The Jumpstart Our Business Startups (JOBS) Act was passed by Congress in April, 2012 bringing joy to the startup world, enabling them to raise money through non-accredited investors!
Crowdfunding invented by the startup world was now a legal option for them. What is significantly unique about the American JOBS Act is the ability to gather equity crowdfunding without a public offering. Any startup founder can raise money from friends and family with the right type of product and, floating a crowdfunding campaign is essential for securing early dollars which are required for all startup survivals. But prior to studying the nitty-gritties of the JOBS Act, and there’s a lot to negotiate, we need to understand what is equity crowdfunding.
EQUITY CROWDFUNDING VS. REWARDS-BASED CROWDFUNDING
The two important kinds of crowdfunding are rewards-based crowdfunding and equity crowdfunding. Generally, people discuss more about rewards-based crowdfunding. This is the type everyone is most familiar with Kickstarter popping up. Corporates offer various tiers of rewards in exchange for different levels of support. Rewards-based crowdfunding remains ideally placed to raise money from your community, but is rarely a good resource to raise the level of funding that many startups desire when raising a round. Occasionally astronomical raises like Pebble Time have pulled in more than $ 20 million for their watch but in 2016, raising more than $600k on Kickstarter, was just not done. But the average seed round of funding for startups in 2016 was $1.4 million. That exceeds double what top earners raised on Kickstarter. This introduces us to the world of equity crowdfunding.
Equity crowdfunding sticks close to traditional ways for startups and SMBs to raise funds. Instead of the usual rewards, investors get equity in the company. Equity crowdfunding is designed for private, early-stage companies, leading to an involved, long-term relationship between companies and investors, rather than rewards-based crowdfunding. The biggest USP of equity crowdfunding is raising large amounts of money in a public manner while the main drawback is surrendering some ownership of your company in exchange for startup funds. Rewards-based crowdfunding, permits retention of full ownership of your company but typically has much smaller raises.
Equity crowdfunding is very similar to traditional fundraising, with two key differences that emanate from the JOBS Act:
- (i) It lets startups raise funds publicly
- (ii) It permits investment by non-accredited investors.
In determining whether equity crowdfunding is useful for your company, the ability to build a community around your business, or tap into an existing one, is critical. Exposure to potential investors through crowdfunding is a matter of chance as the platform provides the needed traffic. The startup’s core focus is to drive awareness, months before the raise. Let us review what Title II and Title III have done.
TITLE II OF THE JOBS ACT
Title II of the JOBS Act since 2012 has led to raising about $1.4 billion. This section permits startups to raise money publicly from accredited investors but weren’t allowed to announce publicly about raising funds. That obviously makes it harder to raise funds. Title II is more successful than Title III due to:
- a) investment firms have lots of money and it is easier to deal with paperwork and,
- b) these are not limited by the $1 million cap.
TITLE III OF THE JOBS ACT
Title III is the section of the JOBS Act that allows startups to raise money publicly from non-accredited investors. Earlier, you needed to have an income exceeding $200,000 a year and a net worth of at least $1 million. With Title III of the JOBS Act, 2016, anyone can now possibly invest via equity crowdfunding but, rollout is poor with the prime issue being the $1 million cap. This is useful for small startups in early rounds but does not raise larger funding rounds. Title III involves time-consuming paperwork, all reviewed by lawyers. For the privilege of raising only $1 million, it’s not worth it for many companies to go with non-accredited investors.
That is why some accredited investment firms don’t invest in companies with non-accredited investors. It’s like asking pros to work with amateurs.
NEED TO FIX THE JOBS ACT
But this is not the last of JOBS Act reforms. Before implementing Title III, Congress had introduced a bill named Fix Crowdfunding Act with the goal of raising the cap to $5 million and also enables entrepreneurs to test the waters for investor interest prior to opening up a public round of funding. The bill ought to reduce the cost of raising funds by decreasing the excessive paperwork startups had to complete. It appears that the government is taking cues from startups and really trying to make it easier for entrepreneurs. They need to make the changes more rapidly and finally succeed in getting a JOBS Act that really works.