October 30, 2015
by Chance Barnett
The SEC just voted on and passed rules to implement Title III of the JOBS Act, bringing non-accredited investors into the fold for equity crowdfunding.
This sets the stage for equity crowdfunding to continue its exponential growth over the next 3-5 years, on top of the existing market for accredited investors.
As the CEO of equity crowdfunding platform Crowdfunder.com, I’ve had a front row seat as a participant in JOBS Act legislation and the long delayed regulatory rulings.
The public has been waiting on Title III equity crowdfunding for three and a half years now, as the SEC continuously stalled in finalizing rules to allow non-accredited investors to come into the market and invest in startups under Title III.
Crowdfunding was already expected to surpass VC in 2016 at $34B a year in total crowdfunding online, across all types of crowdfunding. By bringing in a new class of investors with Title III, we can expect further growth of the equity market as venture capital continues to move online.
But with today’s vote, Title III equity crowdfunding will kick off and go live in 90 days, once a commenting period takes place and the new final rulings are published in the federal register.
As equity crowdfunding with non-accredited investors under Title III comes into effect, it will have massive implications for startups and investors alike, allowing everyday citizens to invest in startups. This will open up a tremendous amount of capital available to early stage companies.
Sam Guzik, securities attorney involved in legislative and regulatory efforts surrounding equity crowdfunding said, “The growth and lack of problems to date with Title II equity crowdfunding, as well as many state-based crowdfunding initiatives being voted in, appear to have given the SEC more comfort in moving ahead with Title III rules. It’s great for everyday people who have been shut out from investing to date.”
Title III Quick Summary
- Equity crowdfunding expands to include non-accredited investor participation
- The new rules will go into place after a 90 day commenting period and publishing
- Startups and small businesses can raise up to $1M in a period of a year
- Investors making <$100,000 per year can invest the greater of $2,000 or 5% of annual income
- Investors making >$100,000 per year can invest up to 10% of their annual income
- Offerings must be made via Broker-Dealer or Portal Intermediary
- Significant disclosures are required for companies to help provide transparency
Implications for Equity Crowdfunding and Venture Capital
This marks the first time in over eighty years that everyday citizens will have access to investing in early stage companies. The barriers everyday citizens have experienced in participating in early stage private investing are slowly but surely going away.
In the 1980’s, you had to call your stockbroker if you wanted to purchase shares on the public markets, and pay them big fees just for taking your order. But then we saw innovative and disruptive firms like eTrade come along and disrupt the status quo — allowing retail investors direct access to data, information, and trading on their own.
We’re seeing the same shift for investing in startups today that we saw in the 1980’s for transactions in the public markets. Wealthy institutions, VCs, and Angels have had exclusive access to investing in high-growth startups, but with Title III we see the beginning of a more level playing field for information and access for everyday investors to early stage private investments.
I anticipate that the next evolution in VC and angel investing will be realized in the form of equity crowdfunding platforms serving as Venture Capital firms and funds of their own, as investing in startups moves online and is opened up to the general public.
This isn’t to say that VC and angel investing as we know it will die. Rather, a hybrid model will emerge where VC’s and Angels will lead and set the terms at which they want to invest, and then leverage equity crowdfunding platforms for distribution to a much larger set of investors.
The New Equity Crowdfunding Laws
For those seeking more detailed information on the rulings, the SEC posted this release. The highlights below are taken from their release:
Disclosure by Companies
Consistent with Title III of the JOBS Act, the proposed rules would require companies conducting a crowdfunding offering to file certain information with the SEC, provide it to investors and the relevant intermediary facilitating the crowdfunding offering, and make it available to potential investors.
In its offering documents, among the things the company would be required to disclose:
- Information about officers and directors as well as owners of 20 percent or more of the company.
- A description of the company’s business and the use of proceeds from the offering.
- 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.
- Certain related-party transactions.
- A description of the financial condition of the company.
- 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.
Companies would be required to amend the offering document to reflect material changes and provide updates on the company’s progress toward reaching the target offering amount.
Companies relying on the crowdfunding exemption to offer and sell securities would be required to file an annual report with the SEC and provide it to investors.
Title III equity crowdfunding transactions will be required to take place through an SEC-registered intermediary, either a broker-dealer or a funding portal. Under the proposed rules, the offerings would be conducted exclusively online through a platform operated by a registered broker or a funding portal, which is a new type of SEC registrant.
The proposed rules would require these intermediaries to:
- Provide investors with educational materials.
- Take measures to reduce the risk of fraud.
- Make available information about the issuer and the offering.
- Provide communication channels to permit discussions about offerings on the platform.
- Facilitate the offer and sale of crowdfunded securities.
The proposed rules would prohibit funding portals from:
- Offering investment advice or making recommendations.
- Soliciting purchases, sales or offers to buy securities offered or displayed on its website.
- Imposing certain restrictions on compensating people for solicitations.
- Holding, possessing, or handling investor funds or securities.