This article provides the information that was announced for the regulations surrounding the Title III of the JOBS Act, which went into effect on May 16, 2016.
With the popularity of crowdfunding, especially in context with equity crowdfunding and its use to raise funds for a variety of fledgling startups companies, companies looking to expand and products, Title III is intended to provide these businesses with the opportunity to raise the capital they need to grow and develop and also providing regulation for the general public, allowing them to invest in crowdfunding offerings while ensuring they are protected.
Equity Crowdfunding is an evolving method of raising funding through online crowdfunding portal/platforms, but it has generally not been used to offer and sell shares and other securities to the general public for some time now. One main reason for this is because in order to invest in these types of investments, you would need to be an accredited invest.
In short, a person in the U.S. is accredited if she meets either of these two criteria:
- $200k in income for each of the past 2 years (or $300k with a spouse), with the expectation of similar earnings this year
- $1m in net assets (assets minus debts)
The JOBS Act included an exemption to permit securities-based crowdfunding and established the foundation for a regulatory structure for these transactions, allowing the general public the opportunity to invest in these types of offerings.
With the new regulations, it also established regulations for a new entity – a funding portal which are the online platforms used to facilitate the offer and sale of securities without having to register with the SEC as brokers.
Below are the highlights of the Title III of the JOBS Act Regulation Crowdfunding
What Are the Rules?
Title III of the JOBS Act established crowdfunding provisions that allow early-stage businesses to offer and sell securities. The SEC subsequently adopted Regulation Crowdfunding to implement the crowdfunding provisions of the JOBS Act. The role of the Financial Industry Regulatory Authority (FINRA) is to oversee the registration of crowdfunding portals and to ensure that they comply with the federal securities laws and FINRA rules. Broker-dealers and funding portals that are registered with the SEC and are FINRA members are permitted to offer and sell securities on behalf of issuers to the investing public using crowdfunding.
Investors are subject to investment limits that we describe below. Investors should be aware that crowdfunding investments carry significant risk: you can lose some or all of your investment.
Who Can Invest
Title III allows both accredited and non-accredited investors to participate in a startup’s capital raise, but there are limits to how much can be invested during any 12-month period in these kinds of securities. The inflation-adjusted investment limits depend on your net worth and annual income
- If either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or five percent of the lesser of your annual income or net worth.
- If both your annual income and your net worth are equal to or more than $107,000 then, during any 12-month period, you can invest up to 10 percent of your annual income or net worth, whichever is less, but not to exceed $107,000.
- During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.
Startups can raise up to $1 million in a 12-month period. The startup must disclose information about the company, such as the names of the company’s officers and directors, how the proceeds will be used, the target offering amount, the deadline, and certain financial information. The type and depth of the financial information the company is required to provide varies depending on the amount of the target offering and whether or not the company has raised money under Title III before:
- If the startup is raising $100,000 or less, it must provide investors with financial statements and certain specific line items from income tax returns, both of which must be certified by the principal executive officer of the company.
- If the startup is raising $100,000.01 to $500,000 it must have the financial statements reviewed by an independent public accountant. The accountant’s review report must be certified by the principal executive officer of the company and provided to investors.
- If the startup is raising $500,000.01 to $1 million for the first time, the financial statements must be reviewed by an independent public accountant, and any resulting review report must be provided to investors. Companies raising under Title III for a subsequent time must have the financial statements audited by an independent public accountant, and the accountant’s audit report must be provided to investors.
For more information about Title III of the JOBS Act, check out some of the official articles published by FINRA and SEC.
Crowdfunding and the JOBS Act: What Investors Should Know
SEC Adopts Rules to Permit Crowdfunding
Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers
FINRA: Funding Portals We Regulate
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