The SEC has, at long last, issued final rules on crowdfunding under Title III of the JOBS Act, issuing a press release with fact sheet and a long final rule release. The rules will become effective in the middle of next year. These rules are likely to transform the manner in which small businesses raise capital. The following are some big picture points about Title III crowdfunding to keep in mind, some of which I’ve written about in the past:
- Title III crowdfunding differs from Rule 506(c) offerings, which have also been termed crowdfunding. Title III crowdfunding can involve accredited and any number of non-accredited investors, and involves relatively small amounts of capital being raised in relatively small increments.
- There has been some skepticism as to whether companies that raise money through crowdfunding will render themselves unattractive to venture capital investors. Keep in mind, however, that VC investment is only appropriate for a small slice of all businesses, usually ones in industries like technology and life sciences that have a high risk-reward profile. When you are thinking of crowdfunding, think of more “everyday” businesses like small manufacturing companies, restaurants, small real estate development projects, etc. Businesses like these can be highly successful without the founders ever learning what the term “venture capital” means.
- Because many of the businesses that will use crowdfunding have a lower risk-reward profile, we shouldn’t assume that investors are essentially purchasing a lottery ticket and throwing away their money. So this is not necessarily a scenario like a VC investor where the only way to be successful is to throw money at dozens of different investments, hoping that one hits.
- Some skeptics have been worried about investor fraud in crowdfunding, but it seems more difficult to accomplish with the protections inherent in the final rules (offerings conducted through a portal that the SEC can monitor, strict dollar limits on investor participation, etc.) than it already is in the existing private placement world.
- The SEC addressed concerns about the costs of compliance with these rules by liberalizing the proposed rules regarding the auditing of financial statements, which will now not be required for companies using these rules for the first time.
- There has also been skepticism about the logistics of startup companies communicating with and seeking approvals from a large amount of crowdfunded shareholders, but the same type of back-office infrastructure that handle these tasks for public companies, stock transfer agents, etc., will likely provide similar services for these private companies.