The much talked about launch of Title III of the JOBS Act goes live in the US today, at last opening up equity crowdfunding investments to the masses. Or so the story goes.
The reality is somewhat different. We at AltFi News have been surprised by the relative shortage of Title III-related announcements over the past few days. The overwhelming sentiment appears to be that the Title III rules, in their current form, are simply too restrictive to allow for the development of a flourishing, retail driven equity crowdfunding sector in the US.
By way of background, the SEC first published proposals relating to the implementation of Title III in October 2013. The proposed rules would allow a company to raise a maximum of $1m through an equity crowdfunding campaign in a 12 month period. Investors would be allowed to invest up to $2,000 or 5% of their annual income or net worth, whichever is greater – if both their annual income and net worth were less than $100,000. If either their annual income or net worth were equal to or more than $100,000, then investors would be permitted to invest up to 10% of their annual income or net worth. These are the rules that are being ushered in today. There are tremendously prohibitive restrictions in place around the marketing of such offerings.
Beyond Title III, there are Titles II and IV – which each opened up their own variety of the equity crowdfunding model. Title IV pertains to the kinds of offerings that are often described as “IPO lite”. The legislation allows firms to raise up to $50m in a 12 month rolling period (subject to painstaking and time-consuming auditing checks and approval by the SEC), with non-accredited investors permitted to invest up to 10% or their income or net wealth.
Title II legislation is less prohibitive than Title III because issuers are required to “take reasonable steps to verify that purchasers of the securities are accredited investors”. UK based equity crowdfunder Seedrs acquired Junction in November 2014, with the intention of branching out into the US. However, the platform’s US offering – unlike the UK mothership – will not be built up around retail investment. As Seedrs CEO Jeff Lynn told us in April this year:
“We are in the process of rolling out a model under Title II. We do not think Title III in its current form is workable. It’s so restrictive and so difficult to get any traction with that it’s not worth our time to focus on. We’re actively engaged with folks in the US and with congress about changes to Title III… But as it stands today we’re somewhat pessimistic.”
That’s not to say, however, that there’s no excitement whatsoever surrounding the launch of Title III.
World-renowned startup hub AngelList had made a move into the Title III space with the launch of a new platform by the name of Republic. AngelList – with its armies of entrepreneurs, angel investors and startup job seekers – may just have the necessary resources in place to make a success of Title III.
iDisclose is a web-based application that helps entrepreneurs to prepare “institution grade disclosure documents for crowdfunding and private placement” in a seamless and cost-effective fashion. With so many constraints weighing down upon Title III, efficiency of process becomes all the more important. iDisclose announced on Friday that it had teamed up with a number of the Title III crowdfunding portals, which are each at various stages in the SEC and FINRA approval process. One of those portals is the above-mentioned Republic.
The heavy up-front compliance costs associated with Title III offerings are an expense that will not be refunded if a crowdfunding campaign is unsuccessful. Co-founder and CEO Georgia Quinn weighed in:
"At iDisclose, we are empowering entrepreneurs to actually comply with the lengthy and detailed regulations set forth by Regulation Crowdfunding. We, like this new industry, are an example of how technology can overcome traditional challenges faced by small and startup businesses when it comes to raising money. I love what we are doing because we protect both the issuer and the investor -- there are no losers here."
Per the Wall Street Journal, more than 40 firms have applied to host Title III offerings, according to the Financial Industry Regulatory Authority (FINRA), a self-regulatory group. FINRA was said to have approved 5 of these portals as of Wednesday last week. Indiegogo, among others, is expected to move into securities offerings later in the year.
A muted start for Title III, then, but with cause for optimism down the line. Chance Barnett, CEO of Crowdfunder.com, summarised in an article for Forbes:
“Bottom line, the crowd won’t be investing in the next Facebook or Uber with Title III, and the majority of entrepreneurs will continue to target fundraising campaigns led by VCs and accredited investors because it is faster and more efficient.”