With Title III of the JOBS Act finally going into effect, easier access to equity crowdfunding is just around the corner. The significance of Title III can’t be understated – for investors as well as for startups. Non-accredited investors will have new levels of access to private equity investment opportunities, and startups looking to raise up to $1 million will have new levels of access to financing options through SEC-registered equity crowdfunding portals.
For startups that have been waiting to fundraise under Title III, now is the time to prepare. Part of that preparation includes finding the right platform to handle your financing. There is no shortage of options, as the Internet is already crawling with fundraising platforms – from FINRA-regulated equity crowdfunding sites to rewards-based fundraising sites like Indiegogo.
Title III will bring even more players into this mix. New equity crowdfunding portals will materialize just for the occasion, and existing fundraising and crowdfunding sites will pivot to take advantage of the new line of business that Title III represents. But not all crowdfunding platforms are created equal. Here are five factors to consider when evaluating your options.
Title III Readiness
Raising funds under Title III is an entirely different matter than raising funds under Rule 506(b) or 506(c) of Regulation D – or even under Title IV. As a result, some platforms won’t accommodate Title III at all, some will use it exclusively, and some will use it only on a limited basis. Be sure that the platform you’re considering has the knowledge and capacity to meet the ongoing legal, financial, and technical requirements of Title III fundraising, as any mishap could be costly.
Due to the rigorous requirements and level of scrutiny involved in becoming a FINRA-registered broker-dealer, platforms with that designation don’t crop up overnight. Broker-dealer platforms have demonstrable experience working within a stringent regulatory framework, which can engender peace of mind from all participants involved in a fundraise. Broker-dealer registration demands ongoing compliance monitoring, and broker-dealers are expected to perform due diligence – on the companies being listed as well as on the investors participating in the investment opportunity.
Although a broker-dealer designation is not required in order to operate a SEC-registered equity crowdfunding portal under Title III, firms with that designation typically have valuable experience working with FINRA and operating within a regulatory framework. Platforms that are operating under these kinds of regulations for the first time may initially experience some administrative headwinds that can impede the fundraising process.
Since Title III will be new for all platforms when it goes into effect, no particular platform can claim Title III expertise right out of the gate. However, established equity crowdfunding platforms do have certain advantages over brand-new platforms. You can evaluate a platform’s experience using multiple metrics:
- How long has the platform been in operation?
- How much money has been raised on the platform?
- How many companies have raised money on the platform?
- How many successful exits has the platform seen? How many failures?
- Does the company have experience fundraising with non-accredited investors?
Established platforms have had more time to refine internal processes, identify best practices, and optimize the experience for investors and entrepreneurs alike. Firms with relevant prior experience can put those insights to work for you, rather than using your fundraise as a proving ground for their platform or as a learning experience for their staff.
Another advantage that established platforms have over new ones is that they often have a larger and more active membership base of investors, as they’ve had more time to execute marketing initiatives and have had more opportunity to parlay investment successes into investor recruitment and retention. Platforms that have a strong membership base of investors to draw from have more potential for traction on your investment opportunity than those that rely on incidental investor traffic being driven to their platform.
In addition, firms that thoughtfully vet and register investors not only wind up with better qualified investors, they’re also able to build a base of investors who have a vested interest in the platform, so to speak. Sites that invite any and all participants may have high numbers of potential investors but may also share those investors with many other similar platforms, resulting in lower overall participation rates.
Due Diligence and Curation
Perhaps the most important factor to consider is whether – and how – the platform curates deals or otherwise screens potential opportunities for investors. Platforms that list every available deal without doing due diligence should be a red flag to a startup looking for financing, for several reasons. Lumping your investment opportunity in with dozens or even hundreds of others does your company a huge disservice. It also provides a poor end-user experience and does little to inspire confidence among potential investors.
Lack of conscientious curation also indicates that the platform is willing to throw any investment opportunity on the wall just to see if it sticks, rather than going through the effort of vetting the opportunity themselves. With the advent of Title III, due diligence is even more important, given that the rule has relaxed audit requirements at lower levels of financing, especially for first-time issuers.
Platforms that list investment opportunities indiscriminately will invariably list companies that are not ready for fundraising. Having those companies thrown into the mix means fewer eyeballs on your investment opportunity. It could also mean that the platform itself isn’t invested in your success.
The Road Ahead
The equity crowdfunding landscape is going to change dramatically this year and beyond. There are still many questions about Title III that will be answered only after investors and startups have tested the process for themselves. Given the newness of Title III and the sheer number of moving parts involved in financing your startup, it makes sense to eliminate as many unknowns as possible. Choosing the right platform for your Title III fundraise is an excellent first step.