On April 5, 2012, the Jumpstart Our Business Startups Act, or JOBS Act, became the law of the land in the United States. The JOBS Act, which contains significant reforms to long-standing rules around the sale of securities, is expected by many to completely reshape the way startups raise capital.
One of the first portions of the JOBS Act to be implemented allows companies to publicly solicit investment from accredited investors. Previously, the rules governing private offerings prevented companies from engaging in so-called general solicitation, presenting a big hurdle for many small, young businesses, particularly those with limited investor relationships. Today, a good number of startups are using the JOBS Act’s 506(c) exemption to promote their fundraising efforts on sites like Angelist.
Even more sweeping changes are coming. Title III, a soon-to-be-implemented portion of the JOBS Act pertaining to equity crowdfunding, will allow companies to raise capital from non-accredited investors. Title III will, for instance, make it possible for companies to raise small amounts of capital from thousands of individuals in bite-sized chunks. These investors will not have to be accredited and can offer an internet startup the opportunity to raise money from its users, or enable a new restaurant to solicit investment from its patrons.
Many have high hopes for the JOBS Act and believe that it will fundamentally change the investment landscape in the United States for the better. But given concerns regarding disclosure and fraud, it shouldn’t come as a surprise that the JOBS Act brings with it a significant number of new rules, some of them complex, which are designed to protect the public and investors.
Companies availing themselves of the JOBS Act’s 506(c) exemption to solicit investment publicly are required to take reasonable steps to verify that their investors meet the accredited investor criteria. Title III of the JOBS Act contains even more complexity—the amount of money non-accredited investors will be allowed to invest each year will be limited, for example.
A new crop of compliance vendors are emerging to help entities adhere to the JOBS Act’s rules and regulations. Some of them are basing their businesses on APIs.
One of those vendors is Crowdentials, an Ohio-based startup that recently raised $300,000 and launched its first offering, an investor verification service, which is available as an API. Using the API, platforms that facilitate fundraising can outsource the verification of an investor’s status to Crowdentials at a reported cost of $20 to $40 per verification, or less if verifications are purchased beforehand in bulk.
Another player in the space, CrowdBouncer, also offers an API for investor verification. It has also developed offerings in anticipation of the implementation of Title III of the JOBS Act.
CrowdBouncer’s Title III database is designed to help crowdfunding investment portals accurately track how much money an individual has invested. Using an API, portals can send CrowdBouncer transactional information for each investor and retrieve real-time information about an investor’s current investments across all of CrowdBouncer’s portal partners. This gives portals the ability to ensure that the individual does not exceed his or her limits. The company’s other offering, a crowdfunding securities identification protocol dubbed CrowdSIP, allows portals to generate a unique identifier for each offering. The identifier is created via an API request and can be used in regulatory filings and in connection with activity related to the offering.
The combination of new regulation and APIs looks to be a potent force for disruption and innovation.
Upstarts like Crowdentials and CrowdBouncer can handle processes that would otherwise require their customers to hire attorneys and accountants and engage in manual, offline exchanges of data. And they can do so at a fraction of the traditional cost.
As Charles Stack, a Crowdentials investor, explained to The Wall Street Journal, the type of investor verification that Crowdentials can provide at $20 to $40 a pop or less has historically cost hundreds or thousands of dollars per deal when performed by an attorney or accountant.
Because addressing regulation can be so costly, complex and labor-intensive, Crowdentials and companies like it offer examples of how API-based offerings can be used to disrupt markets and spur innovation that might not otherwise have occurred if companies didn’t have a cost-effective and efficient way to outsource regulatory compliance.