015.
24	S&P Dow Jones Indexes, As of January 30, 2015.
25	Sectors and supporting data from McGuireWoods, “TopAreas HealthCare Private Equity Investment,” 20146	U.S. Securities and Exchange Commission, “Eliminating
the Prohibition Against General Solicitation and General
Advertising in Rule 506 and Rule 144A Offerings: A Small
Entity Compliance Guide,” Modified September 20, 201326 Aaucm.org

7	Average deal size in 2014 was GBP 199,095. JD Alois,“FCA
Publishes Review of Crowdfunding Regulations States No
Need to Change,” CrowdfundInsider, February 3, 2015.

28	The Numbers, “Movie Budgets,” Accessed on February 19,
2015, http://www.the-numbers.com/movie/budgets/all

8	Andy Sharman, “UK’s New Finance Regulations Face Their FirstBig Test in Crowdfunding,” Financial Times, October 7, 2014.
9	Data from the Center for Venture Research at the Universityof New Hampshire
10	AngelList data
11	Supporters contribute to a campaign in exchange forreceiving a new product or other reward from the company
running the campaign.
12	https://www.fdic.gov/bank/individual/failed/banklist.html
13	Analysis by the U.S. Small Business Administration (www.
sba.gov) for the years 1993 to 2009.
14	Diad Consulting, Inc. “Business Failure Statistics & Reasons
Summary,” September 21, 2014.
15	This funding mechanism can also be used in concert withtraditional bank loans. Take a business that leases its
commercial office space and has an opportunity to purchaseit. They have 5% cash for the down-payment, but the bank’s
policy is 20%. The business would need to raise the additional
15% to qualify for a U.S. Small Business Administration (SBA)
504 or conventional commercial real estate (CRE) loan.

27	Film Courage, “How are Kickstarter Perks ReallyDistributed?”, February 29, 2012, http://filmcourage.com/
content/how-are-kickstarter-perks-really-distributed

29	Film L.A. Research, 2014 TV Study: The Decline of Dramatic

Television Series Production in California, 201430	The Chartered Alternative Investment Analyst Association(www.caia.org) points out that the term “alternative
investment” is sometimes used to define anything that is
not cash, a publicly-traded equity or fixed income. Common
examples include real assets, hedge funds, commodities
and private equity.
31	Deepali Nigam and Larry Tabb, “U.S. Crowdfunding: The
Making of a Market,” TABB Group, 2014.
32	infoDev (The World Bank Information for Development
Program), Finance and Private Sector Department,“Crowdfunding’s Potential for the Developing World,” 2013.
33	National Association of Realtors, “Existing Home Sales
Rebound in December, 2014 Total Sales Finish 3 Percent
Below 2013,” press release, January 23, 2015.
34	National Association of Realtors, “Existing Home Sales Coolin January as Available Inventory Remains Subdued,” press
release, February 23, 2015.
35	PwC and Urban Land Institute, “Emerging Trends In Real
Estate: United States and Canada 2015,” 2014.

16	Americans held approximately $7.3 trillion in IRAs as of Q3
2014, according to the Investment Company Institute.

36	Stephen Key, “The Hidden Benefit of Crowdfunding,” Inc.,
October 29, 2014.

17	Pitchbook, “2014 Annual U.S. Private Equity Breakdown
Report”

37	PricewaterhouseCoopers, US Technology Deal Insights,
February 201518	Cambridge Associates, “US Private Equity and Venture CapitalFunds Earned Positive Returns for Q3 2013 and Improved
their Q2 Results, According to Cambridge Associates”

38	BlackRock, “The New Diversification: Open Your Eyes to
Alternatives,” 201419	Dealflow.com, “Online Deal Marketing Outlook for Q1 2015,”
February 2015

39	Cambridge Associates provides indices tracking early, late,and multi-stage venture capital returns.

20	OfferBoard Group, “Equity Crowdfunding under Title II of the
Jobs Act: The First Year,” 2015.

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PENSCO CROWDFUNDING REPORT42