From savings to banking to investing… finance is moving online. With this, we’re seeing the disruption of venture capital brought about by new laws that may change the game for how entrepreneurs can raise funding and who can invest.
As the CEO of equity investment platform Crowdfunder.com, I was part of a small leadership group engaged on JOBS Act legislation in Washington D.C. and helped bring about new equity crowdfunding laws in the U.S.
It’s been over three years since the first portion of US equity crowdfunding laws went into effect in September of 2013 under Title II of the JOBS Act, opening up equity crowdfunding with accredited investors.
And now three years since the passage of Title II, the two remaining equity crowdfunding portions of the JOBS Act have finally come into effect (Title III and Title IV), bringing with them the long-awaited non-accredited investor rulings.
Today, everyday citizens can finally invest in early stage startups alongside angels and VCs. But not so fast…
Three Pathways In Equity Crowdfunding
With three equity crowdfunding pathways now available for startups fundraising (i.e., JOBS Act Title II, III, IV) there seems to be some confusion in the market about which paths of the JOBS Act are the right ones for entrepreneurs to take and how they work.
New data has come out in two recent equity crowdfunding industry reports and they show an interesting tale about the implementation and use of each of the crowdfunding laws:
Title II (accredited): effective Sept 2013, 6,613 offerings, $1.47 billion in capital commitments
Title III (non-accredited): effective May 2016, 49 successful offerings, $11.5 million committed
Title IV (non-accredited): effective June 2015, 133 offerings filed, outcomes TBD
It’s worth noting that what we’ve seen in operating our Title II accredited investment platform at Crowdfunder.com supports this trends. We work with a large number of startups backed by top tier VC funds and also co-invest in some of these companies in our VC Index Fund.
In short, the large majority of startups backed by notable angels and VCs aren’t opting to take advantage of the newer non-accredited crowdfunding laws under Title III and IV.
But it’s also worth noting that the non-accredited equity crowdfunding alternatives are much newer and will likely grow over time. But the punchline remains the same – startups have been slow to adopt the new non-accredited rulings.
Crowdfunding Grows, But Slow With Non-Accredited Investors
While the adoption of non-accredited crowdfunding rules may be slow, many aren’t fully aware of the rapid exponential growth of crowdfunding as a whole. As an overall industry, Crowdfunding is set to surpass Venture Capital after 2016.
Equity crowdfunding is the newest portion of the overall industry, and has been growing at a rate of about 2x each year, specifically under Title II with accredited investors.
The adoption of equity crowdfunding under Title II (with accredited investors) has been rapid and widespread with over 6,000 startups and small business participating in the first 3 years. But the growth of non-accredited crowdfunding has been much slower.
The key reasons for the slow growth are likely due to the relative high costs, time, and potential risks associated with both non-accredited funding paths (i.e., Title III & Title IV).
At one time it was estimated that it could cost as much as $39,000 just to raise a $100,000 under Regulation CF / Title III with non-accredited investors (article). Moreover, making an offering to non-accredited investors requires working with either a broker dealer or FINRA regulated crowdfunding platform and consists of due diligence, legal fees, filing costs, ongoing reporting, and campaign marketing costs, among other things.
Meanwhile, Title II platforms don’t always come with these costs and requirements. Several of the larger Title II platforms don’t operate as a broker dealers and may be able to do so under relaxed requirements and specific SEC No Action letters that have eased the legal and regulatory requirements when fundraising solely with accredited and institutional investors (check with your legal counsel on whether what your registration requirements may be).
Today, founders have several options to choose from in equity crowdfunding. I believe the industry in the U.S. will continue to grow as the $20 Billion angel market, the $50 Billion venture capital market, and the $1.2 Trillion overall private placements market continue to shift towards online models of distribution. And entrepreneurs fundraising will have more options and paths to capital than they’ve ever had.
It’s a great time to be an entrepreneur.
*Disclaimer: I’m the CEO of Crowdfunder.com, a Title II platform, a participant in JOBS Act legislative and regulatory efforts, and a startup founder and early stage angel investor. These are my own opinions and do not necessarily reflect those of Crowdfunder, Inc. and its affiliates.