Lots of smart people attended the CFGE Crowdfund Real Estate Summit in Austin last week. On Thursday, there was a wonderful and heated discussion about Title III of the JOBS Act.
Some thought that regular, non-accredited investors should be allowed to invest in whatever they want, whenever they want, without the protection of the government. Some of the more opinionated think that the word “protection” in the preceding sentence should be in quotation marks, or even preceded by the phrase “so-called.”
Title III tries to balance two competing interests: on one hand, giving ordinary people the chance to invest in private deals; and on the other hand trying to protect ordinary people from the risks inherent in private deals.
It does so using the tools of traditional securities laws – namely, disclosure, transparency, reporting, and regulation. These were the tools introduced back in the 1930s at the height of the Great Depression. The Securities Act of 1933 and the Securities and Exchange Act of 1934 cleaned up the cesspool that Wall Street and become, and that approach has served the country extremely well over the last 80 years.
But we’re finding that it doesn’t quite work in Title III. Those traditional tools, which have worked so well for so long, are too expensive, so expensive that they defeat the purpose of the JOBS Act. Specifically, the traditional tools make capital so expensive that entrepreneurs can’t afford it.
Over lunch I thought of a different approach, one that is more attuned to the times.
Suppose a deal sponsor is raising capital for Project X. I propose that regular, non-accredited investors should be allowed to invest under the following conditions:
- Accredited investors unrelated to the sponsor invest at least 25% of the capital for the project.
- Each non-accredited investor is limited to 10% of income or net worth.
That’s it. No cumbersome reporting or regulation.
Why does this work? The whole point of Title II is that accredited investors are smart and sophisticated enough to protect themselves. If accredited investors are taking 25% of the deal, it means that smart, sophisticated investors have decided that it’s an investable deal. Or to put it in modern terms, the Crowd, through accredited investors, have validated the deal. And by limiting the amount of the investment to 10% – borrowing a rule from proposed Regulation A+ – we ensure that regular investors don’t over-invest.
This is a modern solution to a modern problem. It balances investor participation with investor protection through a mechanism that relies on the Crowd, not the government.
I’m interested to hear what others think.
Questions? Let me know.