Signed into law in April 2012, the Jumpstart Our Business Startups (JOBS) Act was supposed to change the way small businesses raise capital. Title III of the Act, specifically, would democratize funding, allowing businesses to raise up to $1 million from average citizens. But three years after becoming law, Title III is still not in effect.
The notable success of rewards-based crowdfunding platforms like Kickstarter are proof that there is an audience ready and willing to provide capital for America’s small businesses. Last year, the platform successfully funded 22,252 projects for a total of $529 million raised, many of which were startups in need of working capital. The majority of Kickstarter’s pledges came from the United States. Entrepreneurs in the nation are eager for access to untapped funding, while traditional lending for small business has yet to reach the pre-recession levels.
Funding By All, For All
Under the current rules, individual business investors must be accredited, which comes with high expectations. Per the Securities and Exchange Commission, an accredited individual investor must have income exceeding $200,000 in each of the two most recent years, or joint income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year. Net worth criteria include individual or joint net worth with a spouse exceeding $1 million at the time of the purchase, excluding the value of the primary residence of such person.
Not surprisingly, these standards rule out the majority of Americans. Title III would clear the way for small businesses and startups to sell securities or equity to non-accredited investors through regulated online platforms.
The proposed legislation would still place limits on how much individuals could invest, however. The lower threshold for investors would open investing to the general public and provide business a new source of capital. Making investing more open has already been successfully tested at the state-level. Fifteen states, including Colorado, Massachusetts and Texas, already have intrastate crowdfunding exceptions on the books with legislation pending in another 15 states.
Following the passage of the JOBS Act, the SEC was tasked with releasing the final rules that would govern crowdfunding under Title III. About two years later, an agreement has yet to be reached. Some are calling for instating the rules “as-is.”
But, some argue, there could be a good reason to wait. As soon as there is an official start date for allowing crowdfunding under Title III, the Financial Industry Regulatory Authority (FINRA) would need to begin the process of registering and licensing potential providers, as pointed out by Wales Capital and CrowdBureau founder Kim Wales in a piece for CrowdfundInsider.com – a task for which officials may not be entirely ready.
With delay after delay, some experts are declaring Title III dead. But SEC chair Mary Jo White has said there is no “drop dead date” and has set a new target date of October 2015 for implementing the new rules. If the SEC is able to meet the new target, another 60 days is needed to publish the rules to the federal register. Early 2016 would be the earliest Title III would go effect.
The “Sleeping Giant”
Title III isn’t the only portion of the JOBS Act that’s been faced with delays. Title IV, known as Regulation A+, is also waiting for SEC approval. Under Title IV, small and emerging businesses could raise up to $50 million from non-accredited investors in the form of an inexpensive public offering, or has some have called it a “mini-IPO.” The shares would still be SEC registered and regulated, but would face looser reporting requirements and reporting mandates than a full public offering.
Title IV is already facing a brighter future than Title III. Finalizing Regulation A+ was on the agenda of the SEC’s Advisory Committee on Small and Emerging Businesses, the first meeting of the committee in 15 months.
For both investors and business, it could be worth the wait. Both the United Kingdom and European Union have found ways to successfully incorporate crowdfunding and other alternative financing methods. Equity-based crowdfunding topped €80 million in 2014 in Europe alone according to research from the University of Cambridge and EY. The market in the U.K., which is more mature, saw crowdfunding increase in volume more than four times.
While the SEC decides the fate of the JOBS Act, small businesses’ need for capital hasn’t gone away. Titles III and IV provide a pathway for small and emerging businesses to an untapped audience of investors, and, along with those investors, a new pool of potential working capital.