Why the Most Significant Part of the JOBS Act Has Yet to Catch On

Like many small-business owners, Crista Freeman relied on personal savings when she first started her company, Phin and Phebe’s Ice Cream. It was a small operation: from her Brooklyn, N.Y., apartment, she would whip up unique flavors such as Fluffernutter, maple bacon pecan, and Vietnamese iced coffee.

As she began selling her product to increasing numbers of independent grocers in the area, Freeman reeled in $150,000, first from a small group of angel investors. And when she landed accounts with Whole Foods and the Fresh Market, she turned to the online equity marketplace CircleUp to raise an even larger chunk of cash—$320,000, which she secured in about six months in 2014.

The money enabled Freeman to expand into 2,000 retail locations and add four full-time employees. Now Freeman’s company, which has $2 million in annual revenue, is about to close another round on CircleUp for $1 million.

More than 6,000 U.S. companies like Phin and Phebe’s have raised a total of nearly $1.4 billion in investor cash using online equity marketplaces similar to CircleUp since 2013, according to Crowdnetic, a crowdfunding and marketplace lending researcher. They’ve been able to do this thanks to Title II of the Jumpstart Our Business Startups Act (JOBS Act), which Congress passed in 2012 with the goal of freeing up capital for the nation’s small businesses. Title II allows startups to publicly advertise that they’re raising capital and thus broadly solicit cash (for example, through equity crowdfunding platforms) from so-called accredited investors — those with $1 million in assets, or annual income of $200,000. Before this, startups could not publicize their funding efforts.

The relative success that businesses have had attracting financing using Title II stands in marked contrast to the far slower adoption rate of yet another provision of the JOBS Act called Title III, which was made available to businesses this spring. And the lessons that platforms and companies devoted to Title II have learned could be instructive for business owners and crowdfunding platform operators alike: namely, Title III needs a bit of streamlining, simplifying, and cost-reduction to get off the ground, crowdfunding experts say.

Title III was supposed to be the lynchpin provision of the JOBS Act, allowing private companies to solicit $1 million annually from anyone wanting to invest — not just accredited investors. The provision was held up for years as the Securities and Exchange Commission wrote rules to protect small-time investors. Since going into effect this past May, uptake has been sluggish. Only about 90 companies have registered with the SEC to hold equity sales using the act. Altogether, the 60 that have gone on to raise money brought in $6.6 million, a fraction of what’s been raised under Title II, according to NextGen Crowdfunding, an equity crowdfunding research and advocacy organization.

Freeman says she prefers soliciting only accredited investors Title II, at least for now, because it aligns with her long-term strategy, which could soon include seeking professional venture capital or private equity investment.

“Most times private equity companies do not want to invest in a business with non-accredited businesses in their [capitalization] table,” she says.

Rory Eakin, chief operating officer and co-founder of CircleUp, says two of the biggest holdups for Title III are its costliness and reporting requirements.

Companies are limited to raising $1 million in a given year, yet on average most companies using Title III are looking to raise about $100,000, according to Crowdnetic. Platform fees, financial audits, and ongoing filings required by the SEC, can sap tens of thousands of dollars. After 10 years, a $100,000 raise could cost a small business $75,000, says Richard Swart, the chief strategy officer for NextGen.

More important, Eakin says, the SEC requires companies using Title III to make their financials available to the public, which can put small businesses at a competitive disadvantage. Title II, by contrast, lacks most of the filing fees and public audit requirements.

“Title III should move more in the direction of Title II for accredited investors,” says Rory Eakin, co-founder and chief operating officer of CircleUp.

Curiously, the number of Title II raises per year has decreased, while the dollar value of the raises is going up, according to Crowdnetic. (See chart.) The reasons for that could be that investors have grown more comfortable with Title II as a way to invest, and are investing increasingly larger amounts. And more tested companies could be coming to the fore to experiment with it as a capital raising tool, as less tested ones drop away, says Luan Cox, president and chief executive of Crowdnetic.


It’s perhaps not a coincidence then that many of the most successful online Title II platforms are beginning to behave more like professional money firms. OurCrowd, based in Jerusalem, has helped 100 companies raise $300 million since 2013. It has a network of 15,000 investors from 110 countries, about 2,000 of which are active in deals, says Jonathan Medved, the platform’s founder. Half of the site’s investors are based in the U.S.

Not only has OurCrowd helped startups raise hundreds of millions of dollars, it’s enabled many to do so quickly. For example, Medved says OurCrowd helped one fintech company raise $4 million in 48 hours about two years ago. While that’s not the norm, Medved says, it isn’t unusual for companies to raise large sums of money in a matter of weeks, or a few months.

“We can consistently raise millions of dollar for companies,” Medved says.

Much like a venture capital firm, OurCrowd has created four investment funds that focus on sectors, regions, or the phase of a company’s growth. When investors invest, they also do so through so-called special purpose vehicles, or SPVs. Those are limited partnerships that gather together the investors as a single entity, which solves the problem of having too many stray investors in your company.

OurCrowd also rejects 98% of the companies that come to it for financing, Medved says, and its vetting process plus its investment structure has garnered the interest of VCs. Well-known venture capital funds, including US Venture Partners, Spark Capital, Menlo Ventures, and Charles River Ventures, have invested alongside OurCrowd in its platform companies.

“My biggest concern, and reason for not doing [Title III raises] is that in its current format, it does not allow for the SPV structure,” Medved says. “When you can aggregate everyone and represent them, you can act like a VC investor.

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Legislation pending before the U.S. Senate called the Fix Crowdfunding Act would in fact let Title III platforms create SPVs, to pool together individual investors. It would also reduce some of the regulatory paperwork associated with the raises.

Nick Tommarello, co-founder and chief executive of equity crowdfunding marketplace Wefunder, says those changes could help with uptake. Wefunder, an online platform for both Title II and Title III raises, has facilitated about 80 percent of all Title III raises since the spring, worth over $5 million.

Tommarello says he thinks Title III will grow exponentially in the coming years.

“We’ve found that each company we fund directly brings a dozen more to us,” he says.

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