There is so much excitement in the air about finally implementing Title II of the JOBS Act, permitting general solicitation of accredited investors. You can just hear the engines starting up now. Venture funds, private equity funds, even hedge funds are preparing to market their funds to accredited investors on a board scale.
Technology, of course, is making all of this possible. Investors will have access to a vast number of opportunities to put their hard earned capital to work. This differs from the current method of raising funds through meetings and conversations with individual investors, which is very time consuming. The Title II process will enable funds to market to the general public, potentially reaching a far greater number of investors through the use on technology platforms than they could in person.
But the differences do not stop there. According to the proposed regulations, it is going to be necessary for the fund managers to take on a proactive verification of an investor’s financial claim to be an accredited investor. This requires an individual to have a net worth of $1 million, not including ownership of their home, or an annual income of $200,000, or joint income of $300,000 if filing with a spouse. It is likely that investors will have to submit either tax returns, bank statements or 9-W earnings statements from employers to verify their claim. We hear on this point that the SEC is going to be very strict. There are even whispers that the SEC may increase the amount required to meet the accredited investor bar, but we will have to wait until the release of regulations on September 23 to find out if this bears out.
While accredited investors will have many more options visible to them, how will they be able to size up the anticipated performance of any of these funds? They can certainly look at the track record of the fund, whether Angel, VC, Private Equity, or Hedge Fund. When it comes to these privately held funds, however, how much are they going to reveal about their past performance? For those investments that go to the public market through an IPO, there are reporting requirements in public documents. But this is a very small number of transactions in total. This potentially leaves the data on previous performance somewhat opaque to the investor. Here is where the funds that choose to post more regarding their performance will have a leg up on others.
I spoke to Attorney Douglas Ellenoff of Ellenoff Grossman & Schole LLP, an expert in securities, who expressed an admiration for some of the proposed requirements under Title III of the Jobs Act, what is generally referred to as crowd funding, It is meant to attract unaccredited investors who will be limited in the amount they can invest. Title III regulations are still tied up at the SEC with no issue date in sight. However, Doug believes that Title II funds ought to adopt some of the anticipated requirements discussed regarding Title III. He cited providing educational papers, seminars and a proactive informational site for investors to learn more about the process of investing in privately held companies as something he would endorse.
According to attorney Joseph Bartlett, of Counsel to McCarter & English LLP, the new rules for accredited investors will create a new model on online Venture funds. As a founder of VC Experts, and industry newsletter and resource center, Joe has seen the morphing of investment models over a 40 plus year period. He expects these rule changes to go through some growth pains as funds and investors become familiar with new rules. “This is a new model for the pledge fund investor,” he commented. “There will be some adjustments made along the way as issuers and investors learn the new rules of engagement.”
What should investors consider doing in this new environment? Do your homework on the background of funds soliciting investors. You should start with funds you already know and read carefully the terms for your investment. Compare funds side by side to make sure you have an understanding of which funds are investing in companies, or making companies available for investments in industries in which you have some experience. Without doubt, there will be attempts to stampede investors into certain “hot funds” or “hot companies ” listed on funding platforms. There is going to be a period of trial and error in this new investing opportunity. Trust the people you know, your own network of colleagues and friends.
We are about to enter a new world of investing I think it will democratize capital in some profound ways, which, I believe, in the long run, is good. Take incremental steps instead of leaping in. Time is on your side as this new opportunity evolves.