“Oculus Rift virtual reality headset raised $2.4 million on Kickstarter [in 2012], no strings attached. Those donors weren’t looking for a payout; they wanted to support something they believed in, and maybe get a pair of virtual reality goggles to play with. But when Facebook bought Oculus a year and a half later for $2 billion in cash and stock, backers wondered: what if I’d asked for equity instead of a poster?” Can equity crowdfunding, under Title III, democratize access to capital and investment opportunities? It is unclear whether the new Title III rules lay the foundation for this to actually materialize, and whether Title III platforms are likely to attract high quality, high growth startups like Oculus Rift. So far, predictions have varied: some hail the Title III rules as ushering in the dawn of a new future (“For the first time in 83 years, all investors—regardless of income or net worth—will now be able to invest in high-potential startup companies”) while others dismiss equity crowdfunding for everyday investors as dead on arrival. The purpose of this brief is to consider this question through the lens of the emerging field of innovation science. Opening equity crowdfunding to non-accredited investors proved to be more complex and controversial. There was – and still is – debate over whether everyday investors contribute enough to share in the returns of high-growth startups like Oculus Rift. Some argue that through rewards-based platforms donors often spot the next great idea or consumer product, demonstrating the demand that startups need to secure venture backing. Therefore, as a matter of fundamental fairness, they should be allowed to share in the returns. Others feel strongly that professional investors bring more to the table (in terms of experience, networks, mentoring, and money), take on more risk, and suffer greater losses. Still others raise concerns that allowing unaccredited investors to participate through rafts of small, individual investments may also impose additional frictions on subsequent rounds of capital (e.g. because of a complex equity structure). Moreover, at the time the JOBS Act was passed, equity crowdfunding from non-accredited investors required the development of a new regulatory structure. Startups had not been allowed to offer securities to non-accredited investors via private placements in the past, and expanding access to them required additional protections, as non-accredited investors have fewer resources and are assumed to be on average less sophisticated than accredited ones. At the same time, however, care needed to be taken to avoid placing too many disclosure requirements on startups, or they would simply ignore equity crowdfunding as a channel of capital formation altogether. It is no wonder, given these challenges, that drafting implementing rules for Title III took close to three years. AngelList, the first equity crowdfunding platform in the US that allowed accredited investors the chance to gain access into early stage companies, is embracing Title III /Reg CF crowdfunding. AngelList is launching a new off-shoot cmopany labeled Republic to allow non-accredited investors the opportunity to support SMEs. (http://www.crowdfundinsider.com/201...es-into-title-iii-crowdfunding-with-republic/) Title III crowdfunding has come under a good amount of criticism. The rules, as they stand now, are ladened with many restrictions that risk undermining investor protection. Whereas Title III of the JOBS Act may not democratize the funding of and returns to high growth startups, it could still have a positive impact on the economy. Small sized businesses and civic initiatives may use Title III platforms to build a community around their products and projects and develop new forms of marketing and branding that extend beyond what is currently possible through reward-based crowdfunding. Backers will have more options to support businesses and social impact initiatives that they care about, while at the same time sharing in their long term financial returns. Nor should everyday investors, platforms or the SEC give up on the goal of allowing more people to share in the returns of high-growth startups. Instead, the SEC should actively investigate how the market design mechanisms that have improved the online platforms used by accredited investors can be ported to non-accredited backers. At stake, is the ability of crowdfunding to not only fund more of the same entrepreneurs and ideas typically funded through traditional channels, but to also fundamentally change how society allocates capital to ideas. Better regulation and market design could remove frictions in the flow of early-stage capital, and expand the number of entrepreneurial experiments the economy is able to sustain at any point in time. As an AngelList investor, I would like to seek your take on “AngelList launching a new off-shoot cmopany labeled Republic to allow non-accredited investors the opportunity to support SMEs”.
My understanding is that other crowdfunding portals are under title III already. StartEngine is for one.
Title III was passed in 2015 but didn't come into effect until this May 16th. The previous rules were so restrictive that it didn't make sense for almost any company to participate. This amendment changes that. I remember when they passed it, I got excited and then realized the rules suck and it ratifies in 2016. Now it has come into effect but the limit is still restrictive, 1m instead of 5m, and the federal vs states disclosure rules still need to be adjusted. But overall this is a huge positive step. Basically anyone with a strong idea and a great bplan can get funding. Provided all their other duvks are in a row, i.e. background, leadership and personnel, etc.
Hmm, I always thought that the Title III was mostly affecting investors, namely non-accredited investors.
Can one get funding at the ideas stage itself, to bootstrap the company? Or does one need to have a pilot and some paying client(s)?
If you're a serial entrepreneur with a couple successful exits than an idea is all you need, or a PhD with a patent on a clearly marketable technology. But in either of those cases you don't really need crowd funding either. Otherwise you're one of thousands of idea stage companies competing for the same $s. Just put yourself in the investors shoes, sign up as one if you can and sort through a bunch of companies as if you're investing. You'll see what it takes to stand out enough to have a chance at funding. I think the true value of crowd funding to the entrepreneur is exactly this, that you can for the first time see and analyze not just the companies that were funded but also those that weren't to figure out the differentiating factors.
What about PhD+idea with provisional patent filed? Any good websites you recommend where this can be done?