Starting on Monday May 16, the U.S. Securities and Exchange Commission will permit small business to crowdfund equity stakes in their business.

The U.S. securities market is a bit late to the crowdfunding party, according to Denise Valentine, a senior analyst at industry research firm Aite Group. “This was a big argument to pull this through our system, it was not like in Europe where it was embraced. It was fought for and there are key leaders in the industry who have been trying to move this forward.”

Companies that meet the Commission’s definition of a small business under Title III of the JOBS Act may crowdfund up to $1 million per 12-month period from accredited investors after filing certain information to the regulator and making it available to potential investors.

These new regulation will bring a new class participates into the corporate crowdfunding equation, according to Valentine. “The whole Title III idea was to open up this market for individuals who had some extra money, but could not find opportunities or were shut out from certain opportunities to become shareholders in companies.”

The crowdfunding initiative is much smaller than initial public offerings, which had a median deal size of $93.8 million in 2015 according Renaissance Capital.

To further retail participation, many in the market have suggested updating the Commission’s definition of accredited investor by lowering the net-worth threshold an accredited investors need which is set at $1 million in the U.S.

If investors’ annual income and net worth are more than $100,000, Title III permits them to invest up to 10% of the lesser of their net worths or annual incomes into a company’s crowdfunding process. If  an investors’ net worths or annual incomes are less than $100,000, they still may invest, but only up to $2,000 or 5% of the lesser of their annual incomes or net worths.

Also, investors may not purchase more than $100,000 in crowdfunded securities in a 12-month period.

Valentine is skeptical that this new method of raising capital will affect the dwindling IPO market of the past few years.

“There is this great drive in the IPO market to find the next Google,” she added. “That’s been going on for some time and why the IPO market has thinned out over the last couple years, aside from the economic situation.”

Yet, Wall Street might feel a bit of an impact as retail investors who are chasing returns look toward crowdfunding opportunities instead of fee-heavy mutual funds.

“This mass market, or Title III Market, felt that all they were subject to were expensive mutual funds with active management, which don’t always deliver on the return, or index funds,” Valentine said. “With crowdfunding, investors are going to make some money out of it and get a return instead of just a t-shirt for donating.”

Featured image by momius/Dollar Photo Club