Author Topic: Title III of Jobs Act - Any Impact?  (Read 7777 times)

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Title III of Jobs Act - Any Impact?
« on: October 30, 2015, 04:27:03 PM »
Apparently something relating to SEC crowdfunding passed today:

http://www.forbes.com/sites/goncalodevasconcelos/2015/10/30/democratising-crowdfunding-what-can-the-us-learn-from-the-uk/

I hadn't heard of this until now - does it matter to LC? Hasn't LC already been crowdfunding equity? Or is there some distinction here between consumer debt P2P and...idk...venture capital P2P. I assume either way this isn't bad news for LC, potential good news?

RazzleDazzle

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Re: Title III of Jobs Act - Any Impact?
« Reply #1 on: October 30, 2015, 04:39:05 PM »
This has big implications in the real estate crowdfunding market. LC and Prosper are already established through lengthy legal prospectus / S1 filing and now LC post IPO is opening up many other states (blue sky law exempt) so it's moot for them

I fully expect real estate platforms (including ours) to utilize this incredible ruling (congratulations to SEC- finally doing a great thing!) to open up platforms to unaccredited investor

So far only groundfloor.us had RegA filed to allow non-accredited invrstors on short term fix and flip loans

The change may take few months to a year but it has far reaching implications in capital formation/marketplace

PhilGD

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Re: Title III of Jobs Act - Any Impact?
« Reply #2 on: October 30, 2015, 06:11:14 PM »

I fully expect real estate platforms (including ours) to utilize this incredible ruling (congratulations to SEC- finally doing a great thing!) to open up platforms to unaccredited investor


Can you elaborate a little more on the opportunities that retail investor will see down the road? Do you think platforms will have to open up one state at a time, or do you see this as a turn key solution that will open the door to all retail investors?

RazzleDazzle

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Re: Title III of Jobs Act - Any Impact?
« Reply #3 on: October 30, 2015, 06:49:53 PM »

I fully expect real estate platforms (including ours) to utilize this incredible ruling (congratulations to SEC- finally doing a great thing!) to open up platforms to unaccredited investor


Can you elaborate a little more on the opportunities that retail investor will see down the road? Do you think platforms will have to open up one state at a time, or do you see this as a turn key solution that will open the door to all retail investors?

Hi Phil

Basically, currently majority of Real estate platforms (including ours) are using Reg D or some variation to raise funds for real estate deals. This is limited to Accredited investors. What Title III does is provide the legal framework for equities crowdfunding for non-accredited investors. However, it is not a terrible genius leap to convert that to debt securities. As a CTO of Reamerge I am fully diving into the nitty gritty as we speak and waiting for mature implementation of the law to then open up all the deals to EVERY investor in the USA (accredited AND non-accredited). And no - not per state; the whole USA. Ofcourse I expect states arguing this law to the fullest (we are seeing that with the recent passage of Reg A+ rulings). So we may have to wait for all 50 states to comply, but I bet thats where we eventually settle.

So if you go to realtyshares lets say, you won't be able to invest in their 10% fix and flip lending deal if you are not an accredited investor. Same thing with Reamerge. But once a portal with issuers begins raising funds under Title III regulation; well non-accredited investors can also invest in the same 10% deal.

IMHO this paves way for a new boom in different kinds of portals and platforms (think consumer debt, real estate, equities (a young uber raising funds - think about that!), accounts receivables) you name it. Sky is the limit.

Let me know if that answered your question.

FYI: There is 60 day public comment period right now and I expect January or February to see major activity in this arena.
« Last Edit: October 30, 2015, 06:53:37 PM by RazzleDazzle »

P2PFact

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Re: Title III of Jobs Act - Any Impact?
« Reply #4 on: October 30, 2015, 09:39:14 PM »
Hi RazzleDazzle, great insight. This is very exciting news and will open up a whole new era in equity capital market. Do you know if this rule covers debt crowd funding? If I'm a business owner and equity funding is cheaper or easier than debt then possibly I may go for equity instead of debt. This is one way I think may have impact on small business marketplace lending.

PhilGD

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Re: Title III of Jobs Act - Any Impact?
« Reply #5 on: October 30, 2015, 10:01:17 PM »

I fully expect real estate platforms (including ours) to utilize this incredible ruling (congratulations to SEC- finally doing a great thing!) to open up platforms to unaccredited investor


Can you elaborate a little more on the opportunities that retail investor will see down the road? Do you think platforms will have to open up one state at a time, or do you see this as a turn key solution that will open the door to all retail investors?

