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.

Trackbacks

  1. […] 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. […]

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