Not All Crowdfunding Strategies Are Created Equal

Not All Crowdfunding Strategies Are Created Equal

There has been a lot of controversy lately surrounding Title III platforms that has been giving crowdfunding a bad name. To offer some clarity, it is helpful to understand the difference between crowdfunding, the JOBS Act, and Direct Public Offerings.

 

The Jumpstart Our Business Startups (JOBS) Act, was initially signed into law on April 5, 2012. Though many identify the JOBS act with crowdfunding, crowdfunding accounts for certain sections of the Act contained in what is known as Title III. Title III permits entrepreneurs to solicit up to $1M of investment capital for their small business as long as all transactions were conducted through a registered crowdfunding online platform, but with no regulatory review.

 

Crowdfund Capital Advisors reported that by the end of 2016, 21 crowdfunding portals launched a total of 186 campaigns. Of these 186 ventures, 105 closed, with 49.52% of these campaigns hitting their minimum funding targets. Collectively, these 52 ventures were able to raise a total of $13,115,477. Meanwhile, surveys have found that many Title III offerings have failed to comply with the SEC’s disclosure requirements Given the low success rates and spotty compliance of Title III crowdfunding offerings thus far, the term “crowdfunding” is getting a bad reputation in the investment community.

 

And yet, investment crowdfunding as a democratic way to raise capital is much broader than Title III of the JOBS Act, which have been around for decades.

 

One key advantage of DPOs compared to Title III crowdfunding is that DPOs are reviewed by securities regulators, which reduces the risk of fraud or noncompliance and therefore allows investors to invest with more confidence. Most DPOs rely on one of two strategies known as the intrastate strategy or Rule 504. Recently, as discussed in Brian Beckon’s blog post, the SEC revised some of its rules in order to make DPOs easier. For example, Rule 504, which allows for a raise from multiple states, were previously limited to $1 million per year. The SEC increased that limit to $5 million (effective January 20, 2017) to facilitate regional offerings.

 

Additionally, as an added protection to investors, updates to Rule 504 include “bad actor” disqualifications. These will prevent any person charged with fraud or persons linked with other criminal activity from soliciting investment using this rule. This bodes well for the future of investment crowdfunding via DPOs, even as Title III platforms are facing challenges.

 

To learn more about why we think Direct Public Offerings are one of the best mechanisms to fund your business and create local wealth, click here.