Title III Crowdfunding Now Everyone Can Invest

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Well last Friday it finally happened. The SEC passed Title III of the JOBS Act which effectively allows non-accredited investors to invest in private placement investment deals. In plain English this means when you visit any of the crowdfunding platforms they will allow you to view and invest in their offers without confirming that you are an accredited investor. Well at least in theory this will be the case.

On the surface this seems like the day we have all be waiting for in the crowdfunding industry but in reality it may have limited impact. While everyone has been jumping for joy about the new legislation and don’t get me wrong there is a lot to jump for here, there are still some issues. The problems are basically due to the capital limits placed on the deals which can be offered to non-accredited investors. In the current version of Title III the maximum that can be raised in these offerings will be $1 Million dollars. This may seem like a lot, but for most high quality real estate deals the capital limit basically prevents any of these deals from opening up to the small retail investor.

In my opinion the greatest potential crowdfunding offers retail investors is precisely in these type of investments which are relatively lower risk investments compared to start-up investing. The limit will have a small impact on the start-up investing platforms such as seedrs.com and seedinvest.com as most of these offerings are for less than $1 Million dollars. This is the exact issue that Nav Athwal, CEO of Realtyshares.com addresses here.

There are other issues regarding the additional regulatory hurdles which will be placed in front of the companies wishing to take advantage of this new legislation as Tanya Prive points out as well. You can read more about her concerns here.

In contrast to the issues raised by Athwal who runs a real estate crowdfunding platform, Chance Barnett CEO of crowdfunder.com a platform for startups, was singing the praises for the new legislation in his article here.

The contrast of these two views I think is really dependent on what Athwal pointed out. The implications of Title III are vastly different for real estate platforms as opposed to start-up platforms. The start-up platforms have a lot to gain as most of their offerings will fit under the $1 Million dollar cap and due to inherent riskiness of investments into start-ups investors will in any case want to commit less of their money to these investments. The opposite is true for the real estate platforms, which need more capital for each deal and are inherently much more stable investments which attract larger investments from each investor, the investment caps on these type of deals will seriously hinder the participation of retail investors.

One of my major concerns as well is that when the legislation actually goes into effect the start-up platforms will be the first to adopt offerings under title III. The hype and exuberance on the part of many retail investors to get in on these deals will lead to money flowing in without sufficient due diligence and without the proper hedges against risk. Since these are the most risky investments in the crowdfunding space it is really a horrible place for us to have to start with retail investors. A few deals that go bad and with start-ups the majority go bad will put a black cloud over the industry in terms of retail investors and this is all before the real estate platforms will be able to figure out the proper way to take advantage of the new legislation.

I hope for the industry and for investors both platforms and investors will proceed with caution using the proper due diligence and diversification to invest.

Title III of JOBS Act, Equity Crowdfunding for Non-Accredited Investors

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Here is a great article from Chance Barnett, CEO of crowdfunder.com about the implications of the Title III for start-ups.

The SEC just voted on and passed rules to implement Title III of the JOBS Act, bringing non-accredited investors into the fold for equity crowdfunding. This sets the stage for equity crowdfunding to continue its exponential growth over the next 3-5 years, on top of the existing market for accredited investors.

Crowdfunding was already expected to surpass VC in 2016 at $34B a year in total crowdfunding online, across all types of crowdfunding. By bringing in a new class of investors with Title III, we can expect further growth of the equity market as venture capital continues to move online.

The public has been waiting on Title III equity crowdfunding for three and a half years now, as the SEC continuously stalled in finalizing rules to allow non-accredited investors to come into the market and invest in startups under Title III.

Read the full article here.

What Is Wrong With Title III Crowdfunding

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Not everyone is so convinced about the prospects of Title III of the Jobs Act which was recently passed by the SEC.We thought we would post some thoughts from around the web on the issues with the current legislation.

Nav Athwal, CEO of Realtyshares.com voiced his concerns about the legislation because the capital limits effectively exclude real estate deals.

Athwal writes:

In theory, it seems like a win-win for both sides but putting the Title III changes into practice may not be a realistic goal at this stage of the game. At my two year old crowdfunding for real estate startup RealtyShares where the goal has always been to cater to the general public and not only Accredited Investors, we’re struggling to determine if this rule is actually as impactful as it appears to be in theory. That is because while Title III does expand crowdfunding opportunities for non-accredited investors, there are still certain requirements that have to be met and restrictions that apply.

