Ever since its inclusion in the JOBS Act, equity crowdfunding promised to revolutionize private investing, uniting startups with individual investors through the power of the Internet.
Currently, crowdfunding sources are a popular way for startups to raise money and build notoriety for their product or idea. People can donate money out of the goodness of their heart or offer a larger donation in exchange for a “gift,” typically an early version of the product. Thus, crowdfunding is an outstanding method for certain startups to get their ventures off the ground.
However, law forbids the sale of equity via crowdfunding sources. This leaves angel investors or altruistic donations as the only way for risky startups to raise capital.
Title III of the JOBS Act seeks to change that. However, major questions surround the legislation, as well as the entire concept of equity crowndfunding. Can investors and entrepreneurs expect equity crowdfunding to become legal anytime soon?
Title III of the JOBS Act
The Jumpstart Our Business Startups Act (JOBS Act) was put into law in September 2013. It's goal is to promote investment in small American businesses by easing securities regulations, hence fostering a more open business environment. Title III of the JOBS Act promised to legalize equity crowdfunding, allowing startups to sell shares through crowdfunders.
According to the SEC, equity crowdfunding would make “relatively low offerings of securities less costly… to help alleviate the funding gap and accompanying regulatory concerns faced by startups and small businesses,” hence enabling startups to grow faster and accelerate hiring. Title III would permit investments in startups up to $1 million from “accredited” investors.
Why Startups Want It
Although crowdfunding is a popular way for risky startups to raise capital, it can be rather inefficient and costly. Most crowdfunding sources are all-or-nothing; if a venture does not meet the threshold amount, the venture will receive nothing. In the meantime, the venture’s precious time has been wasted. Meanwhile, the “gift requirement” for larger donations can make raising capital extremely costly. These inefficiencies can even hinder long-term growth and profitability.
Equity crowdfunding, as opposed to traditional crowdfunding, is a whole different ballgame. Startups could value their venture however they please, enabling them to sell equity at attractive prices with minimal search costs.
Meanwhile, investors would be giddy about the thought of investing in the next Facebook (FB) or GoPro ($GPRO) before venture capitalists get their hands on precious equity. The concept is exciting for everyone involved, but lawmakers have been reluctant to write the proposal into law.
Nothing. The SEC had about nine months to finalize equity crowdfunding and simply let the deadline pass without a word. The SEC likes to be in control and probably doesn’t want startup investment to become the Wild West, permitting equity transactions with minimal oversight.
In a free market situation, the implementation equity crowdfunding could go smoothly. A laissez faire equity market would do wonders for small businesses and startup ventures, allowing them to quickly obtain financing without much interference, costs, or risks.
On the other hand, equity crowdfunding could be a total disaster for several reasons. Accounting and legal implications would be enormous. Investors who want to sell equity would have essentially no exit strategy without any investors to sell to. Plus, not enough regulation would be dangerous for investors and too much regulation would prove counterproductive to the entire idea.
Thus, the SEC fears writing Title III into law. It is still struggling to find a logical, meaningful balance between too much and too little regulation. Even with 585 pages in rules and regulations, the SEC is uncomfortable with the legislation in its current state.
At least under its current leadership, the SEC will probably continue to twiddle its thumbs when it comes to the topic, but won’t publically denounce the idea because it doesn’t want to kill the crowdfunding buzz and look like an anti-business villain. The SEC was more or less forced to write Title III’s legislation–a law it never agreed with in the first place. The legislation is overcomplicated yet strikingly incomplete, so crowdfunders shouldn’t expect equity crowdfunding anytime soon.
The idea is nonetheless exciting. Opening up early stage investment to the general public is a tantalizing prospect for both entrepreneurs and investors. However, the idea is too premature at the moment and needs to be backed by stronger legislation before we can expect Title III to be written into law.
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