The SEC has, after three long years, finally moved on rulings that allow everyday citizens (non-accredited investors) to participate in equity crowdfunding and investment in private startups and small businesses.
The long awaited promise of democratizing investment in startups & small businesses in the U.S. through equity crowdfunding laws is about to be fulfilled. These new rulings come under Title IV of the JOBS Act and will done initially through what are called Regulation A+ investment offerings.
In this post I’ll share a brief history of equity crowdfunding laws including an infographic, details on how the new Title IV / Regulation A+ offerings that include non-accredited investors work, and the impact these changes will bring to the landscape of private investing and fundraising.
A Brief History of the JOBS Act and Equity Crowdfunding
It was three years ago that the JOBS Act was voted into law by Congress and signed by President Obama on April 5th of 2012.
While implementation of the JOBS Act was mired by regulators at the SEC, Title II of the JOBS Act was the first portion of equity crowdfunding laws implemented in September of 2013. This portion of the equity crowdfunding laws allowed for public advertising of fundraising. However, it restricted the right to invest to Accredited Investors (wealthier investors) and left everyday citizens out in the cold.
In the first year of equity crowdfunding under Title II we saw this new capital market grow from nothing to an estimated $250M+ in funding raised publicly online.
Shortly after Title II was passed, the SEC came out with a proposal for Title III of the JOBS Act which was the part of the legislation that aimed to allow everyday citizens, or non-accredited investors, to invest through equity crowdfunding. Since then, Title III rulings completely stalled, and many felt they were dead on arrival.
Fast forward to today and we’re, at long last, about to bring non-accredited investors into the new capital market for equity crowdfunding. The new Title IV rulings / Regulation A+ offerings will become actionable after roughly 60 days, following publication in the Federal Register.
With this historic ruling by the SEC, early stage investment is moving further online and being truly being democratized by allowing the general public to invest.
Regulation A+: Equity Crowdfunding With Non-Accredited Investors
The new rules for Regulation A+ offerings which include non-accredited investors are broken up into two tiers (alternatives) that allow companies to raise up to either $20,000,000 or $50,000,000.
Regulation A+ broadens the definition of “qualified investors” to include non-accredited investors, though there are clear caps on how much they can invest. Non-accredited investors can invest a maximum 10% of their income/net worth per year, protecting these often less experienced investors and making it so that they can’t “lose it all” with a single crowdfunded investment.
Once the rules become actionable in roughly 60 days, entrepreneurs will be able to start raising money from “the crowd.” Prior to these new rulings, only qualified / accredited investors could invest. Accredited investors are individuals who earn more than $200,000 per year or have a net worth of over $1,000,000, or entities with over $5M in assets.
Regulation A+ Offerings: Tier I
Tier I of Regulation A+ allows companies to fundraise up to $20,000,000 from both accredited and non-accredited investors. Tier I offerings will not have state pre-emption (as is the case under Title II 506(c) offerings), but rather will fall under a NASAA Coordinated Review (state-related requirements and review). However, while subject to formal review with state regulators, Tier I raises will not be required to perform formal audits and annual reporting as required under Tier II offerings.
Regulation A+ – Tier II
Tier II of Regulation A+ offerings allow you to raise up to $50,000,000 from both accredited and non-accredited investors. The biggest difference between Tier I and Tier II (other than amount of money you can raise) is pre-emption on Blue Sky Laws, removing requirements to register the offering in each state you sell securities. More significantly, Tier II offerings will be required to have audited financials and annual reporting requirements.
Since Tier II pre-empts state law, it is likely to be the favored tier of Regulation A+ and become more widely adopted by startups and small businesses.
How Regulation A+ Offerings Essentially Work
For companies utilizing Tier II of Regulation A+ offerings, in short companies will prepare all of their final offering documents and have an audit performed on them and their financial statements. They then submit a Form 8a short-form to the SEC and file it electronically via EDGAR online. Once approved, their deal can go live and take in non-accredited investment online utilizing equity crowdfunding platforms like the one I run.
The Future of Investing in Startups & Equity Crowdfunding
I don’t believe angels and VCs will be “disrupted” and displaced by equity crowdfunding yet, in the short and medium term. Rather, I know that great companies are built over time by incredible founders and by the investment and guidance of experienced and seasoned investors who can truly add value. (I stress that last part).
To understand the story of how equity crowdfunding will play out in the future, it’s helpful to look at the early stage startup market through some of the numbers…
Right now we have a VC investment market that is about $30 Billion annually, and an angel investment market that is roughly $20 Billion annually.
There are also roughly 8 million total accredited investors in the US today, of which an estimated 3% who have ever invested in a startup.
More broadly across all early stage private investing, there are roughly $1.2 Trillion in total private placements done each year in the US.
Equity crowdfunding is changing the face of these existing markets by moving them online, reaching new wealthy investors, making the process more social and open, and creating a massive new set of distribution and marketing channels for fundraising.
Over time, equity crowdfunding will eat into the existing investment markets of angel and VC, while also bringing in alongside them an entirely new class of investor (retail, non-accredited).
For the time being, equity crowdfunding will work best when the funding rounds are validated or led by experienced angels, VCs, as well as notable influencers & celebrity investors and entrepreneurs.
But with these new Title IV rulings, we’re about to see the birth of a new class of investors, as now everyone will have the opportunity to invest in what could be the next great startup, consumer product, feature film, or clean technology venture alongside experienced angels, VCs, and influencers.
This new class of investors will grow to become influential, powerful, important voices in the early stage ecosystem: they’ll validate new companies and ideas, fuel their early growth, and then late stage investors will have good reason to pay attention.
Kickstarter paved the way for people to donate and purchase products via crowdfunding, but these backers have been left wanting when companies are massively successful and profit or sell – as was the case when Oculus VR sold to Facebook for $2 Billion and the Kickstarter backers of the company got nothing in the sale.
Now equity crowdfunding is transforming crowdfunding into an opportunity to not just pre-purchase products, but become a true owner and shareholder in a high growth startup.