Security Exchange Commission

Title III of the Job Act, which was passed by the Security Exchange Commission (SEC), gives business owners the chance to use crowdfunding as a new method of fund raising. It also made it possible for regular investors to own stock in private enterprises with significant room for expansion. Its popularity has been aided by the presence of large social media platforms like Facebook and Instagram. However, it presents substantial difficulties for both companies and investors. The long-term impact of Job Act regulations on crowdfunding is examined in this research. Additionally, it shows situations where crowdsourcing would benefit entrepreneurs.
Investors are exposed to the non-diversified portfolio risk because of the Job Act (Prive, 2016). Diversification prospect allows investors to invest a small amount of money in many firms to which of them will take off. If the agreement includes pro-rata rights, then investors can participate in future crowdfunding in companies that have taken off thereby increasing their wealth and ownership. However, unsophisticated investors are not aware of the benefits of diversifying. Title III of Job Act set investment limit to owners of funds. The regulation implies that an investor with an annual income of $100000 can only invest 5% or $2000 in private companies through crowdfunding. This limitation reduces the capacity of non-accredited investors to create diversifies a portfolio.

The legalization of the crowdfunding Job Act regulations means that there would be a series of frauds and legal suits. Fraudsters pretending to be genuine entrepreneurs will fake business to raise funds. Since the majority of investors are less sophisticated, they would not be able to recognize startup that is real and those that are not (Savitz, 2012). Similarly, some startup will fail to take off, and the majority will look to Job Act to save them from the fraudulent investors. Majority of the investors will seek legal redress. However, since individual contribution to the SEC is small, it would be difficult for law enforcement officers to expend resources in the investigation or hiring attorneys to take lawsuits (Savitz, 2012). Furthermore, the amount contributed will in most cases be less than $1million, and this means that authorities would be compelled to address.

The security approval of Title III of the Job Act will create several due to several due diligence that makes access to capital time consuming than other traditional methods. The security offering stipulates under Title III has to go through funding portals or broker-dealers created by security commission. The series of checks waste a lot of time. Though the checkups help protect investors, in this case, it only serves to protect against liability and nothing much on the attractiveness of an investment.

Title III of the Job Act is expensive for most entrepreneurs. It cost startups raising funds through crowdfunding between $30,000 to $100,000 to prepare the required documents such as financials, SEC filing statements and legal disclosures (Prive, 2016). These cost poses a significant risk to the finances of the startup because they incur these cost before they determine whether they will raise the needed capital successfully. Furthermore, paying for all these paperwork is just the initial step. An entrepreneur has to wait for SEC to qualify the offering and even once qualified they have to pay 7% commission to the brokers or registered portal.

Title III of the job act also mandates all these small companies to provide periodic reporting to help it monitor the market on behalf of the ordinary investors. The reporting procedures are costly to entrepreneurs because they will need lawyers to structure the required documents (Prive, 2016). The Job act also places a ceiling of $1 million as the maximum amount a startup can raise. Such limit is likely to lead to underfunding of fast-growing ventures. The result is that most of them can be forced to pursue parallel mean of raising funds at additional legal costs.

Crowdfunding vs. Tradition Forms of Financing

Crowdfunding is better than other traditional forms of funding because it provides broad access to capital. Unlike angel investors and venture capitalist, crowdfunding allows owners of startup companies to raise funds from non-accredited investors (Sherman & Ebrary, 2012). It also an essential source of finance if a startup wants to hedge against the risk of losing equity and incurring a lot of debt expenses before taking a product to the market. The other traditional mechanism of raising capital such as banks loans require periodic interest. Similarly, venture capital and angels investors lead to loss of ownership at an early stage.

Crowdfunding is also suitable for a startup that aims to market its business. Unlike other methods such as bank loans, personal savings and venture capitals, crowdfunding help in introducing ventures overall vision and mission to the market. It is a painless way in which an entrepreneur can get referrals since it uses social media. Through the social media pages, a venture can get several organic visits such as users and potential funders. These individuals form an essential viral market who help to share the message with other connections.

The crowdfunding is a free source of finance. An entrepreneur has no obligation to pay any penalty should it fail to achieve a goal. Unlike bank loans, it does not require periodic interest (The Staff of Entrepreneur Media, 2015). Similarly, it does not involve much due diligence as compared to a venture capitalist, and angel investors who may in most cases require legal documents convince the contribute. It also needs less time for one to access capital as compared to personal savings.

The establishment of crowdfunding serves help entrepreneurs to quickly access funds and investors to have an opportunity to invest in high potential growth companies. However, Job Act poses a significant risk for both parties. It leaves investors vulnerable to the non-diversified portfolio and adverse selection. It also increases cost and time.

References

Prive, T. (2016, May 6). Why Equity Crowdfunding Could Be Dangerous for Investors and Entrepreneurs. Retrieved from http://fortune.com/2016/05/06/equity-crowdfunding-could-be-dangerous/

Savitz, E. (2012, October 22). Crowdfunding: Potential Legal Disaster Waiting To Happen. Retrieved from https://www.forbes.com/sites/ericsavitz/2012/10/22/crowdfunding-potential-legal-disaster-waiting-to-happen/#6c0fb2a9576c

Sherman, A. J., & Ebrary, Inc. (2012). Raising capital: Get the money you need to grow your business. New York: AMACOM.

The Staff of Entrepreneur Media, Inc. (2015). Digging for dollars. Write Your Business Plan: Get Your Plan in Place and Your Business off the Ground. New York: Entrepreneur Press.