Equity Crowdfunding Across the Globe Part 2: The USA and the JOBS Act
Perhaps the most hotly debated topic of all things crowdfunding in the last few months has been the eventual implementation of Title III of the JOBS Act. This section of the act directly relates to the introduction of retail investors to the crowdfunding scene in America.
The state of play across the pond is significantly more complex than anywhere else in the world. Here in the UK, investors must agree to bearing the risk and commit to investing no more than 10% of their net assets and the ceiling for fundraising companies is set at £3.5 million. And that’s pretty much it.
For our friends on the other side of the Atlantic, the minefield that is the incoming legislative regime is a tough one to navigate. We’ve done our best to break it down for you!
In any given 12-month period, for individual investors whose annual income or net worth is below $100,000, they can invest up to $2,000 or 5% of the lesser of their annual income or net worth.
However, if both their annual income and net worth are either equal to or more than $100,000, investors can put in 10% of the lesser of these two variables. Over this 1-year period, no one individual is permitted to invest more than $100,000 through equity crowdfunding.
The maximum amount of money a small business can raise is $1 million in a 12-month period.
For those looking to raise $100,000 or less, financial statements and tax returns have to be certified. For businesses who want to raise between $100,000 and $500,000, financial statements must be reviewed by an independent public accountant. And for those seeking over $500,000, financial statements are fully audited by an independent public accountant. It’s important to note here that first-time crowd funders are exempt from this final regulation.
Many have argued that the new regulations aren’t as favourable as they could be, certainly not compared to what we’ve seen here in the UK. However, the vast majority of the burden is placed on platforms rather than issuers or investors. Any portals must first be registered with the Financial Industry Regulatory Authority (FINRA) and then they must provide investors with educational materials covering almost every aspect of the investment process. Information to be publicly disclosed for a fundraise must be available for a minimum of 21 days before any security is sold and portals are prohibited from providing investment advice or recommending specific offerings.
More interestingly, platforms are permitted to take a financial stake in issuer companies as a form of compensation. This is an opportunity for fundraising startups to bypass the significant costs associated with regulatory compliance. It’s also particularly pertinent considering many commentators are suggesting up front costs of $15,000 for those wishing to raise over $100,000.
So what does this all mean?
Well it’s a mixed bag for those involved really. Somewhat unsurprisingly, investors have been shielded as much as possible in order to prevent any harm being brought onto inexperienced investors. All the onus is on platforms to perform sufficient due diligence both on investors and startups whilst remaining totally accountable to the SEC. But the ability to take shares in the issuers they host certainly counteracts this and may mean greater protection for smaller investors down the funding round line.
What about real estate crowdfunding?
There are typically two ways to invest in property based crowdfunding deals. The first is simply equity investments in commercial or residential properties where investors realise returns in the form of a share of the rental income.
And the second is debt where investors invest in the mortgage loan associated with a particular property. Loans are repaid with interest which finds its way back into the pockets of investors. Generally speaking, equity investments offer higher returns but they are traditionally higher risk. As with equity crowdfunding, until recently, only those with a minimum net worth of $1 million or an annual income of at least $200,000 could invest.
According to data providers, Massolution, there are now 85 real estate crowdfunding platforms in the US. Total investment was predicted to reach $2.5 billion in 2015 alone and with non-accredited investors now set to get a slice of the pie, who knows what this industry could achieve in the coming years. The leaders of the pack in the US are Fundrise, RealtyShares and RealtyMogul. Those directly involved in the industry argue that it has provided greater transparency to a previous opaque market thanks to the enforcement of strict regulations. Furthermore, this area of the rapidly growing crowdfunding industry is seen as a key resource for portfolio diversification, specifically for debt based investments which generally carry lower risk. As with equity crowdfunding however, the true longevity of this sector will be determined by investor returns.