Hi Phil

Basically, currently majority of Real estate platforms (including ours) are using Reg D or some variation to raise funds for real estate deals. This is limited to Accredited investors. What Title III does is provide the legal framework for equities crowdfunding for non-accredited investors. However, it is not a terrible genius leap to convert that to debt securities. As a CTO of Reamerge I am fully diving into the nitty gritty as we speak and waiting for mature implementation of the law to then open up all the deals to EVERY investor in the USA (accredited AND non-accredited). And no - not per state; the whole USA. Ofcourse I expect states arguing this law to the fullest (we are seeing that with the recent passage of Reg A+ rulings). So we may have to wait for all 50 states to comply, but I bet thats where we eventually settle.

So if you go to realtyshares lets say, you won't be able to invest in their 10% fix and flip lending deal if you are not an accredited investor. Same thing with Reamerge. But once a portal with issuers begins raising funds under Title III regulation; well non-accredited investors can also invest in the same 10% deal.

IMHO this paves way for a new boom in different kinds of portals and platforms (think consumer debt, real estate, equities (a young uber raising funds - think about that!), accounts receivables) you name it. Sky is the limit.

Let me know if that answered your question.

FYI: There is 60 day public comment period right now and I expect January or February to see major activity in this arena.

Thanks for your detailed reply, you answered my question and also provided some helpful context as well. I'm excited for any opportunity to continue investing in p2p that allows me to diversify away from Lending Club.

RazzleDazzle

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Re: Title III of Jobs Act - Any Impact?
« Reply #6 on: October 30, 2015, 11:33:16 PM »
Hi RazzleDazzle, great insight. This is very exciting news and will open up a whole new era in equity capital market. Do you know if this rule covers debt crowd funding? If I'm a business owner and equity funding is cheaper or easier than debt then possibly I may go for equity instead of debt. This is one way I think may have impact on small business marketplace lending.

Yes businesses would raise equity this way; in fact that is the primary intention by the lawmakers as the use case for this legal framework. However, entrepreneurs and specifically small business owners don't want to share their hard earned/developed equity and thus debt securities is the better way most of the time. For startups giving up equity makes more sense since there is less traction etc; hence the tag startup

@Phil - you're most welcome. Let me know if you may have questions re: business lending etc. I personally think diversification in multiple platform covering different assets/styles of loans is beneficial to the investor.


AnilG

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Re: Title III of Jobs Act - Any Impact?
« Reply #7 on: October 30, 2015, 11:46:36 PM »
Final Rule: Crowdfunding [PDF] http://www.sec.gov/rules/final/2015/33-9974.pdf
Press Release: SEC Adopts Rules to Permit Crowdfunding http://www.sec.gov/news/pressrelease/2015-249.html
Public Statements from SEC Chair and Commissioner http://www.sec.gov/news/statements

IMO, this is the most exciting development for retail investors since peer to peer lending. Hopefully equity crowdfunding platforms will learn from the success of p2p lending platforms and wouldn't repeat prosper 1.0 issues.
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P2PFact

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Re: Title III of Jobs Act - Any Impact?
« Reply #8 on: October 31, 2015, 11:30:56 AM »
IMO, this is the most exciting development for retail investors since peer to peer lending. Hopefully equity crowdfunding platforms will learn from the success of p2p lending platforms and wouldn't repeat prosper 1.0 issues.

I think this is even larger than P2P lending. In historical context, I think this effectively overturned the 1934 act restriction on retail investor's access to private companies. Overturn of a law that has been in place for 80 years!

rawraw

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Re: Title III of Jobs Act - Any Impact?
« Reply #9 on: October 31, 2015, 01:23:51 PM »
I really fear this is going to blow up in a big way.  But sure hope not, as I don't like the government defining who a qualified investor is

Rob L

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Re: Title III of Jobs Act - Any Impact?
« Reply #10 on: October 31, 2015, 02:49:59 PM »
Oh, now I get it. It's "Shark Tank"!
Small investors will soon have the opportunity to become a mini-sharks.   :)

AnilG

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Re: Title III of Jobs Act - Any Impact?
« Reply #11 on: October 31, 2015, 03:30:43 PM »
Last night, I had a chance to read a few pages of the Final Rule (my sleep-aid). Title III of JOBS act might turn out to be a dud as well. SEC restrictions on maximum investment by a retail investor based on lesser of annual income or net worth and maximum limit on aggregate investment by an investor in a year are head scratchers. Title III is being setup to fail because of these restrictions.