For instance, under Title III individual investments would be limited to either 5 or 10% of the investor’s gross annual income, based on their net worth. And any investment opportunity would be capped at $1 million in total fundraising within a 12-month period. For commercial real estate, a capital intensive asset, these upper limits could be very limiting.

In recent weeks, legislators have been making a push to have the cap raised to $5 million and reduce some of the cost to crowdfunding platforms with regard to Title III offerings. It’s not clear yet which way the SEC will rule on these issues. In terms of the logistics of vetting non-accredited investors and making sure investment deals fall within the guidelines Title III imposes, the challenge may be too much of an obstacle for more nascent startup platforms to take on.

Other verticals, particularly those catering to startups or small businesses, will reap some positive benefits from Title III and those benefits extend to the public as a whole. Unlike real estate, oftentimes startups and small businesses do not need as much cash to hit that next milestone and thus the upper limit of $1 Million could prove workable. On the whole, however, the rules in their current form may not carry as much weight as previously thought.

You can read the full article here.

Other concerns were voiced by Tanya Prive, which concern the higher regulatory demands that will be put both on platforms and start-ups themselves to be allowed to open their offerings to non-accredited investors.

Prive writes:

Plus, a detailed due diligence screening conducted by the intermediaries or their outsourced partners will need to take place before the deal can be admitted, which can take anywhere between 15- 90 days. It will examine every little aspect of the company, its officers and major stakeholders, which depending on whether the intermediary does this in-house or outsources it, will result in additional fees, typically ranging between $2K-$5K. To build on top of that, there is no good way of making this process truly scalable as each due diligence conducted is unique in a way to the company undergoing it.

Read Prive’s full article on Forbes.

It remains to be seen how effective the new legislation will be as well as how many of the platforms will actually start adding offers under Title III. Keep reading more on this issue.

Regulation A+ Crowdfunding

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capitol-552645_1280 Recent legislation was just passed by the SEC referred to as Regulation A+ as Title IV of the JOBS act. This new legislation will help solve a major issue faced by most crowdfunding platforms. Until now, for platforms to open up an investment to non-accredited investors the investment would need to have passed approval by each state separately subject to their Blue Sky Laws. The process was too lengthy and costly for most of the platforms to pursue which is why these investments remained closed to non-accredited investors. With Reg. A+ the SEC basically pre-empts the rights of the individual state to review the investments and allows the sponsor to open the investment to the public in the form of a mini-ipo. This pre-emption will apply to TEIR II offerings which are for funding up to $50 Million but the investors will be subject to investment limits and the offerings will be subject to greater scrutiny. The TEIR I offerings will be increased to allow fundraising up to $20 Million and a new review system will be tested referred to as coordinated review, which will be a combined effort of the states to reduce the time and effort to gain approval for an offering.

Here are the highlights of the new legislation as outlined from Kiran Lingam, General Counsel at equity crowdfunding platform SeedInvest.

