Equity Crowdfunding: A New Era in Capital Formation

Effective today, May 16, 2016, true equity crowdfunding is a reality.  Startups and small businesses are now legally able to raise capital from regular people under Regulation Crowdfunding and Title III of the Jumpstart our Business Startups (JOBS) Act. Historically, the ability to invest in private companies has been largely restricted to accredited investors (i.e. people with over $1M in net worth or over $200k in income).  The JOBS Act was passed in April of 2012 in the wake of the financial crisis to help spur economic activity and job growth.   Specifically, Title III of the JOBS Act provides for equity crowdfunding, or the ability for regular people to invest small amounts in private startups and small businesses for the first time since the great depression. For example, a restaurant could raise $200,000 to open a new location by raising $100 each from 2,000 customers and community members. This new fundraising option may increase investment options for regular people who have traditionally been limited to products such as public bonds, stocks and savings accounts. However, this capital doesn’t come easy, as there are many limits and requirements for companies who choose to raise capital under Title III.  Here are the highlights of the new rules:
  • Companies can raise up to $1M from both accredited and non-accredited individuals during a 12-month period
  • Individuals are limited in how much they may invest each year (many will be limited to $2,000 per year)
  • Companies must provide detailed initial and ongoing disclosure documents and financial statements to the SEC and to the public
  • All fundraising must take place on an online platform and be operated by a FINRA member broker-dealer or funding portal
  • All advertising off the platform must be limited to simple announcements
  • All details and specific communications regarding the offerings must take place on the online platform
  • Only operating companies may raise capital (i.e. no funds)
These requirements lead many to believe that this path will be too expensive or burdensome for good companies to pursue.  Others believe that they can overcome these hurdles and that the law will evolve over time to be more favorable. What does this mean for investors? All investors should exercise some caution in investing in crowdfunding offerings (just as they should with any securities transaction). These offerings are likely to be early stage companies and will be highly speculative and risky.   Investors should assume that many companies will fail and therefore diversification is critical. Investors in crowdfunding should also think about ancillary benefits to investing.  Is this a cause or product you believe in?  Are you a customer with a great experience with the company?  Do you know the founders personally and believe in their ability? What does this mean for small business? Small business and startups now have a new fundraising option to help raise capital to start or grow their business.  While this capital may come with some expense and regulatory burdens, one more path to capital can only be beneficial.  Many small businesses pay high interest rates for debt capital and they may find crowdfunding a viable alternative. What does this mean for the industry? Title III crowdfunding is likely to face many headwinds in implementation and it will be many years before we know its true impact on the industry and on the capital raising landscape. For us, we believe that, while not perfect, this is a huge step in the right direction towards democratizing access to investment opportunities and leveling the playing field for main street investors. Over time, more and more investments will be available to regular people and YieldStreet intends to lead the way in bringing asset backed, higher yielding investment opportunities to the public.
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