After over three years of delays, the Securities and Exchange Commission (SEC) will vote to finalize rules on Title III of the JOBS Act this Friday, October 30th.
The Title III equity crowdfunding rulings will be voted on in a public meeting at the SEC scheduled to take place Friday morning, and are also expected to be streamed live online on the SEC’s site.
There are currently two crowdfunding related laws startups and small businesses may utilize today, with Title II accredited crowdfunding and Title IV Reg A+ with non-accredited investors. But many in the crowdfunding industry see Title III as the true non-accredited equity crowdfunding laws, given their greater ease of use for early stage startups as compared to Title IV.
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What to Expect on Friday
This Friday the SEC will vote on the Final Rules for Title III of the JOBS Act. Once the rulings are published in the federal register and we can expect to see them go live 60 days after the vote.
In the meeting on Friday the Commission will consider whether to adopt non-accredited crowdfunding rules that relate to selling securities under Section 4(a)(6) of the Securities Act of 1933, as mandated by Title III legislation. The Commission will also consider whether to propose amendments to Securities Act Rule 147 and Rule 504.
The specifics of how the SEC will now address the final rules is something that remains to be seen. However, ongoing efforts by legislators and advocates on Capitol Hill indicate that the SEC has been receiving input that could encourage them to raise the yearly cap on fundraising for any given company from $1 million to $5 million. This would potentially reduce many of the costs and burdens placed on startups looking to do Title III offerings.
It was already estimated that The Crowdfunding Industry Will Surpass Venture Capital by 2016 with over $34 billion raised online. But now that Title III rulings are anticipated to come online, expect further rapid growth in this expanding capital market.
Implications on Fundraising for Startups
Title III is the true startup and small business equity crowdfunding portion of the JOBS Act that includes non-accredited investors. While Title IV was recently finalized by the SEC, the Title IV (aka “Reg A+”) offerings are more akin to a “mini-IPO” - as opposed to private startup fundraising - making this route a poor fit for the majority of early stage startups who don’t already have millions in the bank or the ability to manage complex financial transactions and audits/reporting.
Those in the know in the equity crowdfunding industry see Title III as a step in capital formation, but don’t expect the majority of startups to utilize the new rules. The existing Title II and Reg D offerings -- for accredited investors only -- still represent a simpler, low cost path for many startups that don’t want to spend the time and money of a Title III or Title IV offering.
It’s likely that many of the early companies that take advantage of this new non-accredited investor opportunity will be consumer-facing companies. These are companies with large existing customer bases who see strategic value in turning their customers in to stakeholders.
But over time, many in the industry foresee that this new class of investors (non-accredited) will grow exponentially over the next 3-5 years into a multi-billion dollar capital market. Long term, it is entirely plausible that we could expect to see non accredited equity crowdfunding grow to surpass angel and venture capital, which do a combined $60+ Billion per year.
Implications for Venture Capital: Platforms Are The New VCs
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.
Quick Summary of Title III
Title III will allow non-accredited investors to invest in early-stage companies, which will create a new class of investors and a new capital market. This is what will likely transpire over the next 90-120 days as Title III begins to rollout:
- On October 30th, the SEC will vote on Final Rules for true equity crowdfunding (non-accredited)
- Title III of the JOBS Act will finally be realized
- Everyday people will have access to invest in startups alongside, or instead of, angels and VCs
- More potential capital available to startups and small businesses
- This will kickstart a new asset class in alternative finance
- Innovative models will allow individual investors to not only participate, but get access to ways to diversify into a fund of startup investments
- Platforms will lead the way in these innovative new fund and diversification models
This marks the momentous shift we’ve all been waiting for as it pertains to equity crowdfunding as it was originally envisioned: non-accredited investors gaining access to early-stage deals resulting in more companies funded.
Follow me on Twitter @chancebar
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*Disclaimer: I’m the CEO of Crowdfunder.com, have been a participant in JOBS Act legislative and regulatory efforts, as well as a startup founder and early stage angel investor.
