Transforming Los Angeles Into Silicon Beach
As readers of our blog, you likely already know about the benefits of equity crowdfunding. At StartEngine, we believe that every entrepreneur should have access to capital and that every entrepreneur should be able to raise capital on their own terms regardless of geographic location, gender, race, industry, access to VCs, banks and accredited investors, and any of the other myriad factors that impact whether a company is able to raise money.
The only things that should impact an entrepreneur’s ability to raise capital successfully is whether their business idea is a good one and whether the founders have the technical and business acumen, the endurance and the grit, to see it through.
Led by our co-founder and CEO Howard Marks, we have made it our mission to transform Los Angeles into a leading technology city, one that can compete with Silicon Valley in San Francisco and Silicon Alley in New York City. Our vision was, and is, to turn Los Angeles into Silicon Beach.
The first step in that mission was to enable the entrepreneurs in LA to grow their businesses and make the city a hotbed for technology startups. In order to grow, businesses need capital, and as leaders in the equity crowdfunding space, we began educating the city about Regulation Crowdfunding and a new way they could get access to funding.
While there is still work to be done, we have made a lot of progress. Today, Los Angeles is the leading city in equity crowdfunding. 125 companies in Los Angeles have raised a combined $14.7M, and that is just within Los Angeles County alone. For context, San Diego County has raised the second most capital with $8.5M across 34 companies. The word is spreading.
We view equity crowdfunding as a continuation and evolution of the American Dream and of capitalism: let the markets decide what is worthy of investment in its purest form and give access to opportunity to everyone. Why restrict investment opportunities to accredited investors and venture capitalists? The “wisdom of the crowd” is a known phrase for a reason.
For those interested in learning more about the specifics of equity crowdfunding, please check out this article on the differences of Regulation Crowdfunding and Regulation A+.
As Los Angeles paves the way for this type of crowdfunding, the fundraising method continues to grow. Last March, Regulation Crowdfunding crossed the $100M mark in capital raised, and now is well on its way to $200M with $135M raised in the 5 months since. Keep in mind that it took nearly 2 years to raise the first $100M since Regulation Crowdfunding’s inception in May 2016.
Yet there is another sibling to equity crowdfunding, another fundraising mechanism that took the benefits of crowdfunding without following the corresponding crowdfunding regulations: the ICO, or Initial Coin Offering. This explosive capital raising model was adopted by the crypto and blockchain community, in which companies sold tokens to investors that had a proposed function within their business. According to Coinschedule, ICOs have raised more than $20B in 2018 alone.
Now, the $135M of Regulation Crowdfunding looks small in comparison, smaller still compared to the $57B raised via venture capital in 2018, but that ignores all of the capital raised via Regulation A+ (which there is no reported total on, but Forbes reported last year that just 32 companies raised $396M via Regulation A+). Still small by comparison, but indicative of a growing force within regulated fundraising that is becoming more popular every quarter.
However, the thing to keep in mind is that the majority of these ICOs were the illegal sale of securities, and the companies doing ICOs were located all over the world. Investors from anywhere with an internet connection could buy tokens in a matter of minutes. The market is simply much larger, but it is becoming increasingly clear that ICOs in their current form are not a safe way to raise capital or to invest.
A little over a year ago today, we decided to include ICOs on StartEngine’s platform, but only those belonging to a different breed. We wanted to work with companies launching ICOs that complied with securities laws and with the crowdfunding regulations we had become experts at over the past few years. We saw a new marketplace emerging for crowdfunding offerings that offered equity or debt with ownership tracked on the blockchain. Not “utility tokens,” but “security tokens.”
We believed that ICOs in their original form were a 1.0 fundraising model, illegal, and offering no protections to investors or to the entrepreneurs doing them. In most cases, these ‘utility’ tokens had no utility at all, and the purpose of the ICO was to build the platform and grow the company to eventually create that utility. Sounds a lot like a company raising a seed round of funding to build their product, no?
We saw an opportunity to combine this ICO model with the established regulations of crowdfunding (after all, aren’t they essentially the same thing when you get down to it? We called this type of offering an ICO 2.0, or what is now known as an STO, or Security Token Offering.
As the SEC became more vocal over the course of the past year, stating that most ICOs were the sale of securities, issuing subpoenas to those who worked with unregistered ICOs, we are being proven right in our belief that equity crowdfunding and ICOs are really one and the same, the latter just being a more efficient way of issuing and tracking the securities sold.
In order to educate the marketplace about this, we began hosting the StartEngine Summit last fall, as Howard would say to “bring ICOs out of the shadows.” Our goal with this biannual event was to help this new fundraising process establish itself in financial markets. We wanted to teach entrepreneurs how they can utilize an STO to their advantage and avoid issues with the SEC and also how investors can discover and analyze these new financial opportunities.
Our most recent summit in April this year was one of the largest crypto events Los Angeles had ever seen, and our upcoming summit on October 19th will be another marquee event as we continue to discuss the intersection of innovation and regulation. Alongside the brightest minds changing the nature of finance, we will be hosting Christopher Cox, a former SEC Chairman, who will be giving a keynote speech.
The StartEngine Summit will be the kick-off event for the inaugural LA Blockchain Week. This is the first time LA has seen an entire week’s worth of events related to blockchain. From October 19-25, we are partnering with Crypto Invest, USC, Blockchain at UCLA, Women of Blockchain, and Expert Dojo for a week of blockchain events to further establish Los Angeles as a leading ecosystem for entrepreneurs and investors.
LA Blockchain Week will begin with the StartEngine Summit and its focus on finance and securities markets. The event will feature top funds and investors, STO platforms, entrepreneurs tokenizing alternative assets like real estate and oil, trading platforms that can facilitate the trading of those securities, lawyers, stablecoins, and more.
Many of the biggest names in crypto and blockchain got their start in Los Angeles, and we are continuing to drive their work forward by bringing the best innovators and the most active investors to the City of Angels to further build the entrepreneurial community in Southern California.
Every day, Los Angeles grows as a technology city and its name as Silicon Beach strengthens. At StartEngine, we are working hard every day to drive that growth forward. Hope to see you at our summit in October, and we can continue that work together.