The quote above is attributed to a young, European magazine editor, Jozefien Daelemans. However, Ms. Daelemans (whom we do not know) seems mistaken: The inescapable truth about any sort of funding—“crowd” or other—is that it is precisely about collecting money. The presumption with crowdfunding is that a worthy idea lacks only money in order to go from being a dream to reality. And that, irrespective of financial merit, if enough “normal people” believe, then the idea should somehow get funded. So what’s unique about crowdfunding is that the criterion for collecting money shifts from measures of economic utility to whether or not an idea is popular; only, to get money as the object remains the same.
Versions of crowdfunding have been around for centuries, but in its latest form—online crowdfunding—the market has grown from funding mostly entertainment opportunities using Internet sites such as ArtistShare and Kickstarter, to raising capital for equity deals on AngelList and MicroVentures.com. Enthusiasm over crowdfunding influenced the 2012 JOBS Act legislation: Title III of the Act contained provisions to allow non-accredited investors to purchase shares in private placement offerings. Rules approved by the U.S. Securities and Exchange Commission include:
- Startups and small businesses can raise up to $1 million annually through crowdfunding,
- Investors making <$100,000 per year can invest up to $2,000 or 5% of annual income,
- Investors making >$100,000 per year can invest up to 10% of annual income,
- Significant disclosures are required by companies to help provide transparency, AND
- Investments must be made through a broker-dealer or SEC-registered crowdfunding portal.
Industry observers expect equity crowdfunding to outpace traditional angel and venture capital investing in the next 3-5 years as the new rules open a tremendous amount of non-accredited investor capital to the early stage investing market. Click for more information.
Title III equity crowdfunding will certainly be a significant way that money gets collected to fund early stage companies. Another will be through Title IV of the JOBS Act, which authorized Regulation A+ offerings to non-accredited investors. As with Title III, Title IV Regulation A+ allows non-accredited investors to invest a maximum of 10% of their annual income in private placement offerings. Companies may raise up either $20 or $50 million, according to a two-tiered regulatory structure. Regulation A+ offerings entail significant registration and reporting requirements for companies: Companies using Tier I are not exempt from state registration; companies using Tier II are exempt from state registration, but must provide the SEC with audited reports and financial statements ahead of the offering, and annually thereafter. Click for more information.
Owing to the burden on small companies to comply with Regulation A+ requirements, Angel Capital Group does not anticipate receiving many startup company deals under Title IV. It’s equally unlikely that ACG will invest through a broker-dealer in Title III crowdfunding offerings. What’s more likely is that we will encounter companies that start fundraising by making a traditional Rule 506(b) offering; wherein, angels and venture capitalists will set terms for the deal. Once VC’s or angels “lead,” the company may then try to “fill” the offering to reach whatever full amount of money it intends to collect by bringing in non-accredited investors through a crowdfunding platform. We don’t expect that this method of combining traditional private placement fundraising with crowdfunding will be disruptive—we hope that what results in the wake of the JOBS Act are more ways of funding worthy entrepreneurs and their best ideas.
This is published under the Appalachian Regional Commission POWER Grant, PW-1835-M.
Copyright Appalachian Investors Alliance, Inc. 2018
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