Title III of the federal JOBS Act (Jumpstart Our Business Start-ups) in the US contains new rules regarding equity investing. Previously, corporate shares could only be purchased by ‘accredited investors’, people with a yearly income above $200,000 or a total net worth of $1 million. However, when the new regulations took effect in May of this year, that all changed. Now anyone can invest up to $2,000 annually in a start-up of their choice, allowing small businesses to acquire as much as $1 million in funding from groups of amateur investors.
US president, Barack Obama, called the bill a ‘game changer’ when he signed it into law four years ago. Since then, Title III, sometimes called Regulation Crowdfunding, has faced setbacks with implementation, largely as a result of concerns from the Security and Exchange Commission. The SEC feared lack of regulation could put inexperienced investors at risk of making poor choices or being conned into questionable schemes. These details were eventually ironed out in a rewrite, but experts in the financial industry remain divided as to how much difference Title III will really make. The experiment is being watched by financial firms around the world. Henner Diekmann, who is founder and partner of Diekmann Associates in Namibia, takes both a personal and a professional interest in all types of investment topics.
Opportunity for some
President Obama’s enthusiasm echoed the sentiments of many who see the bill as a way to make investment more democratic. Internet crowdfunding sites like Kickstarter and Indiegogo have become increasingly popular over the last few years, allowing ordinary people to support projects and organisations they believe in. However regulation on these sites has so far only allowed companies to offer donors trial products or other one-time advantages; long-term stock equity has remained the province of licensed investors.
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Regulation Crowdfunding makes these limitations obsolete, at least in the US. There’s a host of new sites springing up to act as ‘middlemen’ for amateur investors and start-ups interested in expanding. Republic, SeedInvest, and StartEngine are just a few of the many crowdfunding sites that have appeared recently, focused on providing equity opportunities for every-day internet users.
The excitement is infectious. ‘For the first time in 83 years’ anyone can invest in ‘high-potential start-ups….regardless of income or net-worth’ states one site. Some small business owners are equally enthusiastic. Kelechi Anyadiegwu is a young entrepreneur who started an internet based African clothing line about two years ago. She has successfully attracted over 100,000 potential customers to her Instagram and Facebook pages, and orders are increasing so much that she needs to expand her infrastructure and workforce in order to handle them. Ms. Anyadiegwu sees crowdfunded equity as the way to go. She believes the women who buy from her are passionate about African textiles to the point that they would be interested in becoming not just customers but shareholders who reap a benefit from her company’s success.
Large companies will still need venture capital
However, there are many investment experts who don’t believe the new regulations will bring much change to the business landscape. A start-up with real potential is still more likely go the traditional route and look for venture funding from ‘accredited’ investors with large amounts of capital. Businesses focused on unicorn status (1 billion in total net-worth) will have a long way to go relying only on small internet based donations.
Moreover, even in the crowdfunding environment, people with a lot of money at their disposal are going to end up with a higher degree of influence. To attract these donors, start-ups will need to join ‘syndicates’, networks that allow ‘lead investors’ to follow their holding and take a more active part in what happens to the company. As syndicates take on an increasingly important role, they are likely to influence which start-ups receive capital in much the same way that traditional venture funds have picked out the winners.
Some companies may go both routes
Of course there’s nothing to stop a company that is able to attract venture capital from also building a customer base through crowdfunding equity. Rorus, is new start-up that manufactures water filtration products for developing countries. So far it’s been able to draw $300,000 from accredited sources, but young CEO Kyle Henson thinks there is still an opportunity to ‘build a community’ by offering shares through crowdfunding sites. That kind of popular support is ‘an intangible that you don’t get from private fund-raising’, he says.
Henson is likely right in his assessment that crowdfunding will help companies get extra funding for projects with an ideological message, a goal that appeals to the general public. Christian Catalini, assistant professor at MIT’s school of management, agrees. According to him, crowdfunding will provide small business with ‘new avenues of fundraising’ and the opportunity to build a committed user base. Additionally, it will likely open up more capital to underrepresented entrepreneurs, especially women and minorities. As yet it remains to be seen how big an effect this will have on the overall market, but it’s certain that all types of investors will be watching the new developments with interest.
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