Equity Crowdfunding - Ready for Prime Time?

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September 19, 2016

The Jumpstart Our Business Startups (JOBS) Act was signed into law on April 5, 2012.  One of the most novel aspects of the JOBS Act was that it would allow unaccredited individual investors to make investments in companies through the private marketplace, much as accredited investors have been permitted to do for many decades.  This part of the Act is referred to as Title III, also known as Regulation Crowdfunding or Reg CF.  In common practice it may be referred to as Equity Crowdfunding, because Title III lays out the rules, requirements and controls for equity crowdfunding. 

Accredited investors – individuals or couples with net assets that exceed $1million excluding the primary home, or individuals making greater than $200,000 per year or couples making greater than $300,000 per year – may use an exemption which allows them to invest in unregistered securities.  The JOBS Act Title III sought to give unaccredited investors the ability to invest in unregistered securities.  Title III does so, while imposing limits on investment and additional requirements on companies that choose to raise funds from unaccredited investors. 

Fast forward more than four years, and on May 16, 2016 that provision finally became reality.   It is now a little more than 90 days later and the very first results are in.  What does the early data show?

The start is slow with little momentum so far. 

Raising funds under Title III must be made through an approved portal.  This portal will collect the funds, and the company will incur reporting and auditing requirements that will have ongoing costs.

There are 16 portals currently approved for Title III funding and the number of portals continues to increase.  Of the 16, one of the portals has done 92% of the crowdfunding to date!  The most active portal is WeFunder. https://techcrunch.com/2013/03/19/wefunder-launch/

Some of the registered portals are Broker/Dealers and some are not, and many of the portals have no previous equity experience. 

There is a dramatic variation in the amounts raised, from $1000 up to the cap of $1million. From a company standpoint this is expensive money.  Portal management and administration fees can range from 3% to almost 10%, with average costs landing in mid-range.  Companies must also pay for internal administrative costs that far exceed what they would expect to spend without this funding, primarily in legal and accounting fees.

Why would a company choose to seek funding under Title III?  For one thing, accredited investors make up approximately 3% of the population.  This population is bombarded with opportunities to invest and the noise level is extremely loud so the ability to be heard and seen by this audience is challenging and carries a very high failure rate.  Alternatively, Title III opens up a far wider audience, and does so in a highly controlled way, protecting both the company and the unaccredited investor. 

Why would an investor choose to invest in a company through Title III?  This avenue may hold some appeal if the investor is highly motivated to follow and invest in the private markets but is not an accredited investor.

Why jump in now?  Right now the space is not yet crowded and the ability to have your venture reviewed may never be better.  First reports show that the funding rate is significantly higher than the crowded rewards-based crowdfunding platforms.   If you have thought through the costs and the administrative burden carefully and you are ready to use this platform now, consider getting in before this becomes another crowded platform.  

- by Hollis McGuire, SBDC Nashua Regional Director