New Crowdfunding Law Powers Up Everyday Investors
When Facebook bought Oculus VR Inc in 2014 for $2 billion, thousands of everyday investors who donated money to Oculus project on Kickstarter and raised over $2 million got nothing in return since their contribution was a donation and not an equity investment.
Traditionally, everyday investors never got an opportunity to invest in the next Facebook or the next Google as they were not accredited investors and their smaller size of investment did not allow them to participate with the super wealthy group of investors. They also did not have access to the startup deal flow since the only channel for entrepreneurs to get funded was via super wealthy angel investors or Venture Capitalists (VC).
“Traditionally, everyday investors never got an opportunity to invest n the next Facebook or the next Google as they were not accredited.”
Everyday investors never got the oppotunity to invest in the next Facebook or Google as they were not accredited investors.
Previously, approximately 500,000 super rich angel investors participated in startup investments across the entire United States. This was no different than a small fraction of Americans who could participate in public stock markets just 25 years ago. In the 1980’s, an everyday investor had to call a stockbroker if they wanted to purchase shares on the public markets, they didn’t have information and research that was quickly available to wealthy investors. In the 1990’s with the advent of internet, eCommerece and companies like eTrade — the everyday investors got direct access to data, information, and ability to trade on their own.
“The Title II of JOBS Act of 2012, enabled 9 million new investors to partcicpate in startup investing — but it still represents only 3% of american population.”
The Title II of JOBS Act passed in 2012, changed that and opened up startup investing to approximately 9 million new mid to high income investors who either made over $200K annually or had a net worth of over $1 million (excluding primary residence). The impact has already been huge. In short couple of years, equity crowdfunding has grown dramatically and research indicates that it will grow to $2.5B by end of 2015.
While that was a welcome change it allowed only 3% of American population to invest in startups. In a nutshell, a complete asset class of startup investing was denied to everyday investors and it also made it very difficult for entrepreneurs to raise capital from the time-constrained super rich investors.
JOBS Act, title III passed in Oct 2015 allows everyday investors to buy shares of a private company
This has changed with the passage of JOBS Act, Title III in October 2015. New rules adopted by the SEC allow everyday investors to buy shares of private companies. Essentially, any individual investor can buy an equity stake in a private startup just as they would participate in a crowdfunding campaign on Kickstarter, but instead of receiving a product in return, they’d receive an ownership stake in the company.
“Title III allows a completely new asset class of startup investing available for everyday investor that enables them to be part of the next Apple or Google.”
In a nutshell, Title III allows a completely new asset class of startup investing available for everyday investor that enables them to be part of the next Apple or Google. Title III makes startup investing a more level playing field as it enables the information, deal flow and ability for everyday investors to invest in early stage startups. It essentially opens up start-up investing to over 250 million Americans and makes it a lot easier for entrepreneurs to raise capital and pursue their dream instead of getting tied in the corporate handcuffs.
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- by Naren Patil