  • High Maximum Raise:  Issuers can raise up to $50,000,000 in a 12 month period for Tier II and $20,000,000 for Tier 1.
  • Anyone can invest:  Not limited to just “accredited investors” – your friends and family can invest.  Tier 2 investors will, however, be subject to investment limits described below.
  • Investment Limits: For Tier II, individual non- accredited investors can invest a maximum of the greater of 10% of their net worth or 10% of their net income in a Reg A+ offering (per offering).  There is no limit for accredited investors in Tier II. There are no investment limits under Tier 1.
  • Self-Certification of Income / Net Worth:  Unlike Rule 506(c) under Title II of the JOBS Act, investors will be able to self-certify their income or net worth for purposes of the investment limits so there will be no burdensome documentation required to prove income or net worth.
  • You can advertise your offering:  There is no general solicitation restriction so you can freely advertise and talk about your offering, including at demo days, on television, and via social media.
  • Offering Circular Approval Required:  The issuer will have to file a disclosure document and audited financials with the SEC.  The SEC must approve the document prior to any sales.   The proposed indicate that the Offering Circular will receive the same level of scrutiny as a Form S-1 in an IPO.    This is the biggest potential drawback of using Reg A+.   
  • Audited Financials Required:  For Tier 2, together with the Offering Circular, the issuer will be required to provide two years of audited financial statements.  Tier 1 offerings require only reviewed financials (not audited).
  • Testing the Waters:  An issuer can “test the waters” and see if there is interest in the offering prior to spending the time and money to create the Offering Circular.  This would be “Preview” mode on SeedInvest where investors can express interest, but can’t yet invest.  This is important so that companies don’t have to gamble on their fundraise and can see if there is interest prior to investing in legal and accounting fees.
  • Ongoing Disclosure Requirements:  For Tier 2, the issuer will be required to make an annual disclosure filing, a semi-annual report, and current reports, each of which are scaled back versions of Form 10-K, Form 10-Q and Form 8-K, respectively.  These reports will also require ongoing audited financials.  These disclosures can be terminated after the first year if the shareholder count drops below 300.  There are no ongoing disclosure requirements for Tier 1.
  • State Pre-Emption:  As discussed above, the old Regulation A (now Tier I) was never used because it required registering the securities in every state that you make an offer or sales.  New Reg A+ Tier 2 preempts state law – again – this is huge.  Tier 1 Reg A+ again does not have state pre-emption but will be a testing ground for NASAA Coordinated Review.
  • Shareholder Limits:  In a welcome departure from the proposed rules, it appears that the Section 12(g) shareholder limits (2,000 person and 500 non-accredited investor) will not apply to Reg A under certain circumstances.  This fixes a major problem from the proposed rules which would have limited the potential for very small investments (i.e. $100).
  • Unrestricted Securities:  The securities issued in Reg A+ will be unrestricted and freely transferable, though many issuers may choose to impose contractual transfer restrictions.
  • No Funds:  Investment companies (i.e. private equity funds, venture funds, hedge funds) may not use Reg A to raise capital.
  • Integration:  There are several safe harbors so it seems that you can use Reg A+ in combination with other offerings.  There are safe harbors for the following:

No integration with any previously closed offerings

No integration with a subsequent crowdfunding offering

No integration where issuer complies with terms of both offerings independently – can conduct simultaneous Reg D – 506(c) offering.

Bottom line, this is what we have all been waiting for or at least sort of. It remains to be seen how quickly these filing procedures will take and whether they will be quick enough for many of the platforms to make use of. Although timing may be less of a factor when a start-up is looking for funding because their product or offering is usually unique to them, this is not the case when the offering is for real estate. Since the real estate deals are basically subject to competition between sponsors who ever can close the deal and get the financing quicker is usually the winner. The projects don’t stay on the market long enough for a drawn out funding process.

It will be interesting to see how the platforms adapt to the new legislation and whether they begin to offer investments under Reg A+. I am confident there will be a solution and we can look forward to freely investing : )

For a comprehensive update on the new legislation read the full post by Kiran here. 

 

The potential of equity crowdfunding

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careerAs equity crowdfunding has started to take shape in the past few years and new legislation Regulation A+ was just passed, the equity crowdfunding market is ripe for explosion. The potential that this new asset class brings to the retail investor is unclear and depends mostly on how well the platforms will be able to successfully navigate and adapt to the new legislation. It will also depend on how well the public receives this asset class and starts to invest in it.

One indication that is worthwhile to look at is where is the “smart money” going. People regularly look to see what stocks investment gurus or hedge funds are investing in and they use this as a gauge for their own investment ideas. I would like to tweak that approach a bit and to take a look at an article written by  Sherwood Neiss a partner at Crowdfund Capital Advisors, an expert in the industry and consider one of the “founding fathers” of Title III of the JOBS Act.

Ness, documents the investments that VC’s are making into the crowdfunding industry in terms of funding the various platforms that exist and seed funding for new platforms. Although he looks at the overall trend of investments both within rewards based crowdfunding and equity based crowdfunding, I want to really look at the equity based platform investments. This is what Ness had to say:

More than seven equity crowdfunding platforms have received over $180 million in financing, with the oldest among them being only four-years old. This too shows validation for a business model of which one of the two models (Title III, crowdfunding for all) has yet to go into effect. We anticipate equity crowdfunding to blossom in the next 36 months, with a majority of venture capital flowing into this space as early movers are proving the model, the media is covering it with more interest, and the global appetite for this sector expands significantly.

So even though this isn’t opened up for the retail investor as of yet, you can see that the smart investor are already pouring money into this industry. This should be a good indication of what the future holds for equity crowdfunding.

Click here to read the entire article on VentureBeat.com