Navigating the Post Title III Environment
- Jul 06, 2016
In May 2016, Title III of the JOBS Act was fully implemented, allowing issuers to raise as much as $1 million in any trailing 12-month period. Many real estate developers and operators won’t get a significant amount of utility from this exemption because of the dollar constraint, but I have seen many new crowdfunding entities springing up to fund small raises for early-stage companies.
The exemption could presumably be used for other crowdfunding companies to raise money for operations, as well, although many of them are likely to operate under Title II, which allows significantly more capital to be raised for real estate projects. As time passes, expect the platform-portal intermediary space to evolve and many new entrants to arrive.
The white label space is evolving in the industry, as well. Many new entrants are forging software solutions to aid promoters in raising capital using their own website, free from the constraints of intermediary platforms. Marketing service providers are working on solutions to assist promoters with their own websites, including locating accredited investors and spurring new relationships. These site solutions are also streamlining tax processing, investor relations and other tasks that have traditionally been very manual and have required significant manpower from promoters.
Site aggregators like Crowdseekr and Alpha Flow are forming business models similar to what Priceline.com offers in the flight and hotel space. These sites are a “platform of platforms” that serves as a single spot for investors to see projects from various original underwriting platforms. Early entrants to the platform operator space spent significant sums of money to acquire investors with funding they raised from angels or venture capitalists. The investor acquisition model will largely be served by these aggregator sites going forward, and it will be interesting to see whether or not there was any value in being first to market for the larger platforms, which used expensive financing to grow.
Overall, tools in the industry are significantly more robust than they were in the early years, and the business models are steadying. Many platform sites have migrated to larger raises to support their staffing costs. It will be interesting to see whether or not issuers and promoters choose to implement the technology on their own and control their capital formation process in its entirety, or if they favor outsourcing this part of their value chain to third-party platforms.
I think there will be room in the industry for many sets of services, which should serve promoters well. Minimizing investor acquisition costs will be the bread and butter for aggregators and will enable platforms to be started at a lower cost. These trends should lead to the promoter having more overall control over how to present their projects for investment online without the need for expensive intermediaries.