Crowdfunding platform StartEngine said it is acquiring rival platform SeedInvest from Circle, best known for the USDC stablecoin, pending approval from the Financial Industry Regulatory Authority (FINRA).
“SeedInvest was acquired by Circle a few years ago, and it's one of the largest players in equity crowdfunding. We are one of the top firms in the field. By acquiring SeedInvest, it puts us in a leadership position in the marketplace by having more investors than anyone and a lot more customers, companies that need to raise capital,” StartEngine CEO Howard Marks told CoinDesk.
“Since we've had this financial crisis in the last few months, a lot of venture capitalists have stopped investing in companies that ordinarily they were already supporting,” Marks told CoinDesk, explaining the rationale of the deal. “What they're doing is helping those in their portfolio they believe are more promising and others they're not going to provide capital for, which is understandable.”
Marks believes this opens up an opportunity to raise capital for those who have a promising future but not enough support from venture capitalists. “With the acquisition of SeedInvest, we're going to almost double the number of users we have on our platform,” he said.
The price of the SeedInvest acquisition was not disclosed and Circle was not immediately available for comment when contacted by CoinDesk. Howard Marks is being advised on the deal by Kevin O’Leary, who continues to be an active investor and stakeholder in the digital assets space.
In March 2020, Circle said it was looking to sell SeedInvest, roughly a year after finalizing the buy, as it no longer fit into the company’s core stablecoin business.
"In June this year, Circle announced to employees the plan to divest itself of SeedInvest later this year as we pivoted to focus on our core business and drive USDC adoption. As a result, Circle has decided to sell SeedInvest’s customer base to StartEngine," the firm said.
The SeedInvest acquisition is the second major M&A deal in the equity crowdfunding sector to occur in the last year. Last December, Republic, another equity crowdfunding platform announced that it was acquiring U.K.-based crowdfunding platform Seedrs in a deal worth $100 million (the deal was completed in September 2022). Initially, Seedrs tried to merge with another rival in the U.K called Crowdcube but that deal was blocked by the country's Competition and Markets Authority.
Trading tokenized securities in startups
During SeedInvest’s tenure with Circle, the company had announced plans to offer tokenized shares of firms listed on its platform by acquiring an alternative trading system (ATS) license. However, it’s unclear whether the plan progressed as SeedInvest still does not offer tokenized stocks in its listed companies.
Generally, the market for tokenized securities, or security token offerings (STO), is considered to be soft. In Asia, where multiple jurisdictions have approved STO frameworks, the interest hasn't materialized. In the U.S., investors have not been given them the same consideration as other digital assets, as CoinDesk has previously reported, because there's not the same efficiencies found in other crypto platforms.
StartEngine’s Marks says that the tokenized securities are in the works, post-acquisition, but it will look different than what the firm had initially proposed. Part of the reason why is that StartEngine also has an approved ATS platform, and is considered a broker-dealer, so there’s no need to duplicate efforts.
"We have put together a plan to do what we call security tokens. SeedInvest had plans that are similar. What we're acquiring are the assets of SeedInvest – SeedInvest the name, everything. But the idea of the tokenization, that stays with Circle," he said.
Crowdfunding in startups
SeedInvest said that in its 10 years of operation, it has supported over 300 startups helping them raise more than $470 million from 700,000 users.
SeedInvest, Start Engine and other equity crowdfunding platforms use a framework from the Securities and Exchange Commission called RegCF that allows firms to raise up to $1 million per campaign, and $5 million annually, by selling equity to the public via SEC-registered intermediaries. Normally, companies are not allowed to solicit the sale of equity to retail investors publicly but RegCF provides an exemption.
While executives in the equity crowdfunding sector promoting it as a more "democratic" way to raise funds, giving retail investors a chance for exposure to high-growth tech startups that would otherwise raise behind the closed doors of traditional venture capital, data shows that the investment vehicle remains incredibly risky for retail. A case study conducted by AltFi data shows that of the first 367 companies that used the U.K.'s crowdfunding framework only 16% went on to raise additional capital at higher valuations, while only one conducted an exit – and provided a 2.5x return to investors.
Data from U.K-based Crowdcube shows that 6% of crowdfunded companies have completed a successful exit since 2011, while data from 2018 from U.S.-based crowdfunding sites show an exit rate that varies between 10%-16%. Equity crowdfunding evangelists point to high-profile exits, such as self-driving startup Cruise by General Motors (GM), or digital bank Revolut by venture capital firm DST Global as proof the fundraising category has merit.
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