SEC Rule Adoption Ushers in Next Stage of Crowdfunding
It was the vote heard round the (crowdfunding) world. Securities regulators voted last week in favor of Title III of the JOBS Act, paving the way for everyday investors to invest in equity crowdfunding.
The vote by the Securities and Exchange Commission came more than 3½ years after the Jumpstart Our Business Startups Act was signed into law. By changing securities rules to allow private companies to openly solicit individuals, the law’s implementation sparked a surge of new securities crowdfunding platforms.
But, as I’ve blogged about in the past, Title III of the law was bogged down in rulemaking proceedings and before last week's vote, equity crowdfunding had been legal only for accredited investors. That meant only investors who had a certain level of assets or income could participate in equity crowdfunding.
Once these new JOBS Act rules go into effect next year, the general public will be able to buy shares of private companies that are issued on securities crowdfunding platforms.
Will the Equity Crowdfunding Floodgates Open?
There has been a lot of media coverage about what the passage of Title III of the JOBS Act means and whether this will open the floodgates for equity crowdfunding by everyday investors.
The SEC did put guardrails on crowdfunding for everyday investors. Individual investors with an annual income or net worth of less than $100,000 will be allowed to invest up to $2,000 over a 12-month period, or 5% of the lesser of their income or net worth, whichever is greater. Investors with an income or net worth of more than $100,000 will be permitted to invest up to 10% of the lesser of their annual income or net worth per year -- but not more than $100,000.
While the adoption of Title III means many more investors will be eligible to take part in equity crowdfunding, there is certainly a chance that not all crowdfunding platforms will welcome the influx of investors. Some platforms may choose not to work with non-accredited investors.
We could see the development of different tiers of crowdfunding platforms. Some platforms might choose to specialize in targeting higher-end investors, while others may target the mom-and-pop crowd or niche investors.
Crowdfunding in Your IRA
At PENSCO, we are finding an increasing number of self-directed IRA holders are exploring how to diversify their portfolios and use their retirement funds to invest in equity crowdfunding opportunities.
It’s one of the reasons we launched The PENSCO Marketplace® last year and continue to expand its offering. The PENSCO Marketplace helps investors find private placement opportunities across a number of industries that could help them grow their retirement savings, and we expect demand will only rise with the approval of Title III.
Let’s use real estate as an example. Real estate is one of the most popular asset classes among our self-directed IRA clients because of its potential to be used as an income generator, a hedge against inflation and a portfolio diversifier. The introduction of crowdfunding has opened the doors to real estate opportunities that were previously marketed solely to high-net worth individuals or institutions.
Rather than needing millions of dollars to invest upfront, crowdfunding platforms allow investors to participate in equity and debt deals where minimum required investments hover around $5,000 or $10,000. Lower minimum investment levels allow for investment across multiple property types or regions instead of having to commit to one project. And real estate crowdfunding allows investors to locate viable deals with unprecedented speed and efficiency.
Envisioning Crowdfunding’s Future
These newly adopted crowdfunding rules will go into effect 180 days after they are published in the Federal Register, and there is no doubt that 2016 will be an exciting year of growth and change for the industry.
Since the approval of the rules, we are fielding more questions from issuers, who are interested in learning how to access self-directed IRA funds for new investment opportunities, and we expect a wave of portals to enter the space. It will be interesting to see how these portals differentiates themselves and whether they choose to limit the types of investors they solicit – accredited investors vs. the general public.
As with all investments, investors who use their self-directed IRA funds to participate in crowdfunding deals need to ensure they have performed adequate due diligence on the offering and that the investment matches their risk profile.
But in the words of Silver Portal Capital, a real estate crowdfunding site featured on The PENSCO Marketplace and a participant in the 2015 PENSCO Crowdfunding Report, “We are only in the first stage of the crowdfunding lifecycle.”
At PENSCO, we are excited to see what the next stage brings.
PENSCO’s Blog is purely for educational purposes. PENSCO does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Individuals are encouraged to seek professional advice before making any investment decision. Investments are not FDIC insured and are subject to risk, including the loss of principal.