by Onki Kwan
The fourth annual crowdfunding conference in Silicon Valley March 3-4 and, finally, crowdfunding under Title III will become a reality. Although the Crowdfund Act was signed into law in April 2012, the SEC waited until October 2015 to finalize crowdfunding rules under Title III, and companies must wait until May 16, 2016, to begin raising money under Title III.
The SEC has always been wary of companies taking advantage of investors who could not fend for themselves. After the stock market crash of 1929, the SEC decided that everyday Americans needed protection, enacting laws preventing all but the top 3 percent of our country’s population from investing in private equity.
The SEC’s well-intentioned rules closed off the private market to all but the already wealthy. This meant that business owners who sold parts of their company to their friends and family were breaking the law. In poor minority communities such as the Bayview, this meant that business owners were left to fund their businesses with their own savings and debt, if they could convince a bank to lend to them at all.
Although many small businesses have used this strategy to get started, an infusion of capital is often necessary for a business to scale. For example, at least $10,000 is needed for a restaurant to buy a walk-in freezer, ensuring that it has enough inventory to meet customer demand and providing substantial savings on shopping costs.
Title III of the JOBS Act would enable small business owners to raise up to $1 million from anyone over a 12-month period through a website called a funding portal. Investors can invest anywhere from $2,000 to $100,000 over that same period, subject to their annual incomes and net worth.
Title III of the JOBS Act would enable small business owners to raise up to $1 million from anyone over a 12-month period through a website called a funding portal.
The SEC was not favorable to this or any type of crowdfunding because of the risk of fraud. Other provisions of the Crowdfund Act have been enacted and there have been minimal instances of fraud, however, prompting the SEC to finalize Title III.
Despite a lack of fraud, many industry experts are not favorable towards Title III because the money is scant and the investors unsophisticated. While Silicon Valley is not the target audience for Title III, small businesses – like those in the Bayview – stand to gain the most from such financing.
Unlike raising money from accredited investors, which requires either pre-existing connections with the top 3 percent or a compelling in-person pitch to that audience, Title III crowdfunding can only be conducted through a funding portal. This means that a company can sell its shares to anyone who has access to an internet connection.
While Silicon Valley is not the target audience for Title III, small businesses – like those in the Bayview – stand to gain the most from such financing.
In addition, while a potential investor hearing a company’s pitch may make investment decisions based on unconscious or implicit biases, Title III crowdfunding places the focus on businesses themselves, rather than business owners.
To get initial interest, business owners still need to establish strong connections to the community. Because the Bayview is insular and tight knit, many existing businesses will have a pool of potential investors before they offer a single security to the public. These pre-existing connections may be critical to the success of a crowdfunding campaign.
Women, like minorities, have historically been less likely to receive funding from venture capitalists and angels – so-called “accredited investors.” They have been more successful than men at crowdfunding campaigns, however, because they have tighter knit networks and are more likely to appeal to investors on an emotional level. Bayview businesses may find success under Title III for these same reasons, the community itself being its largest asset.
Accredited investors may not find it worthwhile to invest a mere $2,000 to $100,000, but even a small initial investment can amount to a large sum of money over time. In 1998, Andy Bechtolsheim invested $100,000 in Google. He is now worth $3.5 billion, much of that money from his initial investment in Google.
Because the Bayview is insular and tight knit, many existing businesses will have a pool of potential investors before they offer a single security to the public. These pre-existing connections may be critical to the success of a crowdfunding campaign.
Even if he had only invested $2,000, his net worth would still be in the billion-dollar range. Although most companies will not be the next Google, for the first time ever, anyone can invest in a company at the stage where growth can be the most exponential.
Onki Kwan is the community development director of Bayview/Hunters Point Community Legal, where she helps local businesses raise money under Title III of the JOBS Act. She can be reached at firstname.lastname@example.org.