As the CEO of Crowdfunder and a participant in JOBS Act legislation, I’ve had unique access to people and parties involved the regulatory process, and I wanted to share some insights with you.
Those in favor of equity crowdfunding had reason to celebrate recently. On July 10th, just three months after taking office, Mary Jo White, Chairman of the SEC, called a portion of the JOBS Act to vote which passed 4-1.
The SEC vote finalized rulings around Title II of the JOBS Act, which lifts the longtime ban on public solicitation and creates a new type of offering called 506(c), that essentially allows companies, for the first time in over 80 years, to freely advertise that they are fundraising to the general public.
Here’s the simple SEC Fact Sheet about the vote and new ruling.
When White took office she stated that she saw crowdfunding laws as a priority. With this first movement by the SEC, we see that Chairman White has the desire and will to implement the JOBS Act and crowdfunding-related laws that were passed with overwhelming bipartisan support, but the SEC nearly killed JOBS Act Rulings for equity crowdfunding under the two previous Chairs.
What This First SEC Ruling Around Equity Crowdfunding Means
Pulling out the top level details, this ruling paves the way for companies looking to raise investment via equity crowdfunding to use a platform like Crowdfunder to advertise/promote their offering to Accredited Investors within a “walled garden”, like the Crowdfunder’s verified Accredited Investor Network. This was also made possible from a legal and regulatory perspective under a recent No Action Letter from the SEC.
The more significant implication of the Title II Ruling is that companies on equity crowdfunding platforms can soon, but not today, begin promoting their investment offering OUTSIDE of a verified Accredited Investor community online, on places like social networks (Facebook, Twitter, LinkedIn), as long as that promotion leads back to a platform that verifies Accredited Investors before giving them access to the investment offering.
Companies making offerings must also do a new and more comprehensive filing with the SEC prior to doing any solicitation.
One of the most interesting areas this will have an impact is how it might shape the opportunities and behavior of existing Angel Groups. These already coordinated groups of investors have an opportunity, and it’s likely that angel groups can leverage the power of equity crowdfunding for their own benefit, if they know how to jump on the opportunity.
Industry leaders in crowdfunding are generally in agreement about the positive outlook for all of crowdfunding, given the recent ruling. Jason Best of Crowdfund Capital Advisors, an Advisor to Crowdfunder, and a key leader in JOBS Act legislative efforts, explained the recent vote and the implications…
This first crowdfunding related SEC Ruling was historic and after working for two years to bring better access to capital to entrepreneurs and small businesses, it feels great to watch the SEC take this important step forward. Lifting this ban will create new opportunities for businesses to seek funding and give potential accredited investors more choice in investments to consider. I’m also happy to see the approval of the bad actor provision which strengthens investor protection.
It usually takes 30-60 days for rules to become ‘official’ by being published in the Federal Register. Until the rules are published in the federal register, Companies may NOT generally solicit. This is obviously important.
With the adoption of these rules, it is great news for equity crowdfunding platforms.
But some don’t agree that this one Ruling does enough, considering the need for access to funding options. A few call it a step forward, but not yet transformative because it won’t touch the entirely new potential capital market of non-Accredited investors and help “formalize” and grow the friends and family funding market.
Implications For Title III, Equity Crowdfunding With Non-Accredited Investors
These first Rulings bode well for the remaining JOBS Act Rulings for crowdfunding, namely Title III, which will allow non-Accredited Investors to take part in equity crowdfunding. But when will equity crowdfunding under Title III be proposed, and will it pass a vote at the SEC?
Through my inside relationships in the legislative and regulatory space, Title III is expected to first have a proposal and commenting period within the next couple of months. The result of this would be that we’d likely see a 90 day, or more, commenting period for equity crowdfunding with non-Accredited Investors.
Once that commenting period happens, the finalized Title III Rulings would be put to a vote.
How Will The Equity Crowdfunding Market Take Shape?
In any new market, especially one that creates an entirely new capital market and asset class for early stage investment, there’s going to be noise and lots of would-be entrants.
Which begs the question, what are the strategies to succeed in a burgeoning and crowded market?
Here’s a list of the Top 10 Crowdfunding Sites for Funding. This covers both Rewards and Equity based crowdfunding.
Many companies looking to grow in the equity crowdfunding space are taking the approach of picking a niche and looking to corner it. A few top level notables in the marker are:
SoMoLend: Debt lending for small businesses
Crowdfunder.com: Local community strategy via CROWDFUNDx, Startups & Social Enterprises
CircleUp: Consumer products, $1M or more, Accredited Investors only
AngelList: Silicon Valley investor-centric Startups
AlumniFunder: Bringing alumnists together to back college entrepreneurs
It’s important to keep in mind that equity crowdfunding is not another internet market niche, it’s an entire new Capital Market, and will create a new investor class. Here are some tantalizing statistics:
Historical annualized returns for various asset classes: (source)
Savings Accounts: 6%
Stock Market: 9%
Seed Capital: 27%
Estimated U.S. market for Title II crowdfunding (accredited investors): $20 Billion (source)
Estimated U.S. market for Title III crowdfunding (non-accredited investors): $2 Trillion (source)
Long-term investment capital held worldwide: $200 Trillion (source)
Whatever percentage of long-term asset allocation that shifts towards equity crowdfunding, one thing is clear: just like in the investment banking industry, there will be room for several big equity crowdfunding portals as well as dozens of niche players.
That said, market brand names and leaders will certainly enjoy network effects from breakout growth that reinforce their leadership positions.
The winners will be the ones that can execute well on their own strategy, deeply engage an active investor base, and provide quality deals for their community to invest in.
One of the other keys to success in the market will be how to give the needed education to investors and entrepreneurs about how this new market and the investment process works. Investing can be a complex process, and crowdfunding has the power to simplify and help standardize more of the investment process.
A good example of some of this kind of broader education happening for equity crowdfunding was the recent CROWDFUNDxNYC event, a collaboration between Crowdfunder.com and Social Media Week that brought together New York-based investors and the crowd to identify 15 top New York businesses looking for funding.
Top investors and entrepreneurs shared their tips and insights around the risks of equity fundraising, crowdfunding laws, pitch & storytelling and more. This kind of thing is just the tip of the iceberg of what can happen to educate more of the US to help create a safe and healthy regulated equity crowdfunding market.
People who never had the opportunity to invest, and people who never had the investor network to successfully raise funding, will soon be able to participate in this huge new market. Getting in right from the start is important.
Investment deals with Accredited Investors are already happening online at sites like CircleUp and Crowdfunder, and the market is about to see a big first public push within the next 60-90 days as a result of the recent Title II passing.
So get engaged and choose how you want to participate by joining an online crowdfunding community. You have the opportunity to play a part in the most significant financial innovation in early stage business in recent history.
Source: Forbes – Chance Barnett