In the world of crowdfunding, investors are wondering exactly when the final ruling for Title III of the Jumpstart Our Business Startups Act will be implemented, as well as just what it means for the lending vehicle. While still a relatively new initiative, Title III is making headway in investing conversations, as it reaffirms how the scope of crowdfunding is not only expanding but also becoming a mainstream investment platform.
What is Title III?
Title III is one of seven titles in the JOBS Act, which was signed into law by President Barack Obama on April 5, 2012. According to Forbes, the first initiative of the JOBS Act was Title II, which was created in September 2013 and allowed for public advertising of fundraising in the equity crowdfunding realm.1 While this was a step forward in establishing the prevalence of crowdfunding, Title II limited investing to only accredited investors, which meant that citizens who didn’t meet the income and net worth benchmarks couldn’t take part in the process, as noted by the U.S. Securities and Exchange Commission.2
“Title III aims to make every citizen eligible to participate in equity crowdfunding.”
Title III is the long awaited non-accredited crowdfunding component to the JOBS Act, which allows non-accredited individuals to participate and invest online into private companies in small increments – those between $1,000 to $5,000. It was aimed to modify the restrictions that Title II put forward by increasing eligibility. For borrowers, this means there is more capital available. For lenders who couldn’t previously participate, now is the chance. However, since the introduction of Title III, it has been stalled and has yet to receive final rules written into law. While the SEC proposed rules in October 2013 and announced in December 2014 that those directives would be finalized by October 2015, many investors and industry professionals are anxiously waiting to see what the new guidelines will entail and how drastically those provisions will modify the role of crowdfunding and impact businesses.
According to TechCrunch, Title III is ambitious, seeking to establish an entirely new capital markets infrastructure.3 One of the proposed provisions of Title III is the concept of “funding portals,” which protect investors who lend to private companies – a move that hasn’t been seen in recent history. Title III also makes it so these funding portals aren’t subject to the same requirements as broker-dealers regulated by the Financial Industry Regulative Authority. Additionally, Title III implements increased levels of disclosure from companies as well as placing maximum income/net-worth caps on how much investors are allowed to fund.
As the SEC gets closer to finalizing the rules and maintains its intended rollout date, there will then be a 60-day period for the rules to be written into the federal register. This timeframe makes it likely that the beginning of 2016 is the earliest investors will see its change to the equity crowdfunding world. And while many are thrilled and seeing Title III as progress for the lending channel, there are others who are concerned that the new rules create too many regulations and hoops for both investors and companies.
Concerns regarding Title III
According to Forbes, the JOBS Act is a clear demonstration that crowdfunding is a main source of capital for many businesses.4 Regarding Title III specifically, Forbes noted it “will democratize fundraising and improve access to capital for startups and entrepreneurs by providing an online mechanism for companies to sell securities or equity in their businesses to non-accredited investors.”
The fact that regulators have taken so long to establish rules and the anxiousness has swelled demonstrates overwhelming public support for startups and small businesses. By allowing investors of all financial standing to fund a piece of a private business, crowdfunding has opened the playing field to just about everyone. However, there are some who feel Title III will not perform as intended and hurt the crowdfunding economy that has been on such a steady spurt of growth in recent years.
While Title III seeks to revolutionize crowdfunding, some worry about the cap restrictions.
Crowdfund Insider noted Title III’s inclusion of funding caps is out of place and even pointless.5 While there is some debate as to whether the intention is to limit the activity of fraudulent deals or keeping the playing ground fair between projects funded by the poor and the super-rich, Crowdfund Insider, which is a leading source on alternative investing, is one source that disagrees with the cap.
“The conversation can’t continue until the final rules have been released.”
Additionally, TechCrunch noted the rules are too strict, and unless they are changed before being finalized, companies will have to jump through too many hoops to participate. The rules are designed to protect investors, but TechCrunch stated they will cost companies too much time and money. While there are certainly advantages of such an initiative, there are those expressing concern that Title III will go largely unused as companies will be more inclined to crowdfund outside of Title III.
However, with the debate continuing on both sides of the fence, investors are arguing that the most important move for the SEC at this point is to simply release the rules. While initial rules were released, they are likely to change, and the final form they take is all investors are interested in.
Releasing the rules
Investors cannot know for sure how Title III will play out until they have an accurate concept the of final rulings. Chris Tyrrell, chairman of Crowdfund Intermediary Regulatory Advocates, spoke with Crowdfund Insider about the possibilities Title III would bring to the business world and noted the conversation can’t go further until the final rules are released for public viewing.6
“Modifications to the proposed final rules are necessary for a smoothly functioning, economic crowdfunding marketplace – such as including the portal liability and accounting cost provisions – but most importantly, issue the rules as soon as possible.”
Tyrrell said the initiative could definitely work to democratize the crowdfunding of capital markets but not until the SEC gives investors transparency into the process.
- “SEC Democratizes Equity Crowdfunding With JOBS Act Title IV,” Chance Barnett, 2015. Forbes.
- “Investor Bulletin: Accredited Investors,” U.S. Securities and Exchange Commission, 2013. Investor.gov
- “The JOBS Act Is Progress But Much Remains To Be Done,” Rory Eakin, 2015. TechCrunch.
- “JOBS Act And Crowdfunding: Will They Finally ‘#ReleaseTheRules’?” Mary Juetten, 2014. Forbes.
- “The Funding Cap on Title III Retail Crowdfunding Is Pointless,” Rodrigo Nino, 2015. Crowdfund Insider.
6. “Release Title III: Securities Based Crowdfunding Rules – The New Investing Model,” Kim Wales, 2014. Crowdfund Insider.