In the more than two years since the passage of Title II of the JOBS Act, equity crowdfunding with accredited investors has rapidly grown, allowing startups to easily seek funding online with little added costs or hassles.
As the CEO of Crowdfunder, a leading equity crowdfunding platform + venture fund, I see firsthand how the ability to reach thousands of Institutional and individual angel investors online through equity crowdfunding is transforming startup fundraising and early stage venture capital.
Unfortunately, the highly anticipated “boom” of access to non-accredited investors, namely regulated under Title III, is a bit of bust. I wrote previously about howTitle III Crowdfunding Will Disappoint Entrepreneurs.
The Fix Crowdfunding Act Bill was introduced in Congress on March 23rd, two months prior to Title III officially going into effect in May. Some key legislators including McHenry (R – NC) who sponsored this new bill, are aware of the shortcomings of the previous legislation and want to improve it. The Fix Crowdfunding Act passed through the House of Representatives with a 394-4 vote on July 5th and now moves onto the Senate with major bipartisan support.
What is the Fix Crowdfunding Act?
The Fix Crowdfunding Act was introduced in March, sponsored by Representative Patrick McHenry of North Carolina. The changes outlined offer a lifeline to the troubled Title III legislation. Title III was intended to allow non-accredited investors to invest in private businesses but created barriers, burdens, and costs too significant for many otherwise investable startups and small businesses to want to take on. The new equity crowdfunding bill addresses several significant problems with the previous JOBS Act Title III legislation:
- Increases the annual company fundraising limit from $1 Million to $5 Million.
- Enables the use of Special Purpose Vehicles (SPVs) to group individual investors into one legal entity, rather than clutter up cap tables directly.
- Exempts equity crowdfunded startups from the kind of registration requirements of publicly traded companies after they reach 500 investors.
- Includes a “Test The Waters” provision allowing companies to gauge investor interest on a portal online before the time and cost of an official offering.
How It Will Help Investors
- Protection: The bill extends the same protections currently available to accredited investors to non-accredited investors. In the current legislation there is no protection for investors that invest in company that is committing fraud via the crowdfunding portal. The new bill allows crowdfunding portals to disqualify issuers that are found to have provided false information. This seems like common sense, but was excluded from the original legislation.
- Access: The changes laid out make it much more appealing for early-stage businesses to utilize equity crowdfunding as a fundraising outlet. Because of this, more startups will take advantage of the opportunity, providing increased access to great investment opportunities for the average American.
How It Will Help Startups and Small Businesses
The bill fixes some glaring errors to Title III which created several hurdles to success for startups utilizing equity crowdfunding including:
- Raises Funding Limits: The change in Fundraising cap from $1 Million to $5 Million is huge for startups. In the current VC market (Check out my thoughts on the changing venture landscape), average seed rounds are growing annually.The median seed round in 2015 was $2 Million compared to $750K in 2012. This number will continue to rise, with 2016 seed projections averaging at $2.5 Million. This allows small businesses utilizing equity crowdfunding to raise similar amounts to those using traditional Venture Capital.
- Clean Up Cap Tables: The inability to use Special Purpose Vehicles (SPV) for organizing large pools of smaller investors made crowdfunding a burden for growing businesses. It’s unrealistic that a startup would have the bandwidth to monitor the desires of every non-accredited investor. It also was a deterrent to future investors. The suggested changes would enable businesses to use SPVs to organize their non-accredited investor pools. This is a huge win for startups and investors.
- Decrease Risk: Under the new bill, companies would be able to gauge investor interest before spending the time and money involved in officially launching an equity crowdfunding campaign. The upfront costs associated with a non-accredited crowdfunding campaign are significant. This change has the ability to decrease the risk to startups by permitting them to conduct preliminary research and take interest before they launch an official campaign.
The equity crowdfunding bill is now in the hands of the Senate. Given the strong bipartisan support from the House of Representatives, it would be surprising to see it fail.
The changes outlined in the Fix Crowdfunding Act have the ability to make equity crowdfunding with non-accredited investors a more viable fundraising outlet for early-stage ventures. This could finally be the game changer for investors and startups that the public has been interested in.
Interested in seeing this bill move forward? Reach out to your state senate to express your support.
*Author’s Note: The bill has been amended since the publication of this article, impacting the effectiveness of the bill. To see the amendments, click here.