In 2015, the Securities and Exchange Commission (SEC) implemented Title III and Title IV of the Jumpstart Our Business Startups Act, or JOBS Act. Under new SEC rules, any member of the public has the ability to invest in privately-owned, early-stage and mid-size companies that are seeking investment capital through equity crowdfunding.
How does this change things for investors?
In short, now everyone has the potential to be an investor in a privately-owned company. Title III allows unaccredited investors the opportunity to reap financial benefits when a privately-owned company IPOs or is acquired by a larger entity — an outcome previously available only to accredited investors.
Before Title III, the only option available to the public-at-large was rewards-based crowdfunding on sites like Kickstarter and Indiegogo, where support was rewarded with goods or services. So, if people backed a company that was later acquired or went public, all they got was the previously promised goods and services — or sometimes, nothing at all.
What does it mean for companies?
Under Title III and Title IV, a company may accept investments from unaccredited investors — meaning companies will have the potential to attract more capital, which translates to higher growth potential than ever before.
Until now, fundraising from the general public was the exclusive domain of companies large enough to afford the high costs of going public on stock exchanges like NYSE and NASDAQ.
What businesses benefit most from equity crowdfunding?
Of course, not every business will find equity crowdfunding the best way to raise money.
Certain rewards-based crowdfunding campaigns, such as films like “Veronica Mars” — or even a business created to produce the film — do not translate as well in an equity crowdfunded setting. One reason is because the value of shares would be diluted by a large number of investors. Earning potential is also more limited when there is a finite end to a project.
For companies considering equity crowdfunding under these new rules, a critical factor to consider is if the amount being raised is $5 million or more. Although there is no minimum fundraising amount, completing the Regulation A+ process requires both time and money – upfront costs can be between $75,000 and $150,000. There are also ongoing costs related to financial reporting, as well as SEC filing costs and broker-dealer commissions.