After over 15 months of delays, today the U.S. Securities & Exchange Commission (SEC) finally moved on Rulings for Title III of the JOBS Act by issuing their proposal.
Title III is the long awaited “non-accredited crowdfunding” component to the JOBS Act, which allows non-accredited individuals to participate and invest online into private companies, in small increments (say $1,000 to $5,000).
As a participant in JOBS Act efforts, and CEO of Crowdfunder.com, I’m thrilled at how swiftly the SEC picked up crowdfunding Rulings under the now Chairman Mary Jo White.
In this article I’ll share the implications I see for the crowdfunding market with Title III, the highlights of the SEC’s proposed Rulings, and the expected timing on when non-accredited investment/fundraising gets finalized by the SEC and kicks off.
Implications of Title III Crowdfunding
For some perspective as this historic legislation finally comes “unstuck” after 15 months of regulatory delays, I believe four things are happening:
1. Opportunity and capital for entrepreneurship is being democratized.
Early stage investing is rapidly moving into the digital age. Title II of the JOBS Act, implemented on September 23rd, is already driving this move online by creating new ways for companies raising capitalto market/advertise publicly online. But this is still limited to the existing capital from accredited investors only.
Title III will begin to disrupt the entrepreneurial capital market in a more fundamental way, bringing change to the previously elite world of investment fundraising and investing in early stage businesses, which used to be the exclusive domain of the wealthy.
As the market matures, we’ll see a more level playing field for everyday citizens to fundraise or invest, regardless of their personal wealth or their immediate personal connections to wealthy individuals.
2. A new class of investor is being created
Right now the annual VC investment market is roughly $30 Billion. The non-accredited investor market has the long term potential to actually dwarf the existing VC market, just by the massive number of new investors who will be allowed to participate in early stage investing for the first time in over 80 years. A new wave of capital is set to be unleashed by Title III and come into the U.S. investing market, which some estimate will grow to a $300 billion market.
Many of these non-accredited individuals will be first-time investors, though it’s important to note that non-accredited investors are not entirely new to funding businesses. Most businesses and ideas are initially funded with some “friends & family” money. Title III will both help formalize the process of going out to your personal network for capital,
and allow an even broader pool of accredited and non-accredited investors to participate alongside.
3. It’s a Capital Market, Dummy
The buzz phrase on the street is that there are “hundreds” of these crowdfunding platforms out there. While there are many would-be upstarts and entrants, the winners in this market will attract quality deal flow, build a visible brand name, and what is likely the most challenging and critical – execute well on the “demand” side of the equation (engaging investors).
That said, investment crowdfunding is a capital market, not another internet niche. Thus the market does not have a “winner take all” dynamic, though there are network effect advantages for platforms that have already been around and growing their online networks and closing deals.
We don’t see that one single investment bank serves all of Wall St. and the public capital markets, even after decades of competition and consolidation. Similarly, there are many ways to serve Main St. and the multi-billion dollar market of investment crowdfunding.
4. The investment establishment (angels, angel groups, VCs) will evolve, or get passed by
A significant opportunity for Angels & VCs to leverage investment crowdfunding exists. That said, over the last 2 years I’ve had an interesting experience as the CEO of Crowdfunder and participant in JOBS Act related legislation and regulations.
In the past I watched long time angels and VCs publicly go to bat against crowdfunding, stating that they would never invest in a crowdfunded company.
Now, in the last 4-6 months as investment crowdfunding is growing rapidly with accredited investors on sites like Crowdfunder, the tone of most investors has changed. Some of these same investors who were previously skeptical, or even upset about crowdfunding, have made a 180 degree turn. And some are now bringing deals they invest in to sites like Crowdfunder for follow-on investment crowdfunding from other accredited investors & funds.
Given this change in sentiment from investors, I’m reminded again of what Schopenhauer said:
“All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”
Given the potential efficiency gains of using the Internet as a complement or replacement for how you source opportunities and market investments you make for follow investment from the crowd, it makes sense that more established investors are changing their mind.
One could argue that we’re on a path towards crowdfunding becoming the new normal for early startup finance, where founders use sites like Kickstarter to validate projects via rewards-based crowdfunding, or use sites like Crowdfunder to validate and fund businesses via investment-based crowdfunding.
For a bit of humor on how VCs and investors have gone from anti to pro crowdfunding, see this amazing video on “If Nicolas Tesla Pitched VCs.” (This highlights Kickstarter which does rewards/donation crowdfunding where people pre-purchase goods or experiences, not investment)
Timing and Implementation of Title III Crowdfunding Rulings
The SEC just gave their detailed proposal for Title III Rulings. What follows is now a 90-day commenting period where experts, regulators, advocates and opponents effectively “crowdsource” input and hash things out through the SEC site. The SEC does a deep review process on these comments.
Following this 90 days, it is likely that the SEC will spend another 30 days to finalize the revised rulings based on commenting, and then schedule a vote on the final rulings several weeks later.
This timeline has Title III likely coming in April or May of 2014, when the rulings are voted into effect and the first non-accredited crowdfunding can take place.
The Shape of Title III Crowdfunding Rulings
The SEC put our their proposed rules for Title III this morning. Here are the highlights of the 585 page proposal:
For Non-Accredited Investors:
One critical piece of investor protection for investors (and Grandma) are clear caps (limits) on how much non-accredited investors are allowed to invest in a given year. Under Title III, this yearly amount breaks down to:
- For income below $100,000, invest a max of $2,000 or 5% of income or net worth
- For income over $100,000, invest a max of 10% of income or net worth
- Investments made in a Title III crowdfunding transaction can’t be resold for a period of one year
Is Grandma going lose all her money, as some fear?
Grandma is going to be ok, and it is important that all new investors are educated and know that early stage investing is highly risky and a majority of companies don’t survive. With that, crowdfunding isn’t something new- it is at its essence investing, which has been risky for decades and has an existing set of challenges that crowdfunding brings new dimensions to.
For fundraising from Non-Accredited Investors, the company has the following restrictions and would be required to disclose:
- Limited to raising no more than $1,000,000/year under the Title III exemption.
- Disclose financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor.
- Disclose information about officers and directors as well as owners of 20 percent or more of the company.
- Disclose use of proceeds.
- Disclose the price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount.
- Companies relying on the Title III exemption to offer and sell securities would be required to file an annual report with the SEC and provide it to investors.
While some in the market might be waiting for these new rulings under Title III, there is rapid growth under Title II and in accredited investing online. Investors and entrepreneurs alike aren’t waiting for Title III, they’re fundraising online today under the existing laws.
As I talk to company founders each day, they have some idea that non-accredited crowdfunding is on the way and might be a future option, though any company looking for fundraise today is surely focused on the immediate investment crowdfunding opportunity with accredited investors.
With that, while there is a growing base of accredited investors investing online today, only a tiny percentage of the 8,000,000 accredited investors in the U.S. have ever invested in a tech startup or social enterprise. And right now these investors have the opportunity to do this for as little as a a few thousand dollars via crowdfunding.
It’s an interesting time to go on a platform today, see how it works, and be a part of this historic time. So get engaged in the movement and find some local entrepreneurs to support, whether that you do it with your dollars or your time and attention.