Solar and distributed generation (DG) offer asset attributes and capital investment profiles that are well suited to crowdfunding. Projects of 1 MW and less can be supported by equity that is readily obtained from multiple small investors. Such projects also come with social incentives for investment and are further supported by intangibles associated with carbon emissions reductions. In solar and DG crowdfunding, the investors are the consumers – and the consumers are investors – often with motives going beyond financial gain. Communities that stand to benefit from small solar and DG also tend to align with the metrics for crowdfunding both in terms of the numbers of investors in a given project and in the relatively small amount of required initial investment.
For these reasons and more, many predict that renewable energy will be a leading sector for crowdfunding, with projections that crowdfunding may supply rooftop solar projects with $5 billion of investment within five years, more than 50 times the amount raised to date.
Recent market activity certainly reflects increased innovation and growth for solar crowdfunding. Growth is estimated at a rate of more than 75% year to year. However, the potential for this type of capital in the U.S. continues to be constrained by the lack of supporting guidance and regulations from the SEC. As reported below, look for important SEC pronouncements over the coming months having major impacts – which could break either way depending on SEC’s interpretive and policy choices.
Update on SEC Activity
SEC continues to work on the issuance of regulations implementing the provisions of the JOBS Act of 2012 and the Dodd-Frank legislation. Among others, current pending regulations include:
- The long-awaited redefinition of “accredited investor.”
- Regulations implementing the equity crowdfunding provisions of the JOBS Act for non-accredited investors.
- Regulations implementing the new Regulation A+, allowing quasi-public offerings of up to $50 million.
For more details on SEC regulatory activities, see our recent publications. We have created a portal dedicated to the JOBS Act to help you navigate the changing regulatory landscape and to provide updates about related rulemaking and other developments. Also, please follow SWJOBSAct on Twitter for the latest updates about rulemaking and other developments under the JOBS Act.
Crowdfunding in Practice
While the U.S. securities laws do not permit equity based crowdfunding in the general sense, i.e. selling unregistered securities to the public at large, in July of 2013, as required by the JOBS Act, the SEC adopted final rules lifting the ban on general solicitation and general advertising for certain private securities offerings under Rules 506 of Regulation D, effective September 2013.
The new rules left in place the traditional private placement exemption, now commonly referred to as 506(b), which permitted the offering of an unlimited amount of securities with no technical disclosure requirements provided that the offering is limited to accredited investors. Up to 35 non-accredited investors may participate in the offering, but that requires extensive disclosure. The catch is that the offering must be private, in other words no general solicitation or advertising.
Under new Rule 506(c), companies can offer securities by means of general solicitation, provided that they satisfy all of the conditions of the exemption, including:
• All purchasers of securities must be accredited investors, and
• The company must take reasonable steps to verify that the purchasers of the securities are accredited investors.
Essentially, by lifting the ban on general solicitation with Rule 506(c), the SEC permitted crowdfunding by accredited investors. With uncertainty as to what constitutes the reasonable steps required to be taken in order to verify accredited investor status, companies have been hesitant to rely on the 506(c) exemption and instead have been trying to continue to rely on 506(b), even when they are essentially crowdfunding. This requires the development of a pre-existing relationship with investors prior to the offering of securities. As you can imagine, this limits the reach of companies looking to crowd fund their offerings online. Some platforms and companies seem to operate in ignorance of or defiance of the rules surrounding private placements.
As more and more companies start to rely on 506(c) and creative entrepreneurs develop innovative ways to verify accredited investor status, crowdfunding of accredited investors will become commonplace.
Unfortunately, the way the JOBS Act is written and the SEC has proposed the rules, crowdfunding by non-accredited investors, where the investors get an actual investment stake in a project (as opposed to a donation or a return of principal model) will not likely take off until some of the heavy disclosure and reporting obligations have been lifted. Stay tuned for more on JOBS Act 2.0.
Recent Market Developments
Innovative crowdfunding mechanisms continue to proliferate here in the U.S., and even more in the UK and Europe. As the examples below demonstrate, innovation in financing models is becoming as important as technology advancement to the success of distributed energy projects.
Mosaic, heralded as the "Kickstarter of solar," has now launched its Mosaic Places portal, which allows investors to provide capital for solar installation projects that Mosaic has developed. The portal also gives communities the power to nominate their own buildings for a solar array and organize from within to get the installation funded.
Mosaic issues solar asset-backed securities applicable to specific solar projects. Each note issued by the company corresponds to a certain solar installation, and the payment on those notes derives directly from the cash flow generated by the loan obligation attached to that installation. Mosaic reports that it has more than 2,500 investors in 19 solar projects of a total aggregate value of $5.7 million. Investors typically receive 4 percent to 7 percent returns annually, depending on the project. Mosaic reports zero defaults and consistent on-time payments thus far. Mosaic has introduced a solar loan product, for up to 20 years, for U.S. residential PV customers. Mosaic believes the product will meet growing demand not met by solar lease providers.
GridShare LLC has launched an independent crowdfunding platform to help renewable energy projects and cleantech companies raise capital.
CrowdSun has already funded over $2 million across 11 campaigns, two of which have hit the 100% mark so far. The company’s first project reportedly raised $300,000 in three days. Crowdsun.com states that it offers detailed project review. Projected annual rates of return for solar crowdfunded investors are represented at between 4.5% and 10%.
SunFunder is augmenting its crowdfunding activity, launching its Solar Empowerment Fund (SEF) in September 2013. This offer created an opportunity for accredited investors (both individuals and institutional) to invest in a diversified, vetted, and high-impact portfolio of off-grid and grid deficit solar projects with an attractive risk/return profile. Through its platform, Sunfunder enables businesses to provide affordable energy solutions to communities in developing nations. Businesses can seek funding for projects through loan agreements from $50,000 to $500,000. SunFunder has participation options for both accredited and non-accredited investors, with non-accredited investors not receiving interest on their loans, but instead "impact points" - which may be invested in other projects.
Palmetto Group, based in Charleston, South Carolina, offers another alternative platform, which places customer investments into secured debt-like instruments. Palmetto's structure is based on short time horizons, with minimum investment periods of as few as months, offering accredited investors opportunities to invest in solar projects with claimed secure returns of 6% and greater.
Village Power, a Palo Alto, California-based platform, allows community organizations to finance and manage solar power projects through investments from individuals in the local community. With no stated minimum investment amount, Village Power offers both accredited and up to 35 non-accredited investors the opportunity to participate in projects on its platform.
Finally, this October, the first Renewable Energy Crowdfunding Conference is taking place in London. With more than 450 platforms worldwide, the conference hopes to bring together the industry and discuss its future—one that is certain to see crowdfunding become more prominent.
With continued market acceleration in the U.S., and particularly if the SEC delivers on efficient and manageable implementation requirements for crowdfunding under the JOBS Act, we could be seeing the first clean energy crowdfunding conference in the U.S. very soon.
Accredited investors are currently defined as natural persons where the company reasonably believes that the person has a net worth in excess of $1,000,000 (excluding the value of their primary residence), or that the person’s annual income is greater than $200,000 per year. For more information on who is an accredited investor see http://www.sandw.com/f-97.html.