SEC may not understand the small business and startup investing and crowdfunding and the reduction in risk gained through diversification. You just can't spread the risk across lot of deals if you are restricted to very small amount like $2,000 and maximum of $100,000 in a year. Even with P2P Lending, most lenders are advised to have at least 100 loans in their portfolio, that is build a $2,500 portfolio. Even in hedge fund industry, the risk management suggests to have no more than 1% of portfolio in one security. You can't build a properly diversified equity crowdfunding portfolio when investor is restricted to smaller amounts.
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Rob L

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Re: Title III of Jobs Act - Any Impact?
« Reply #12 on: October 31, 2015, 06:41:38 PM »
There's about a zillion things I could comment on in the Final Rule. I don't have the imagination to see how this plays out. That's not to say it won't work out very well thank you. Hope it does! Guess I'm not terribly imaginative.

For starters, what's the business owner going to do with the money? I know he/she must provide this information but, unless I missed it, no enforcement mechanism is suggested (nor can I imagine a practical one). It's quite similar to what a borrower does with a loan from LC or Prosper. Borrowers are under no obligation to do what they said on their application. Money is fungible. Who is to say which money is which? Meanwhile the business owner increases his/her salary, buys company car, puts family on the payroll, increases company 401(k) contributions, travels to "business conferences" at exotic locations, etc. The means by which an unfettered business owner may enrich him/her self at the expense of bottom line "shareholder profits" are legion (and quite legal I think). We are talking about micro-businesses here. More often than not the business owner is (was) the only shareholder anyway. When this is not the case you can be sure there are shareholder agreements in place to mitigate these obvious strategies. I am not suggesting these owners are unscrupulous. Presumably they will follow the letter of the law. Of course the Board of Directors provides oversight, but in a small business the Board of Directors is the owner and their husband/wife/other. There is a reason why the VC's of the world have representation on the boards of the companies in which they invest.

I know the Final Draft and the comments provided prior to its issuance were written by some very smart folks so my na´ve comments above are surely misplaced. Hopefully someone will set me straight. I'm also in agreement with AnilG's diversification comments, but I'll leave that for another post.

rawraw

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Re: Title III of Jobs Act - Any Impact?
« Reply #13 on: November 01, 2015, 01:08:21 AM »
Last night, I had a chance to read a few pages of the Final Rule (my sleep-aid). Title III of JOBS act might turn out to be a dud as well. SEC restrictions on maximum investment by a retail investor based on lesser of annual income or net worth and maximum limit on aggregate investment by an investor in a year are head scratchers. Title III is being setup to fail because of these restrictions.

SEC may not understand the small business and startup investing and crowdfunding and the reduction in risk gained through diversification. You just can't spread the risk across lot of deals if you are restricted to very small amount like $2,000 and maximum of $100,000 in a year. Even with P2P Lending, most lenders are advised to have at least 100 loans in their portfolio, that is build a $2,500 portfolio. Even in hedge fund industry, the risk management suggests to have no more than 1% of portfolio in one security. You can't build a properly diversified equity crowdfunding portfolio when investor is restricted to smaller amounts.
I don't think diversification is comparable to consumer credit.  The "unsystematic risk" is much smaller in crowd funding business start ups and just spreading your investment over a lot of ideas doesn't necessarily come out better.   But still don't like restricting how much someone can invest in.

AnilG

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Re: Title III of Jobs Act - Any Impact?
« Reply #14 on: November 01, 2015, 05:04:42 PM »
I don't think diversification is comparable to consumer credit.  The "unsystematic risk" is much smaller in crowd funding business start ups and just spreading your investment over a lot of ideas doesn't necessarily come out better.   But still don't like restricting how much someone can invest in.

This is exactly how VCs and angel investors work. Identify potentially attractive areas and people. Then spread the investments across multiple startups in that area. While most will go bust or flounder, one or two may hit out of the ball park to cover losses from others. Similar process works for small business investing.

The consumer debt market works on the premise that you make small gains from lending to lot of consumers that will overcome occasional big losses to few consumers due to defaults. The small business equity market works on the premise that you take small losses from investing in lot of businesses that will be overcome occasionally by big gains from few successes.
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