16 May Our Thoughts Going Forward
Our Thoughts Going Forward on Title III for Energy Investing
As you may know, Title III of the JOBS Act now allows for non-accredited investors to invest in the type of crowdfunding projects that have been historically restricted to accredited investors.
Interested companies may seek up to $1M for funding.
Here are the very basic rules as they pertain to investors:
Title III allows non-accredited investors with less than $100,000 income or net worth to invest the greater of 1) $2,000 or 2) 5% of the lesser of their annual income or net worth.
If both an investor’s annual income and net worth are equal to or more than $100,000, the investor may invest 10 percent of the lesser of his or her annual income or net worth.
Many commentators initially saw the promulgation of Title III regulations—so-called Regulation CF—as a boon to both investors at large and entrepreneurs seeking capital. However, that initial enthusiasm has now been replaced by sober realism and the undeniable conclusion that the Title III fundraising structure, in its current iteration and application, is right for certain projects and wrong for others. We agree with this point of view, as we’ll explain.
EnergyFunders has made the decision to hold off on entering this market for the funding of asset-based projects like direct oil and gas investing, until Title III is revamped in a way that allows platforms like ours to play a more active role in the investment. We feel that the Title III structure is flawed as applied to direct oil and gas investments. These are complex investments which require a certain level of due diligence, expertise and management of the investment. Unlike investment in a startup—many of which innovative energy technology startups have approached us to raise capital—a direct oil and gas Investment is something that must be carefully managed and requires certain structuring that Title III simply does not allow.
Some of Title III’s requirements will ultimately remove one of our biggest values, which is offering due diligence from experts and playing an active role as the manager for the assets. Under the Title III structure, the crowdfunding platform can only evaluate projects using an objective checklist approach and cannot play any ongoing management role. After the project is done, the platform must step away. Given these restrictions as applied to complex asset investments, we do not believe investors—accredited or non-accredited—would be best served by platforms that are offering oil and gas projects without a high level of evaluation and ongoing management.
For example: If an operator in Kansas is looking for $300,000 to fund their project, they could have upwards of 100-200+ non-accredited investors under a Title III fundraise. While this might work for a startup investment in which investors are simply looking for that moon shot exit, it does not work for a cash-flowing asset investment. Each investor would be considered a very small working interest owner, with all attendant rights and individual obligations. The operator doesn’t have the resources to handle and manage hundreds of inquiries or even communicate effectively if something goes wrong with the project, like a common cash call requirement, and when it comes time to vote and make decisions as a working interest group, the operator will be responsible to communicate with each investor and obtain his or her vote. Likewise, the operator will need to record title for each of the hundreds of working interest owners and when the project produces revenue, the operator will be responsible to pay each and every small working interest owner. Finally, the hundreds of investors would not have anyone looking out for the good of their investments as a group.
On the EnergyFunders platform, projects are not only evaluated and sought to be rerisked for potential investors, but investor relations is handled and managed for Operators, adding value to both parties. Finally, the manager or general partner of each fund serves the investors in that project. For projects raising under Title III, these benefits and advantages must go away, and so do some of our biggest values.
Lastly, we make money when the project succeeds, not for raising the money. There are other platforms whom model is to put up any and every project presented to them and make money from the proceeds of the fundraise, like a promoter. (We receive an average of a new potential deal every day and the rate is increasing.) While they might not truly care whether a project is successfully developed, we find it very difficult to build long lasting investor relationships if we don’t make money together. That’s why we don’t just put up projects, we carefully evaluate deals to be sure we believe in them as projects.
For now, that means that the types of projects on the EnergyFunders accredited investor platform will not be available on the Title III EnergyFunders Marketplace.
This does not mean that Title III does not offer exciting opportunities for the anticipated EnergyFunders Marketplace.
Quite the contrary.
We expect the EnergyFunders Marketplace to host cutting edge start-up companies in the oil and gas space and the energy space at large.
The energy sector is wide open for innovation by small companies seeking to do existing thing better, or provide groundbreaking solutions to existing problems. We’ve seen some of this first-hand.
We are excited to be moving in this direction.
We are passionate about opening up these opportunities for non-accredited investors and accredited investors alike.
We also remain passionate about financing traditional oil and gas projects with our accredited investor base.
This is an exciting time in the world of investing.
If you haven’t already done so, please sign-up to stay informed and be invited to the grand opening of the EnergyFunders Marketplace.