The Shark Tank is Not For Everyone – The Relative Failure of Title III of the JOBS Act
Following the Great Recession, a bipartisan effort sought to develop legislation focused on aiding small business growth. The Jumpstart Our Business Startups (“JOBS”) Act was passed in 2012, increasing the amount of capital available for entrepreneurs through equity financing.[1] Equity financing refers to the sale of ownership interests as a method of raising capital for business purposes.[2] The JOBS Act reduced barriers to equity financing by creating exceptions to the Securities Act of 1933. These exceptions were aimed at increasing equity investment by reducing barriers to entry, namely loosening anti-solicitation laws and income requirements for investors.
Two of the most significant exceptions created by the JOBS Act are found in Titles II and III. Title II allows small businesses to advertise that they are raising capital. Title III lowers the income threshold for investors in startups and small businesses. Both of these changes significantly increase opportunities for entrepreneurs to conduct capital raises. However, Title II is far more utilized than Title III, despite the restriction on advertising to solely accredited investors.
Title III allows entrepreneurs to raise funds online through equity-crowdfunding from ordinary people. Investors need not be accredited in order to take advantage of securities offerings. This significantly widens the pool of available investors. “For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in,” President Barack Obama said when he first signed the bill into law in 2012. Entrepreneurs have raised $23 million through equity crowdfunding under Title III since it took effect in May 2016.[3]
The greatest impediment to the success of fundraising under Title III is the expense and amount of regulatory paperwork. On top of existing compliance and fundraising fees of 7-10%, entrepreneurs must also fund a CPA review or audit, which can range from $20,000 to $70,000 depending on the amount raised.[4] The high costs associated with fundraising under Title III create a barrier to entry for most early-stage entrepreneurs. The SEC estimates an average of 100 hours of legal and accountancy work is necessary to complete the compliance process under Title III.[5] Entrepreneurs also must spend thousands of dollars annually to comply with ongoing reporting requirements.
Reducing compliance under Title III would increase its utilization. However, costs and reporting requirements currently make Title III equity crowdfunding to ordinary people an unrealistic option for many entrepreneurs.
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