A little more than 2 years since the proposed rules for Title III of the JOBS Act were released for public comment, on October 30, 2015, the Securities and Exchange Commission (SEC) voted 3-1 in favor of the final rules which will allow unaccredited investors to participate in making investments through the mechanism of crowdfunding.
So what are some of the highlights of these new regulations and what does it mean for capital formation? For those of you interested, the press release and the final rules will give you all the information you will ever want to read on the subject, but below are some of the main points of interest taken directly from the SEC press release.
Highlights of the Recommended Final Rules
The recommended rules would, among other things, enable individuals to purchase securities in crowdfunding offerings subject to certain limits, require companies to disclose certain information about their business and securities offering, and create a regulatory framework for the intermediaries facilitating crowdfunding transactions. More specifically, the recommended rules would:
- Permit a company to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period;
- Permit individual investors, over a 12-month period, to make an aggregate investment across all crowdfunding offerings up to:
- If either their annual income or net worth is less than $100,000, then the greater of:
- $2,000 or
- 5 percent of the lesser of their annual income or net worth.
- If both their annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net worth; and
- During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.
The second bullet point is the most exciting for casual observers of the industry. Until recently, the only investors who could participate in private investing were Accredited Investors. There are an estimated 8.7 million investors who qualify as accredited in the United States, and only about 500,000 of them actively invest, which is why there is a lot of room to bring more of them into the fold, and one of the reasons why Patch of Land continues to provide offerings under Title II Regulation D Rule 506c.
While Patch of Land is eager to open up its investments to all interested investors, we believe that the current one million dollar annual offering limit and the various individual investment limitations are not properly suited for us at this time. However, we are excited to see this potential investor pool open up to the whole working population (with a few exceptions for disqualifying investors) which numbers into the hundreds of millions. The new laws will certainly bring forth opportunities for entrepreneurs who will now be able to generally solicit their friends, family, acquaintances, nearly anyone under these new regulations.
ROI vs ROCI
What is interesting about this new phenomenon is that although these newly minted investors who will be able to participate in private securities offerings are looking for a return on investment (ROI), we also believe that Title III will have similar elements of storytelling that the model of Kickstarter employs that will inspire investors to invest even if an immediate return is not likely. This phenomenon can be called, the return on community investment (ROCI), whereby investors who simply want to see something change or a business appear in their own communities would be in the investment for the long haul in order to make their communities better. Since much of what Patch of Land does is focused on building wealth and growing communities, we are inspired by the possibilities for this form of crowdfunding to not only attract career investors, but community investors looking to make a positive impact in their own neighborhoods and beyond.
Safeguards to Investors
Since we are dealing in securities, there are safeguards in place to prevent and detect fraud and the new regulations require all participating parties, from the crowdfunding portals to issuing companies, to register with the SEC and FINRA, the regulatory agencies that are tasked with investor protections. Additionally, these companies must have their financial statements reviewed by an accountant at a minimum during the 1st year of issuing securities to the public with the potential for audited financials for years after the 1st. Everyone is very concerned about the safety of investors and with these thoughtful provisions in place, these instances will likely be few and far between.
Now that these provisions are in place and will go into effect within the next 90 to 180 days, there will be a scramble for many industry participants to begin going through the process of creating the first equity crowdfunding portals that will facilitate the first transactions under Title III. Companies like SeedInvest and EquityNet appear poised to make the transition swiftly and Indiegogo has also stated publicly that they will play in this arena as well. No matter what the future holds, one thing is for certain; the world of capital formation is changing once again and anyone, regardless of income, can now become an average Joe VC. The popularity of Shark Tank has paved the way for this inherent desire to be a venture capitalist, and we believe that this will be adopted by every day investors faster than we all can anticipate.