UPDATE: The Securities and Exchange Commission approved Title III of the JOBS Act on Wednesday, allowing non-accredited investors the ability to participate in equity crowdfunding opportunities. While Title III generated the most excitement among the investment community when the JOBS Act was signed in 2012, it has also been the slowest to be addressed by the SEC. Now that the long-awaited decision has finally arrived, the landscape for early-stage startups and investors will be drastically impacted as a new source of capital and opportunities is opened up.
It’s been a long, long ride for the JOBS Act. Originally passed in 2012, the final chapter appears to be coming to a close on Friday, when the SEC votes on the proposed rules for Title III, the crowdfunding portion of the bill.
Initially among the most exciting parts of the legislation, enthusiasm for Title III has gradually waned or been siphoned off to other parts of the bill. For starters, the rules made it hard to envision startups making much use of them. Companies wanting to engage in equity crowdfunding across state borders would be hamstrung by a number of costly regulatory accounting burdens, the non-accredited investors they did draw in would be limited in how much they could invest, and the total raise was capped at $1 million, making it a very expensive way to raise…not a lot of money.
Then, in March, the SEC revealed its new rules regarding Reg A+. It was already clear that the cap on how much money could be raised in a year via this loophole would be expanded from $5 million to $50 million. However, the bomb the SEC dropped was to open the process up to non-accredited investors.
This essentially seemed to be an end-around on the Title III provisions. The one thing they were supposed to do (open capital markets up to non-accredited investors) was now available in a cheaper, easier form in Reg A+, and with the opportunity to raise 50 times as much money.
So who even cares about the vote on Friday? Isn’t Title III really just DOA, and made entirely superfluous by the new Reg A+? Maybe not. The thing is, it’s next to impossible to predict precisely how people and markets will react to these things. These rules may not be exactly what people were initially anticipating, but it’s not hard to imagine a way that they could still make important differences in the American landscape.
The Floodgates Open…but Only a Crack
It’s certainly true that the visions of the investment floodgates swinging open that a lot of people had immediately after the passage of the JOBS Act haven’t quite lived up to expectations. This is not likely to be the birth of a grassroots financing utopia, where future Facebooks (FB) or Twitters (TWTR) are built on thousands of small investments from average Americans.
The hottest startups of the day – like Uber or Tinder, are likely to continue sticking to venture capital firms in anticipation of a massive IPO down the line. That was likely never going to change – JOBS Act or not. The next few tiers below that will likely be the companies that utilize Reg A+.
However, what is intriguing about the Title III provisions are how they could ultimately affect the smallest businesses out there. Certainly, some of the regulatory burdens will keep smaller players out of something like equity crowdfunding. However, there are other methods for raising funds in Title III that could wind up being more important.
Locavesting Might be Small Potatoes, but It Could Mean Big Things
It seems as though one particular element of Title III is getting overlooked – namely, the provisions for intrastate lending. I can understand this, as on some level, the geographical limitations undoubtedly make it much less interesting to those focused on larger capital markets. However, what this could potentially mean to the thousands upon thousands of largely local small businesses out there is actually fairly exciting.
Under rule 147, those capital raises that take place entirely within a single state don’t have to deal with the limitations in place for crowdfunding that’s nationwide. The reporting requirements are much simpler than those placed on equity crowdfunding, and there’s no limitations on general solicitation.
That prospect might not get a lot of investors salivating, but it could mean pretty big things for small, local businesses. Imagine a popular local restaurant or store being able to raise money for an expansion to a new location or to expand their website not by going to a bank but by reaching out directly to their customers.
Ultimately, that may be the biggest legacy of Title III, a future where locavesting can bridge the gap for small businesses. It may not be providing financing for a brand or business that’s going to grow into a mega-cap powerhouse down the line, or even companies looking to expand into a modest small-cap space, but it is helping open up traditional elements of capital markets to a broad swath of people and businesses that never used to be able to take that route. For plenty of businesses, building customer loyalty can be even more valuable moving forward.
Boosting Goodwill by Leveraging Grassroots Funding
It’s also important to remember that there’s no sure way to know how people will react once this hits the open market. Sure, going through arduous accounting requirements just so you can raise $1 million in tiny pieces from hundreds of investors doesn’t seem, on the surface, like something that will get a lot of traction. However, the nature of the new sharing economy has a tendency to occasionally defy expectations.
Most notably, it’s becoming more and more clear that the perception one can attach to their brand can mean a lot. Even if it is inefficient, being able to claim that your business is funded and grown by a collection of small investors can be its own asset. This is particularly true among millennials, a group of consumers who tend to be less focused on returns and more focused on supporting brands and companies that project a sense of ideological alignment.
Just look at some of the larger projects on Kickstarter or IndieGoGo. People poured millions of dollars into private enterprises that offered little to no chance at real returns simply because the ideas behind them were appealing. That sense of community that could be fostered by an equity crowdfunding campaign could be leveraged into a branding exercise that would ultimately be its own revenue driver. If you’re a fashion line that makes clothes domestically and pays a living wage, or an organic food brand committed to sustainable agriculture, engaging in this sort of equity crowdfunding could be seen as both a capital raise and a branding exercise that appeals greatly to your core consumers.
An Unexpected Capital Revolution
At the end of the day, the Reg A+ rules took a lot of wind out of the sails for Title III. The revolution does appear to be coming in terms of capital formation, it’s just not going to be from where we expected. However, that doesn’t mean that we should simply pass over the SEC’s Title III vote on Friday. It may not be something that’s going to get a ton of headlines, but these rules and options could still provide some big changes for a lot of American businesses and investors.
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