Equity Crowdfunding - Boom or Bust?

  

Three and a half years in the making, the SEC has finally approved Title III of the Jobs Act which will extend equity crowdfunding to non-accredited investors. In theory this will create a win-win for small companies and average citizens. Startup businesses will now be able to attract capital that will allow them to grow (and hopefully hire more employees) and individuals that are classified as non-accredited investors will be able to participate in potentially lucrative investment opportunities previously limited to the wealthy. Although the concept is sound the reality may prove to be somewhat different.

As of February 1st, 2016 registered Broker/Dealers like CircleUp, FunderClub and Wefunder, will be able to offer non-accredited investors opportunities to participate in equity funding rounds for small companies. However, while the requirements for investors have been lowered the requirements for the companies are not insignificant. In an effort to protect individual investors, the SEC has imposed a series of compliance requirements that are both costly and time consuming. Forbes magazine estimates the compliance costs only can range anywhere from $25K to $85K and this is in addition to the funding fee which typical runs from 5% to 8% of the amount raised. The SEC also limits the amount that can be raised through equity crowdfunding to $1 million making this an expensive proposition for many small, cash-strapped businesses.

While the SEC has taken steps to try and ensure that only legitimate businesses can qualify for equity crowdfunding there is a concern that financially savvy VCs and angel investors will ‘cherry pick’ these opportunities leaving only the more speculative, higher risk businesses seeking this type of investment. Ultimately only time will tell if Title III of the Jobs Act will be a boom or bust for startups and non-accredited investors.



 

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