History Has Been Made
It finally happened:
After three years of politics as usual, the U.S. Securities & Exchange Commission just enacted the last remaining piece of The JOBS Act.
The JOBS Act is a set of laws that opens up the private equity markets to all U.S. citizens. Historically, only “accredited investors” (those who earn at least $200k per year, or have a net worth of at least $1 million) were allowed to invest in private equity deals such as start-ups.
But now, because of the enactment of Title III of The JOBS Act, all investors, regardless of income or net worth, can enter this market.
For investors, this is reason to celebrate. Historically, this “off-limits” market has been delivering the highest returns. In fact, prior to Title III being enacted, CNBC called private equity "The best retirement asset you can’t have.” According to the article, "Time and again private equity has proven that it's the single-best asset class for public pensions, by delivering superior returns over longtime horizons."
However, with the potential for greater returns comes greater risk—and investors need to be prepared.
In a moment, we’ll explain the details of this new law, and the specific steps investors should take to prepare themselves.
But first, let’s re-cap how we got here.
The History of The JOBS Act
There were two main inspirations for the creation of The JOBS Act:
- Job Growth — Historically, most new jobs in this country have been created by small businesses. By making it easier for small businesses to raise capital, the government hoped that more businesses would get started—and more new jobs would be created.
- Crowdfunding — Over the past several years, an online trend called crowdfunding has emerged. On websites like Kickstarter and Indiegogo, entrepreneurs solicit funds for their projects (e.g., a new toy, video game or film). And those who provide funding receive a "reward": for example, they might receive a free version of the video game when it's ready, or an exclusive screening to the new film. This concept is thus known as “rewards-based crowdfunding.”
Click Above to See a Brief History of Equity CrowdfundingThe downside here is that, if these projects go on to become billion-dollar enterprises, the initial backers won’t receive any of the upside. Not a penny.
A perfect example of this “win/lose” scenario happened with a company called Oculus VR. Oculus originally raised capital for its virtual reality headset on Kickstarter. Two years later, Facebook acquired the company for $2 billion, making its founder extraordinarily wealthy—but leaving its Kickstarter backers without a cent.
Title III of The JOBS Act aims to remedy this with a concept known as “equity crowdfunding.”
With equity crowdfunding, financial contributors receive equity—i.e., an actual ownership stake in the businesses they back. So if a business becomes the next Oculus (or Microsoft or Google), early backers will receive their share of the gains.
But in order to make this happen, 83 years of securities laws had to be rolled back. You see, ever since The Great Depression, everyday citizens have been legally prohibited from investing in privately-held securities.
With the passage of the JOBS Act, all that is now changing.
Explosive Growth
Although the JOBS Act was passed in 2012, the SEC didn’t enact it all at once.
One of the first components it enacted was “Title II.” This piece of the law—which applies only to Accredited investors—allows a start-up to advertise that it's raising capital, and to post its investment deal online.
In June of 2015, another piece of The JOBS Act was enacted: Title IV.
Title IV was designed to help later-stage private companies (i.e., companies that already have a proven product, and may already have millions of dollars in sales) raise money.
Title IV deals are sometimes referred to as “Mini-IPOs.” They earned this moniker because they require a costly and time-consuming filing and review process by the SEC that’s only slightly less onerous than a traditional IPO.
Because of this heavy vetting process, the SEC determined that non-accredited investors could take part in Title IV deals.
All of these deals are hosted on websites known as “Funding Platforms.” These platforms play matchmaker between entrepreneurs seeking capital and investors looking to invest.
In just two years, these funding platforms have already raised over $1 billion for start-ups—that's quite a feat.
"Uber" Growth
What’s driving all this demand for private market investments?
A few things...
For one, the world’s highest-growth companies are staying private longer. And if these companies are already worth billions of dollars by the time they go public, it’s unlikely you’ll see a dramatic increase in share price after the IPO.
In fact, according to Renaissance Capital, the average IPO so far in 2015 provided a negative return on its first day, falling 3.5%.
Recent headlines from mainstream press like The Wall Street Journal are helping drive demand, too—for example:
Airbnb Raises $1.5 Billion in One of Largest Private Placements
Alibaba Deal Values Snapchat at $15 Billion
Uber Valued at More Than $50 Billion
Coincidentally, Uber isn’t just one of the fastest growing start-ups in the world today—it’s also one of the first major crowdfunding success stories:
In 2010, Uber leveraged a website called AngelList (which is now one of the largest equity crowdfunding platforms) to raise its initial round of funding.
If you’d been a member of AngelList, and had been accredited at the time, you could have become an angel investor in Uber when it was still “cheap.”
And here’s what that would have done for your portfolio:
A $1,000 investment in Uber in 2010 would today be worth an estimated $6 million. And a $10,000 investment would be worth $60 million.
You would have earned a 600,000% ROI.
That’s 6,000 times your money on a single investment.
Higher Returns = Higher Risk
Stories like Uber’s are creating a lot of excitement around early-stage investing.
So when the first batch of Title III deals comes online next year, it’s widely expected that investors will be eager to dive in.
And there will be plenty of start-ups there to help meet that demand.
Currently, the SEC estimates that roughly 2,000 companies will use Title III to raise money online each year...
That's roughly 160 companies per month—and that number will likely go up over time!
Which presents investors like you with a unique problem...
How will you have the time to review each company?
Well, we've been thinking a lot about this problem, and we believe we've finally come up with the solution.
In tomorrow's email, we'll share it with you—expect it in your inbox at 9:00 AM Eastern!
