Securities Regulation Daily Wrap Up, JOBS ACT—Report examines Reg Crowdfunding results for women- and minority-owned businesses, (May 2, 2024)
While more women- and minority-led startups are raising money using Regulation Crowdfunding, larger investments still flow to all-male or all-white startup teams.
A report commissioned by the SEC’s Office of the Advocate for Small Business Capital Formation finds that investors undervalue crowdfunding offerings by women and minority entrepreneurs. If disparities in funding continue, Regulation Crowdfunding could perpetuate inequalities in business outcomes. The report suggests that government and Reg CF platforms should try to encourage participation by and offer support to women and minority entrepreneurs, as well as attempt to counter investor bias through educational programs.
Seven years of crowdfunding. The proportion of women among all individual entrepreneurs participating in Reg CF increased from 17.3 percent in 2016 to 22.5 percent in 2022. Reg CF startups also became more racially diverse, with the proportion of white entrepreneurs decreasing from 83.4 percent in 2016 to 73.0 percent in 2022. As for gender diversity, in 2016, 79.2 percent of founder teams using Reg CF were entirely male; 11.2 percent were mixed gender; and 9.6 percent were all female. By 2022 the proportion of mixed-gender and all-female teams had increased to 17.8 percent and 14.2 percent, respectively; only 68 percent of founder teams were all male.
While these numbers do show increasing diversity among Reg CF businesses, the report notes that participation by women and minority entrepreneurs still lags compared to the overall business owner population. According to the report, this underscores the critical need for policy intervention to increase the visibility and accessibility of Reg CF to women and minority business leaders.
Crowdfunding targets. Another of the report’s observations is that unlike with venture capital or angel investing, in Reg CF, founders set their own valuation and crowdfunding target. The report finds that all-female or all-non-white leadership teams tend to set more conservative valuations, even though such businesses have similar or better performance histories going into the offering. This could be a lack of confidence, or it could be because women- and minority-led entrepreneurs tend to operate in less capital-intensive businesses. The report here suggests the need to empower women and minority entrepreneurs in capital-intensive sectors like technology.
Women and minorities do appear to have a better chance at funding through the Reg CF route than through venture capital or angel investing, the report states. But among businesses that meet their crowdfunding target, all male teams and all white teams see significantly higher average funding amounts. The report suggests ways in which the entrepreneurs themselves may be at a disadvantage at how they market the offering, or investors may hold biases. Policymakers, Reg CF platforms, and investors must actively engage in solutions to ensure equal access and mitigate biases.
Exit strategies. While acknowledging that it is too early to fully assess the exit outcomes of Reg CF offerings, the report notes that so far, most IPOs and acquisitions are of companies founded by all-male or all-white teams. This suggests the need for structures that aid in scaling the business and transitioning to traditional financing methods. Platforms and support organizations may also consider creating networking and mentorship programs, and governments could offer grants or loans to companies investing in or acquiring startups with diverse leaderships. “These policies could help Reg CF become not just a one-time funding opportunity but also a steppingstone,” the report concludes.
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