The SEC may be taking its time on developing the rules for non-accredited investors to get involved with equity crowdfunding, but that’s a good thing. The whole purpose of the SEC was to fix the issues that led to the chaos of the Great Depression. Fraud was all over the place, regulation was non-existent, and there were no investor protections in place.
As the world changes, these rules certainly need to change as well. Modernizing investing to include equity crowdfunding makes a lot of sense. So does taking the lessons learned before and after the Great Depression. One important question should be repeatedly asked: do non-accredited investors even need to get involved with equity crowdfunding?
Title IV Allows For Retail Investors
The fact is that many businesses may not even want the option of fundraising that Title III would provide. With Title II and Title IV rules already in place or looking very promising, the SEC has moved to allow limited pre-IPO participation for retail investors in private financing. The fact is that companies may not even want to bother raising capital from non-accredited investors.
Private companies have also had the groundwork put into place where they’ll be able to solicit for funds as well. There has been some slow, but steady growth in these areas and equity crowdfunding in 2015 is expected to exceed $600 million in each quarter. Title III could certainly expand that amount, but it may also be a little bit of overkill. The mix of accredited and non-accredited investors could become a paperwork nightmare for everyone involved.
That’s why a delay in the rules makes sense. If Title IV has already been defined and allows for a “test run” of retail investing, then seeing how that performs before taking full action on Title III makes a lot of sense. It would allow the SEC to see if retail equity crowdfunding is a viable possibility or just an idea that looks good on paper only.
Would Retail Investors Even Benefit From Title III Rules?
Quite frankly, the upside of investing into start-up companies in the first place is that they are inaccessible to non-accredited investors. Having accessibility isn’t a bad thing, but more fingers in a financial pie mean more shares of the pie get taken. It becomes less lucrative for accredited investors to get involved with equity crowdfunding and so they may look to other options.
This would potentially leave retail investors on their own in an equity crowdfunding market dominated by Title III investing. That may not make it appropriate for retail investors to be involved. Companies would have more people to whom they are required to report. The history of retail investing has not generally been successful either, evidence by the lack of retirement savings and even the lack of basic needs that many households have today.
Including retail investments where little or no due diligence is performed could hurt retail investors instead of help them. The end result would potentially be a replication of the chaos that was experienced before the Great Depression. That is definitely something that none of us need. Adding Title II adds transparency in some ways, but it is transparency that some may not understand.
What Are the Odds For Success?
Here’s a real fact: about 10% of start-ups eventually succeed. Venture capitalists realize this fact and so they pick and choose very carefully where their investment money goes. They tend to focus on investments where they already have an established relationship and a planned exit strategy. For the retail investor, this means 1 out of 10 retail equity crowdfunding plans that receive money will give them a return.
Those aren’t great odds. Even when there is success, it could be more than a decade before a return comes back. On a $2,000 max investment for some households, that’s $2k that could be put towards an emergency fund, debt relief, or other more pressing needs. It’s nice to have some shares in a company, but even with a 20% total return on that cash, it’s a $400 gain in total.
Having Title III around would be nice as an investment alternative for those who don’t quite meet the qualifications of an accredited investor. For the average household, however, it may not be the best option to consider. With Title II and Title IV offering some limited pre-IPO participation, the non-accredited benefits may already be realized.
Adding Title III to the mix may just wind up bringing more harm than good.