Equity Crowdfunding: Title III and the Disruption of the Mass Market Segment

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14 September 2014


Title III of the 2012 JOBS Act legalizes equity crowdfunding for all types of investor segments, potentially unleashing a new wave of capital from mass market to ultra-high net worth individuals. Final regulations, however, have not been issued, and wealth managers are left guessing what the impact of equity crowdfunding will be. Given the proposed regulations, Celent believes that equity crowdfunding is unlikely to disrupt the UHNW or venture capital markets, but will open new investment opportunities for younger and mass market individuals.

In the report Equity Crowdfunding: Title III and the Disruption of the Mass Market Segment, Celent provides an overview of equity crowdfunding and does a deep dive on Title III and the proposed rules and how these rules will shape the market. The report examines previous and current regulatory rules, their impact on the private issuing of securities, the benefits and potential risks of equity crowdfunding, and the opportunities for wealth managers and technology providers.

Historically, firms have issued private securities (securities not formally registered with the SEC) to the general public under the domain of Regulation D exemptions. Two provisions of the 2012 JOBS Act, Title II and Title III, create a paradigm for privately offering securities. Title II lifts the ban on public advertising for firms issuing securities through Regulation D. Title III deals specifically with legalizing equity crowdfunding by creating an exemption that issuers can use to raise money from all classes of investors. While Title II’s regulations have been finalized and implemented, Title III remains in purgatory until the final regulations are released.

While a number of online providers already act as intermediaries for startups to issue private securities, these platforms can only service accredited investors. Title III is important because it legalizes crowdfunding for all types of investors, thus potentially opening new sources of capital for startups from new investors and the mass market. Furthermore, its proposed regulations are both ambiguous and stringent, creating a heavy regulatory burden.

Existing coverage of equity crowdfunding tends to swing between two extremes. Reports either herald this as the end of venture capital and the democratization of investing, or a disaster that will be stifled by poor regulations and bankrupt low information investors. Celent argues that the effects will be much subtler, but important nonetheless.

Additionally Celent provides a list of existing online platforms acting as intermediaries for startups seeking funding from accredited investors. Celent expects all of these platforms to take advantage of Title III once the final rules are implemented. The report provides a breakdown of opportunities for wealth managers and technology providers. Celent concludes by analyzing how significant equity crowdfunding will be, and where disruption will occur.

“Given the high regulatory burden and availability of other methods of raising capital, we are unlikely to see major disruption among venture capital businesses. Rather, opportunity will be found in previously underserved segments,” notes Isabella Fonseca, Research Manager for Celent’s Wealth Management practice and author of the report.

“For wealth managers and for technology providers, the opportunity can be found in a couple of areas. First, technology providers can support the regulatory and compliance workflow for issuers around recordkeeping, investor verification, and disclosure. While some wealth managers may be tempted to create funding portals and act as crowfunding intermediaries, Celent believes that the better near-term opportunity is to partner with funding portals and provide online social communities, provide investor verification support, or create mutual fund-like products of startup offerings,” she adds.