Last week, the U.S. Securities and Exchange Commission adopted its final rules for Title III of the Jump-Start Our Business Start-Ups Act, or JOBS Act. This equity crowdfunding provision provides an exemption that allows entrepreneurs raising money through crowdfunding (websites such as Kickstarter, Indiegogo, and SeedInvest) to offer non-accredited investors an equity stake in their business.
Originally signed by Obama over three and a half years ago, Title III had been stalled by regulators as they wrote rules balancing the protection of investors with methods of fundraising that would not be so costly or complex as to impede participation by the smaller companies it is intended for. This has been a hugely anticipated ruling for the staggeringly large and rapidly growing crowdfunding sector, which is estimated to surpass $34 billion a year in 2015 and $90 billion a year by 2020. Many have hailed the idea of the equity crowdfunding provision as something that will finally allow “ordinary” consumer and retail businesses—those less “fashionable” or less appealing to VC investment—to raise capital and give family, friends, consumers, and other industry contacts the opportunity to gain equity in ventures they want to support.
But are the new rules actually worthy of being lauded as such? Under Title III, both the amount that a startup can raise and the amount of money an individual backer may invest are limited. A company issuing equity under this exemption can raise no more than $1 million through equity crowdfunding in a 12-month period. An individual backer’s contributions to all crowdfunding offerings in a 12-month period is limited by annual income and net worth. Those with annual income or net worth less than $100,000 may invest “the greater of $2,000 or 5 percent of annual income or net worth” in a 12-month period, which effectively means that those in this category can contribute no more than $2,000-$5000 a year to all crowdfunding ventures. Those with both annual income or net worth exceeding $100,000 are limited to 10 percent of the lesser of the two. Since one can become an accredited investor with annual income exceeding $200,000 or a net worth above $1,000,000, this caps contributions of non-accredited investors between $20,000-$100,000 (something which may be acknowledged in the prohibition on exceeding an aggregate of $100,000 per year in securities sold to an investor). In addition to these restrictions, the websites acting as intermediaries must register as a broker-dealer or a “funding portal,” certain disclosures must be made by issuers, and shares are illiquid and generally cannot be resold for at least one year.
With these restrictions in place, it seems that Title III might not be as groundbreaking as many hoped it would be. The million dollar cap on the amount a company can raise hardly amounts to much in today’s market. The limitations on backers’ contributions are such that backers may be disallowed from giving more than a trifling amount and, as a result, from getting much equity at all. Moreover, some have voiced skepticism over whether compliance under the provision is really as inexpensive as has been touted. Further, the SEC itself has predicted only 1,900 companies a year will actually use this provision, which is staggeringly small when compared to the 73,400 ventures that received angel funding in 2014.
With such great restrictions in place, it seems the SEC might not have accomplished in the last three and a half years all that was hoped.
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Arianne Taormina is an editor on the Michigan Telecommunications and Technology Law Review, and a member of the University Michigan Law School class of 2017.