In September 2013, regulations surrounding capital formation for small companies changed, and the world of securities investing changed as a result.
Back in 2013, the portion of the JOBS Act dealing with raising funding for business, known as Title II, came into play. This section basically opened the door for medium-sized businesses to raise money from a variety of sources. It kick-started securities crowdfunding, creating more investing opportunities for more people.
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Accredited Investors and the Ability to Invest Like the Ultra Rich
The mass affluent are a group of households at the upper end of "middle class." They meet the requirements for becoming accredited investors (make more than $200,000 a year as individuals or have $1 million in assets, not including a primary residence), but they might not have the same wealth as what we consider "truly" wealthy.
Title II of the JOBS Act provides a way for the mass affluent--those who go through the process of becoming accredited investors--to invest like the wealthy. It's possible for them to invest in startups or growing businesses, or to even invest in hedge funds, without the need for millions of dollars. Instead, many of these platforms allow investors to start with as little as $10,000. Many in the ranks of the mass affluent have that much money available for investments.
"There's a lot going on in the crowdfunding sector," says Matthew Sullivan, the founder and president of real estate crowdfunding company CrowdVenture. "These changes could be seismic for the way we invest, and contribute to the further democratization of investing."
Sullivan points out that technology has opened up investing opportunities for millions over the last two decades, and crowdfunding is the next step. Until the implementation of Title II of the JOBS Act, only angel investors and venture capitalists really had the ability to invest in startups and growing companies. On top of that, investing in hedge funds was difficult for those without at least a million or two available to invest.
"While real estate investment clubs have been around for ages, those have also been hard to break into," Sullivan points out. "You often need to have at least $200,000 in order to be a part of a real estate investment club. Real estate crowdfunding changes that."
Now, real estate crowdfunding companies like CrowdVenture allow investors to join in with as little as $10,000. "What we've seen is the formation of online funding platforms that have been able to generally solicit investments under Title II," Sullivan points out. "While it's possible for individual businesses to ask for money for growth projects, the real change has been in these crowdfunding platforms that allow a larger swath of the population access."
Regulation A+: Non-Accredited Investors Can Join In
In June of this year, Regulation A+ went into effect with the implementation of Title IV of the JOBS Act. With this latest development, even non-accredited investors can become involved. As long as you have the ability to meet the minimum for these platforms--and are willing to accept the risk of loss--you can invest like the wealthy.
However, even with this increase in the ability to invest, Sullivan sees some roadblocks. Even though small businesses and startups can ask for funds from non-accredited investors, he thinks that the process is likely to "be complex and financially onerous for small businesses." Accredited investors are assumed to have a certain level of savvy and the ability to absorb losses from riskier ventures that non-accredited investors may not have. As a result, those aiming to involve non-accredited investors might have a little more red tape.
Sullivan doesn't think that this red tape will be much of a hindrance for crowdfunding platforms, especially in the real estate space, though. "When the implementation of the new Reg A+ and Title IV regulations are better understood, the existing funding platforms will be able to open up their offerings to a much wider, national audience," he says. "Not only will this deliver a significant disruptive influence to the established financial mechanisms for raising capital for small businesses, but it will also mean greater participation in more forms of investing for more people."
