After repeated delays, is there any hope for this part of the JOBS Act?
With the newly-implemented Regulation A+ getting so much attention, it’s easy to forget that there’s still another part of the JOBS Act that needs to be finalized. When the JOBS Act was passed in 2012, Title III of the legislation was viewed as the major change that would finally allow non-accredited investors to invest in private placement offerings. While Title II and Title IV of the JOBS Act have been implemented, Title III still awaits final SEC rules. What’s more, many commentators now question how useful Title III will be to investors and crowdfunding portals with so many other methods of raising capital available. Is there any hope for Title III?
Explaining the 2012 JOBS Act
The JOBS Act, which Congress passed in 2012, was intended to make it easier for small businesses to raise capital by easing various burdens related thereto. While the JOBS ACT instructed the SEC to do certain things (allow crowdfunding portals to raise funds for private placements, lift the ban on general solicitation), it left many of the details of how to do these things to the SEC. As a result, the key provisions of the bill did not take effect immediately, but required SEC rulemaking and final approval.
Here’s a brief summary of how the SEC has implemented the provisions of the JOBS Act to this point:
- Title II of the JOBS Act instructed the SEC to lift the ban on general solicitation and advertising for certain private placements, provided that all investors are accredited investors. After some delays (including reports that outgoing SEC chief Mary Schapiro personally delayed the rules), the SEC adopted rules implementing Title II in July 2013. The rules, enacted as Rule 506(c) to Regulation D, required issuers to take “reasonable steps to verify” that all purchasers are accredited investors, among other revisions, but finally allowed the public solicitation of private equity
- Title IV of the JOBS Act directed the SEC to adopt rules exempting securities offerings of up to $50 million annually from the registration requirements of the Securities Act. Most of the details were left to the SEC, and after three years, the SEC adopted rules implementing Title IV this year. The new rules, which were adopted as Regulation A+, permits companies to offer and sell up to $50 million of securities to the general public subject to certain eligibility, disclosure and reporting requirements (check out our previous blog post on Regulation A+ for more details).
That leaves Title III of the JOBS Act. Title III instructed the SEC to allow issuers to raise funds from non-accredited investors for offerings up to $1 million. Not surprisingly, given the complexity of the subject, the SEC rulemaking process has been lengthy. In October 2013, the SEC released proposed Title III rules, which provide that:
- Organizations may only solicit $1 million annually;
- Only registered broker-dealers and funding portals may intermediate purchases or investments;
- Investors can invest up to $2,000 or 5% of their income (whichever is greater) if their net worth and annual income are both less than $100,000. Investors with over $100,000 in net worth or income may invest up to 10% of either; and
- Businesses raising over $100,000 must supply investors with financials that have been reviewed by an accountant. Businesses raising over $500,000 must supply audited financials to investors.
In December 2014, the SEC publicly set a goal to complete all JOBS Act rulemaking by October 2015. While the SEC hit its goal for Title IV, it looks as though it may miss the target date for Title III. In April, SEC Chair Mary Jo White stated that “[o]n the JOBS Act side, adoption of final crowdfunding rules is our last major rulemaking to complete, which is also a priority for 2015.” No new target date has been set; however, at this point the best guess is that Title III rules won’t take effect until early 2016.
Is Title III Really “Dead on Arrival?”
Given the repeated delays in implementing Title III, the stringent set of proposed rules, and the surprisingly expansive Regulation A+, many crowdfunding industry commentators have little hope for Title III. CircleUp co-founder Rory Eakin claims that the regulatory burdens of the proposed rules will ensure that Title III “will fail quite spectacularly.” Some have even described Title III as “dead on arrival.”
I share some of these concerns, and I’m not sure that real estate crowdfunding platforms will make great use of Title III. The $1M funding cap will be too low for most larger, more attractive commercial real estate deals. This is an unfortunate result for non-accredited investors. The larger commercial real estate projects that require larger equity checks are a far more appropriate investment product than unproven startups. Given that Title III already limits the amounts that non-accredited investors can invest, it makes little sense to put an overall funding cap in place as well. Some in Congress have proposed raising the Title III funding cap to $5 million, and I agree.
These misgivings aside, I wouldn’t underestimate the potential impact of Title III. Once Title III takes effect, the number of potential crowdfunding investors will increase from 8.7 million (the number of current accredited investors) to over 230 million. Some early estimates were that Title III investing would grow the crowdfunding market by another $300 billion. Even if those estimates prove overly optimistic and Title III only becomes a tenth as large, $30 billion market growth is the same size as the annual venture capital investment market. Even with the income and net worth investing limits, the size of the potential investor pool is so large that it cannot be ignored.
I also believe it’s important to the crowdfunding industry that non-accredited investors finally have an opportunity to invest. Even if there aren’t that many initial Title III offerings and the amounts raised are relatively small, allowing ordinary investors to participate in opportunities that were once limited to the wealthy elite will be a huge breakthrough. As with Title II crowdfunding, a successful launch of Title III will demonstrate to policymakers the pent-up demand that investors have to participate in equity crowdfunding, and hopefully pave the way for more workable regulations in the future.
To recap, while I have some concerns over how workable Title III will prove to be, don’t underestimate it’s potential impact. We will have to wait for the final SEC rules (and remember, Title IV was much broader than initially predicted), but any regulations that open up investment crowdfunding to 230 million Americans can’t be all bad. I know firsthand that the demand from non-accredited investors is there, so don’t be surprised if Title III exceeds expectations.