A Year-One Report Card on Title II of the JOBS Act
It’s been a little over a year now since Title II of the JOBS Act went into effect. The enactment of this legislation meant that for the first time since the Great Depression, start-up companies and small businesses could publicly advertise that they were seeking investment funds. With some of the SEC’s most cumbersome regulations relaxed, entrepreneurs could tweet about their fundraising efforts; they could promote them on Facebook or reach out through LinkedIn. Most importantly, entrepreneurs could connect with accredited investors on equity crowdfunding sites like Crowdfunder.com.
Though the JOBS Act had ultimately won bi-partisan support, it took a contentious two-year battle to get it through Congress. During that time, a lot of pretty extreme claims were made.
There was hype. Some speculated that equity crowdfunding would mean the end of venture capital firms and angel investors.
There was alarm. Critics warned that lifting restrictions on advertising and general solicitation would lead to widespread fraud with Grandmas everywhere getting tricked out of their life savings.
So, 14 months after the Title II was implemented on September 23, 2014, let’s do a reality check.
* Title II has fundamentally changed the way entrepreneurs go about raising early-stage financing. From an activity conducted privately in boardrooms, soliciting capital has been brought squarely and openly online. Entrepreneurs used to be largely passive observers of the fundraising process. Now they’re active participants. “No longer do entrepreneurs have to wait for and depend on introductions, email responses and scheduled meetings in order to get their company and fundraising pitch in front of a broad pool of investors,” says Chance Barnett, founded and CEO of Crowdfunder. “With platforms like Crowdfunder, they can reach thousands of investors.”
And entrepreneurs can reach those investors with new tools of engagement. Forget static Powerpoint slides. On equity crowdfunding websites, entrepreneurs can tell the story of their company in compelling ways with social profiles, videos, images and sound.
In what turned out to be a surprise to some, equity crowdfunding has not meant the demise of traditional forms of raising capital. Nor has it replaced rewards-based crowdfunding sites like Kickstarter or Indiegogo. Instead, many entrepreneurs are taking a hybrid approach to funding their companies.
When rock legend Neil Young launched Pono, a high-resolution digital music system, he first mounted a campaign on Kickstarter offering donors a $99 discount on the $399 player. More than 18,000 backers bought in. Next, leveraging that momentum, Young moved on to Crowdfunder and raised more than $6 million in just seven days.
It’s not just the famous that are getting their projects capitalized on crowdfunding platforms. Bitvore, a data mining company based in Irvine, California, is the kind of business-to-business start-up that would have struggled in the pre-JOBS Act market. “This was enterprise tech, not sexy consumer stuff,” says Bitvore’s chief executive Jeff Curie. “We’re in Orange County, not in the Bay Area and we don’t have a built-in network of venture capital firms.” Jeff says Crowdfunder was critical in making the company visible to a far wider swatch of potential stakeholders. “Crowdfunder was really efficient and simple,” Jeff says, “We got people investing in us from all over the United States—Omaha, Las Vegas, Miami. These are investors we never would have met.” Last spring, the company closed a $4.5 million Series A round of funding.
Those are just two of the hundreds of start-ups that have been successfully funded thanks to Title II of the JOBS Act. According to Crowdnetic, between September 2013 and September 2014, $385 million in capital commitments have been made to over 4,700 companies through crowdfunding platforms.
Equity crowdfunding is still in its infancy. But problems tend to surface early in emerging industries and no one has identified the kind of fraud and abuse that critics predicted. Potential takes longer to realize; it’s safe to say that the exponential growth we’ve been seeing in funding new companies is just the beginning.
There’s even more promise in the next section of the JOBS Act—Title III. That phase, which is moving slowly toward enactment, will create an entirely new capital market by bringing a new class of investor to the table. With the enactment of Title III, non-accredited investors will have the opportunity to invest online in private companies in small increments of, say, $1,000 to $5,000.
“Title III will create a level playing field for everyday citizens to fundraise or invest, regardless of their personal wealth or their immediate personal connections to wealthy individuals,” says Chance. Non-accredited investors are already funding businesses through “friends and family” money, he points out. Title III will accelerate and formalize the process and provide protection for small investors with caps on how much non-accredited investors are allowed to invest in a given year. In other words, Grandma will be just fine.