Investing in alternative assets like equity of companies in their early stages present challenges due to variations in regulation globally. The UK has a more relaxed approach to regulating compared to the US. Regulatory agencies put in place restrictions in an effort to protect average investors. The balance to provide equal access to all and protecting people's financial future is hotly debated.
On May 16, 2016 US restrictions were lifted to allow investors, no matter the level of wealth, to be able to participate in private capital markets. The JOBS (Jump-start Our Business Startups) Act Title III, was what enabled unaccredited investors to take part in these investment opportunities. Those deemed wealthy enough by the SEC and termed "Accredited investors" could always invest in private small businesses with little restriction. Today non-accredited investors have access to this same high yielding asset class but there have been challenges in the way the laws were implemented which is currently being addressed.
Changing Regulation: Benefits
Title III of the JOBS Act was passed October 2015, but it took till May 2016 to enact the updates. SEC Chair Mary Jo White had delayed issuance. Market access continues to improve with investors of all economic classes gaining access to participate. The approval of Title III of the JOBS Act makes it possible for non-accredited investors to invest in startup businesses and private firms.
This will allow for larger groups of people to invest smaller amounts of money. As one of the most awaited components of the JOBS Act, Title III opened a road of possibilities for non-accredited individuals to invest in private equity offerings, but restrictions have severely limited the potential.
It is now possible for every individual, not just the wealthy and rich, to invest in the startups. Title III disrupts capital markets by bringing a huge change in the world of investment that was previously reserved for wealthy individuals or fund managers like venture capitalists and angel investors. Everyday citizens will also be able to participate in the investment or the fundraising process, regardless of their bank balances. The technological breakthrough has already begun the process of automating and streamlining costs, and opened up further avenues for startup and private businesses to raise capital.
Non-accredited investors will be bringing more capital to these private markets. Many investors will be putting their money in the market for the first time, but it is important to understand that they are not entirely new to this. Many ideas were usually funded by friends and family at the initial stage. Title III will enable entrepreneurs and new entrants to create their personal network to raise capital and will also allow accredited as well as non-accredited investors to invest their money.
The changing regulatory landscape has enhanced entrepreneurs' chances of success, improve economies and increase jobs. This increase in capital allows more individuals to bring big ideas to market and turn their strategic vision into a reality. Startup businesses benefit from this rule, as it provides an opportunity for long-term success and ongoing development by bringing entrepreneurs closer to future investors.
Equity Crowdfunding can also in theory reduce the costs of raising money through offering equity through reducing costly middle men by directly linking the end investor and entrepreneur seeking capital. The market can also help reduce the costly regulatory burdens of traditional public offerings.
The Securities and Exchange Commission (SEC)
The U.S. SEC uses the EDGAR database to help keep track and regulate the equity offerings. We at Fund Wisdom pull in the listings of offerings to offer the ability to search and visualize the data for research and analysis.
Restrictions and Challenges
SEC rules are costly and overly complex continuing to perpetuate the hurdle for business owners and investors. There are caps on investors and businesses for how much can be put in per year and how much can be raised.
The SEC States, "Because of the risks involved with securities-based crowdfunding, you are limited in how much you can invest during any 12-month period in these transactions." The limitation on how much you can invest depends on your net worth and annual income.
The SEC defines the criteria in its "Updated Investor Bulletin - Accredited Investors." The bulletin describes these sophisticated individuals who can withstand a financial loss. The Federal government agency also defines other types of accredited investors.
“An accredited investor, in the context of a natural person, includes anyone who:
- earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
- has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).”
If either your
- annual income < $107,000, or
- net worth < $107,000,
Then during any 12-month period you are capped at investing
- $2,200 or
- 5% of the lesser of your annual income or net worth.
If both your
- annual income and
- net worth >= $107,000,
then during any 12-month period, you can are capped at investing
- up to 10% of annual income or
- net worth, whichever is lesser, but not to exceed $107,000.
At Fund Wisdom we currently partner with accounting agencies and legal firms as we do not have this expertise in house. Today we focus on our research and analysis on the market data we collect.
We believe the current regulatory framework in the US has continued to be overly restrictive, hindering the development of the equity crowdfunding market. Progress has been slow. Many who were previously skeptical have started acknowledging the concept as viable as more money pours into the space. Many venture capitalists and angel investors are utilizing platforms to get funding from other accredited investors. As an investment vehicle, equity crowdfunding improves success for individuals seeking an investment opportunity and for those who want to finance their ideas and cover the startup cost.
At Fund Wisdom we believe innovative wealth building investments should be accessed by all, as we look to empower the democratization of private equity. Overarching returns for alternative-assets like private equity have outperformed the stock market through the greater risk profile. We showcase investment opportunities in early stage companies to produce higher returns, lower fees, and reduced risk.