Today is an historic day for startup investing and fundraising.
Title III of The Jobs Act goes into effect four years after President Barack Obama signed the act into law.
That means companies, ranging from restaurants and bars to video game makers and software companies, can now raise funds through equity crowdfunding portals from mom and pop investors.
Anyone can invest up to $2,000 a year in equity crowdfunding companies.
Under previous regulations, only accredited investors or high net worth individuals could provide equity investments in startup ventures under the SEC rules.
And equity-based crowdfunding differs from the perk-based crowdfunding done on sites like Kickstarter and Indiegogo. On those sites, companies offer a product or service, t-shirt or other perk, in exchange for money. The person providing the funding doesn’t own any part of the company. They simply pledge to back the venture to receive a product, perk or just provide a donation.
The U.S. Securities and Exchange Commission approved the new equity-based crowdfunding rules last October. The rules allow companies to raise up to $1 million annually through online equity-based crowdfunding portals.
Investors, who make less than $100,000 a year, are limited to investing $2,000 a year, or five percent of their annual income in online crowdfunding deals. Investors who make more than $100,000 a year are allowed to invest 10 percent of their annual income up to $100,000 a year.
One of the big requirements of the Title III rules require company founders to file financial statements and to communicate on a regular basis with investors, said Bryan Menell, chief operating officer with AngelSpan, an Austin-based startup that specializes in investor communications.
In fact, AngelSpan’s founder Joe Milam travelled to Washington, D.C. to participate in the Crowdfunding Technology Demo Day at the Capitol Visitors Center Monday afternoon. It was one of 30 companies chosen to attend the event from around the country.
AngelSpan presented under the Trust and Transparency Companies category. Other presenters included crowdfunding portals, data analytics, funds management and other crowdfunding ventures.
Communication with investors can be a key component to the success of a startup, Menell said.
Yet only 18 percent of startups with investment provide monthly financial reports, key performance indicators or operational updates to investors, Menell said. That statistic comes from an AngelSpan research survey done by Jon Brumley Texas Venture Labs graduate students at the University of Texas at Austin. They surveyed 46 venture capitalists, angel investors, advisors and mentors nationwide that have worked with more than 7,600 early stage companies.
The study also found that 83 percent of investors, advisors and mentors agree startups that communicate perform better in execution and eventual exit compared to the startups that do not communicate.
AngelSpan provides monthly reports to investors staring at $99 a month for companies.
The Jobs Act Title III rules actually require more communication with investors than what is required currently, Menell said. And that increase in transparency is not only good for investors, but it can be quite helpful for companies as well, he said.
The financial reports are important to investors, but it’s the narrative that is more important, Menell said. Angel investors have a big network and lots of business relationships and they can help entrepreneurs immensely, he said.
Menell quoted Angel Investor Jason Calacanis who has told entrepreneurs that the angel didn’t give you all their money. They only gave you part. They will give you more if you communicate.
“All of these things people in your ecosystem can help you with if you communicate,” Menell said. “It’s also about the ask in the ecosystem on your behalf to make your company successful.”
Overall, it remains to be seen what’s going to happen with the impact of Title III and the new crowdfunding rules, Menell said.
“I think it will take off slowly. There are a lot of registered crowdfunding portals in the state. Not all of them are open and ready to do business,” Menell said. “There are some growing pains. It will take a while to build.”
It’s already starting to play out in Texas.
Equity-based crowdfunding has been legal in Texas since November of 2014 when the state passed its own rules in advance of the federal ones. A handful of states adopted their own crowdfunding rules.
There are 10 crowdfunding portals approved in Texas. And as of April 22, 32 issuers had filed under the Texas intrastate crowdfunding rules, according to Robert Elder, spokesman with the Texas State Securities Board.
“The aggregate maximum offering amount for the issuers is $8,561,677,” Elder wrote in an email. “The total raised so far is $1,689,637. As I said, some of the offerings are still open and accepting investments.”
“We don’t have any expectations about who is going to choose to go the federal route as opposed to doing intrastate crowdfunding,” Elder said. “We don’t have a sense of how that is going to play out.”
“There is nothing in the Title III that affects the Texas equity crowdfunding rules,” Elder said. “It’s a broader option for businesses that want to raise funds nationally.”