Last month, the SEC adopted Title II of the Jumpstart Our Business Startups (JOBS) Act, which allowed companies to publicly advertise their fundraising activities. In the short time the law has been in place, a number of companies have emerged and started knitting together a fundraising ecosystem to serve those interested in raising capital through alternative means. Funding platforms like EquityNet and Crowdfunder have been preparing for the regulatory shift and have publicly announced that they are open for Title II business.
Companies like TechShop, a for-profit workshop chain looking to raise $60m for national expansion, are already embracing the new opportunity. The venture capital industry is also making use of the new general solicitation rules, with ff Venture Capital being the first company to test the waters with a public announcement of a new fund. By increasing the number of investors any fundraiser can reach, Title II has effectively raised the likelihood of successful fundraising for a startup business. However, the potential is still limited by the accredited investor certification, which requires participants in exempt offerings to pass the traditional income or asset tests. That limitation might soon be removed if Title III of the JOBS Act is adopted, a proposed exemption that opens the market to non-accredited investors with key restrictions on investment size and frequency.
Under Title III, companies would be able to raise non-accredited funds capped at $1m within a 12 month period. Similarly, investors would be limited in the amount they could invest over the course of a year, dependent on their income level. Any investment would have to be sourced through a registered broker-dealer or funding portal and income certification would be the investor’s responsibility. There’s a reason for these restrictions; when venture investors conduct diligence on a company, they (usually) ask for certain internal data, that more often than not, they receive. If they happen to already be a “major investor” (holdings of equity shares over a certain floor defined in stock purchase agreements), they may even be entitled to this data. Startups will have no obligation to disclose such data to small private investors. Even participants in SecondMarket, generally geared towards later-stage (some might say “IPO-bound”) companies, run into this issue. So JOBS “crowdfunders” will be investing on public information alone, and may be under worse terms than institutional investors.
That said, the JOBS Act has the potential to facilitate and accelerate access to capital for entrepreneurs and existing companies. At the end of the day, not all startups or capital-seeking businesses need (or want) investors that are actively involved or simply a value-add. Looking at the success that P2P lending marketplaces like LendingClub have demonstrated, I can see a happy medium where crowds look to contribute to early venture debt or even convertible notes. Quantitatively-driven VCs like Correlation Ventures may get into this game in a similar way to how certain hedge funds have shunted institutional money into P2P lending. I’m always excited to see superfluous regulatory barriers recede and access to markets expand. But, I do hope that we can take one step at a time and remember a dear lesson from our last global recession: freer capital is a godsend, until it’s a curse.
