What is Title III of the JOBS Act?
In recent years, the world of investing has been greatly changed by a phenomenon known as crowdfunding, or the use of capital sourced from many individual people to collect money for projects and businesses. Until fairly recently, however, the profits that could be realized by investing via crowdfunding were limited only to high-income or high-net-worth accredited investors by US financial regulatory laws. Unbeknownst to some, that regulation was changed with the introduction of the JOBS Act. Specifically, Title III of that act opened up the door to non-accredited investors being able to profit from crowndfunded investment. But just what is Title III of the JOBS Act, and what does it change for average investors?
A Brief Overview of the JOBS Act and Title III
The JOBS, or Jump Start Our Business Startups, Act is a United States federal government initiative that was introduced to modernize rules and regulations concerning the raising of capital for small and startup businesses. Many of these regulations, although designed to protect small investors, were outdated and were impeding both the ability of small-scale investors to invest in higher-yield startup ventures and the ability of private companies to raise capital early on. The JOBS Act, which was passed in 2012 and incrementally took effect over the next four years, was introduced to solve many of these problems while still maintaining some investor protections.
Title III, widely seen as the most important section of the legislation, specifically allows small investors to enter into ventures via equity crowdfunding. Because many small and startup businesses either can not or do not go public until much later on in their life cycles, the removal of the regulations that prevented crowdfunding for small investors opened up an entirely new world of possible investment opportunities. Since Title III went into effect in May 2016, these small investors have been able to use equity crowdfunding to realize the same returns that accredited private equity lenders and venture capitalists have always had access to.
What New Opportunities has Title III Created for Investors?
As the market for alternative investments has grown, equity crowdfunding has become one of its more popular branches. With the enactment of Title III, small investors have gained access to these opportunities. Some equity crowdfunding platforms allow investors to put their money into a wide range of businesses, while others focus on a specific business vertical (real estate, for example). Given the diverse range of businesses that use equity crowdfunding to find initial capital or additional capital for investment, investors can easily create a diverse portfolio of investments. Additionally, crowdfunded investments typically offer higher returns than stocks, bonds, CDs, or other traditional investments. Some crowdfunding platforms even boast performance as high as 12 percent or higher annualized returns, a return rate that is difficult to reach through traditional stocks.
Title III of the JOBS Act has opened up a new type of investment to help small investors balance their portfolios through the higher returns associated with equity crowdfunding. Although the opportunities in this area are considerable, crowdfunding carries financial risk, just like any other investment tool. Those wishing to invest in private companies through this mechanism should carefully weigh the risks and balance their portfolios with lower-risk investments as well. Despite the fact that risk is still present, there can be little doubt that Title III has greatly enhanced the versatility of the average investor.