Jonathan Shieber, October 30th, 2015
The Securities and Exchange Commission is about to vote on Title III Crowdfunding regulations, designed to open up investments in private companies to all investors — rather than just the accredited investors (mostly high net worth individuals) who are legally allowed to invest now.
Many crowdfunding platforms, like Crowdfunder.com, CrowdfundX, and SeedInvest see this as a massive opportunity to expand the investor base for early-stage companies, and a move that can revolutionize the industry.
“This is what we’ve waited three years for: a true democratization of the capital formation process for small companies,” writes Chris Tyrrell, the chief executive of OfferBoard, in an email. “Title III is about “the 91%” — average Americans — who will soon be able to invest in alongside venture capital and accredited investors in companies raising $1m or less. (Accredited investors represent 9% of households, according to the SEC.)”
The JOBS Act has been implemented by the SEC in stages: Title I in 2012, which eased requirements on on emerging growth companies, defined as companies with less than $1 billion in revenues. It exempts companies from disclosures that potentially deterred young companies from going public.
In 2013, the approval of Title II allowed for the public advertising of private offerings to accredited investors. Earlier this year, Title IV enabled companies to raise more money under a limited public offering. It raised the cap on small fundings from $5 million to $50 million in a 12-month period, from both accredited and unaccredited investors if the company complies with certain filings and audits.
For the SEC, Title III has been the biggest sticking point, in part because it’s the one that could open the general public up to more risk. It enables small crowdfunded securities offerings that anyone can participate in, with protective limits based on an investor’s income and net worth, Tyrrell explains.
“You’ll see a lot of companies raise capital offline from Micro-VC funds or angels and then supplement the rounds for up to $1 million from anybody,” says Ryan Feit, chief executive and co-founder of SeedInvest.
Hundreds of entrepreneurs may launch platforms, from small fix-and-flip real estate deals to tech startups, to yoga studios and coffee shops for neighborhoods, envisions Tyrrell.
The move has funding portals licking their chops. If and when they become accredited by the Financial Industry Regulatory Authority, it potentially opens up billions of dollars in new investor cash that they can use to facilitate financing.
Writing in Forbes, Crowdfunder.com chief executive Chance Barnett laid out an even more expansive vision for the impact of these crowdfunding regulations.
Barnett writes:
With Title III, millions of non-accredited investors will come into the new capital market online. As this happens, venture capital is likely to shift.
Rather than depending on venture capitalists for the lion’s share of their early stage capital, startups can look to everyday investors — with the help of equity crowdfunding platforms that aggregate these investors together.
Over time, it’s likely that the collective power of these individuals will be pooled into new models for investment — models that look a lot like venture funds, but with many many more participants as limited partners (LPs).
As equity crowdfunding grows, regular people will become the new LPs.
And…
As people become the new LPs, platforms will become the new VCs.
Platforms will aggregate deal flow and LPs at scale, and empower and invest on behalf of this large scalable pool of investors online.
Not everyone in the crowdfunding universe is as thrilled about the approval of the new regulations.
“Unfortunately this will not mean much,” says Rory Eakin, founder and chief operating officer of the crowdfunding platform CircleUp.
“We are in the very early days of a massive transition to online marketplaces,” Eakin says. But dousing the fires of the crowdfunding community a bit, Eakin thinks that the crowdfunding bill is not likely to change that in a meaningful way.
The draft regulations include some pretty onerous requirements for companies looking to raise money. There’s a 21-day “cooling off” period during which companies can’t raise before they go to market and after they apply for approval to fundraise, says Eakin.
In addition the draft regulations require annual financial audits for companies raising more than $500,000; portals have issuer liabilities in case of wrongdoing, portals need to use established criteria to “vet” deals; and finally, nebulous rules on success-based compensation for portals.
That all adds up to hurdles that private companies raising under the “Form D” process don’t have to deal with.
The question for entrepreneurs, says Eakin is, “do I want to go down a path that has much more time, and cost, and uncertainty, or do I want to raise capital?”