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

by Isabella Fonseca, September 15, 2014
Industry Trends
North America

Abstract

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.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

1

The Jumpstart Our Business Startups Act

3

 

The Basics of Title II: General Solicitation

3

 

The Basics of Title III: Crowdfunding for All Investors

4

 

Summary

5

Benefits and Challenges

6

 

Potential Upsides

6

 

Challenges and Barriers

8

A Closer Look at Title III Regulations

9

 

Issues: Who Can Raise Funds, How Much Can They Raise, and What Are the Obligations?

9

 

Investors: Who Can Invest, and How Much?

10

 

Funding Portals and Brokers Are Recognized Intermediaries

11

 

Other Rules and Areas of Concern

12

Existing Providers

14

Opportunities for Wealth Managers and Providers

17

 

Opportunities for Large Online Brokers

17

 

Opportunities with Some Challenges: Bank Brokers

18

 

Recordkeeping Opportunities for Advisory-Led Wealth Managers and Providers

19

Conclusion: How Disruptive Will Equity Crowdfunding Be?

20

Appendix: Definitions and Additional Materials

22

 

Rule 506

22

 

Accredited Investors (Retail Investors)

22

 

Non-Accredited Investors

22

 

Celent Investor Categories

23

Leveraging Celent’s Expertise

24

 

Support for Financial Institutions

24

 

Support for Vendors

24

Related Celent Research

25

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