Release Date: May 16, 2016
Title III of the JOBS Act goes into effect May 16
BUFFALO, N.Y. — Title III of the JOBS Act is the latest in equity crowdfunding laws that permit individuals to invest in private startups and small businesses — a practice that was previously restricted to wealthier, accredited investors and institutions.
Brian Wolfe, PhD, assistant professor of finance in the University at Buffalo School of Management, explains the difference between regulation crowdfunding and platforms like Kickstarter and Inidegogo.
“Kickstarter and Indiegogo are incentive crowdfunding platforms, meaning you promise to provide some incentive — usually a product or product with perks — for cash,” says Wolfe. “Regulation crowdfunding allows businesses to raise equity capital, so instead of trading a product you’ll make in the future for some cash today like on Kickstarter, equity capital trades ownership of your business for cash.”
For example, if you make $100 next year, someone who owns 2 percent of your company is going to be watching what you do with that $100: maybe you pay it out like a dividend or maybe you re-invest it. It becomes more of a discussion than just your decision.
Wolfe says raising equity capital is like baseball.
“There are a ton of baseball leagues, and working your way up to the major league often takes years in the minors,” says Wolfe. “Sure, there is an occasional star who goes straight to the majors but most players start with an A-ball team and work up.”
He says equity capital funding is the same way. There are the major leagues (listing on a public exchange) and minor leagues (private listing securities with exemptions like rule 504, 505, and 506) where businesses raise billions in equity capital. Regulation crowdfunding adds some extra minor leagues so businesses can raise smaller amounts of equity capital.
On the investor side, Wolfe says before regulation crowdfunding, only sophisticated investors could participate. In baseball terms, it was as if all the stadiums in the world only had expensive box seats.
“After Monday, some ballparks will start to add a few more decks of cheap seats so I can pay $6 and still see the game live,” he says.