Part 3 of a series of posts on the JOBS Act
Title III of the 2012 Jumpstart Our Business Startups (JOBS Act) is a key provision of the Act, allowing everyday Americans — for the first time — to invest in new businesses.
With final adoption by the U.S. Securities and Exchange Commission (SEC) of this provision (which has not yet happened as of this writing), no longer will investing be only for the wealthy who have a net worth of at least $1 million.
Non-wealthy, “non-accredited” investors under old SEC rules would — under new proposed Title III rules — be permitted to invest online small amounts of cash in private companies.
In October 2013, the SEC proposed rules that would allow startups and other small businesses to raise up to $1 million in any 12-month period though crowdfunding, a process by which small investors with a few thousand dollars to invest could participate.
The rules also would require investment transactions to be handled by an intermediary registered with the SEC and would limit the amount of investment securities that could be sold to individual investors under the crowdfunding exemptions over a 12-month period.
The Title III rules were originally expected to be finalized by the end of 2013, but the SEC comment-and-review process has now extended one year beyond that, with crowdfunding advocates still eagerly awaiting final SEC action.
The intent of Title III is to reduce the financial burdens and hurdles facing startups and entrepreneurs by enabling access to new sources of funds from non-accredited investors.
And the bottom line is that – through the Title III rules – investment will be democratized and move online, according to Forbes writer Chance Barnett.
“Title III will begin to disrupt the entrepreneurial capital market in a more fundamental way, bringing change to the previously elite world of investment fundraising and investing in early-stage businesses, which used to be the exclusive domain of the wealthy,” Barnett writes.
“As the market matures, we’ll see a more level playing field for everyday citizens to fundraise or invest, regardless of their personal wealth or their immediate personal connections to wealthy individuals.”
Barnett notes that in 2013 the annual VC investment market was valued at about $30 billion. He says the non-accredited investor market has the potential to dwarf that figure.
“A new wave of capital is set to be unleashed by Title III and come into the U.S. investing market, which some estimate will grow to a $300 billion market.”
Venture capitalists and angel investors who once strongly opposed the proposed changes that would be allowed by Title III are beginning to come around to the idea, perhaps seeing the democratizing of investment as the inevitable wave of the future.
“One could argue that we’re on a path towards crowdfunding becoming the new normal for early startup finance, where founders use sites like Kickstarter to validate projects via rewards-based crowdfunding, or use sites like Crowdfunder to validate and fund businesses via investment-based crowdfunding,” Barnett says.
David Drake, in an article posted earlier this year on the Crowdfund Insider website, says putting the Title III rules in place moves investing “closer and closer to equity crowdfunding,” which he expected to be finalized before the end of 2014.
Equity crowdfunding is an alternative to traditional “rewards” or “incentive” crowdfunding that offers a one-time reward, such as a free sample of the product to be funded or other token prize.
In equity-based crowdfunding, investors share in a piece of the business pie by receiving an ongoing financial return based on the company’s immediate and future value.