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October 10, 2018

Democratization of Equity Crowdfunding with Title IV of the JOBS Act

Title IV of the JOBS Act allows early and later stage startups to raise up to $50 million from accredited and non-accredited investors.


The Story of the Evolution of Title IV of the JOBS Act


The ability to invest in startups was initially only given as a privilege to wealthy individuals. Only accredited investors with a net worth of more than $1 million, or an annual income of more than $200,000 were allowed to participate in private investments. The purpose was to protect the rights of the investors.


However, with the enactment of the JOBS Act in 2012, access to startup investing improved for the general public through Title III, which allows startups to raise up to $1.07M from non-accredited investors.


This was further improved with the enactment of Title IV of the JOBS Act in 2015, which allows early and later stage startups to raise between $20 and $50M from the general public to accelerate investments in growth.


The Main Provisions of the Title IV of the JOBS Act


Title IV of the JOBS Act is also known as Regulation A+. It allows companies to raise up to $50 million from all investors, regardless of their income levels and assets. It differs from Regulation D, under which money can only be raised from accredited investors.


Title IV allows companies to offer their shares to the general public and to make investments in exchange for an equity stake in their company. Although it is similar to an IPO in some respects, it is much less complicated and more cost-effective.


The companies offering shares through Title IV of the JOBS Act also need to file with the Securities and Exchange Commission to get approval. However, the disclosure requirements are less cumbersome and the costs are much lower than a traditional IPO.


Essentially, RegCF enables startups to raise pre-seed and seed capital from the general public up to $1M. But, Regulation A+, allows companies to raise Series A and beyond rounds where capital requirements are often in the $5 to $50M range.


The Steps in the Process of Raising Capital through Title IV


    • The early-stage companies begin by testing the waters to gauge whether the mini-offering is going to be a success.

    • After the waters are tested by checking the indications of interest, the company files Form 1-A, if it decides to go ahead with the offering. After Form 1-A is approved, the company files a final prospectus.

    • When the regulatory approvals have been received, the mini-IPO is launched. The customers are targeted, and the offering is marketed.

    • When the desired amount has been raised, the offer is closed.


The Composition of Title IV of the JOBS Act


A company that chooses to raise capital through the mini-IPO, under Title IV of the JOBS Act, has the option of choosing between two types of offerings. They are called Tier 1 and Tier 2 offerings.


Tier 1: Under the Tier 1 offering, the companies can raise up to $20 million from both accredited and non-accredited investors. Tier 1 offerings allow companies to raise less capital and are also subject to state regulations. However, these offerings have less complicated  filing and audit req uirements.


Tier 2: Companies can raise up to $50 million through Tier 2 offerings. There are no state filing requirements.  However, the financials must be audited before filing and post-offering filings are mandatory. Tier 2 offerings also have restrictions on the amount that can be invested by non-accredited investors.


The Advantages of Raising Capital through Title IV vs IPO


The process of raising capital through Title IV of the JOBS Act is similar to an IPO.  It is called a mini-IPO. However, it has many benefits compared to raising capital through an IPO.


    • A Reg A+ offering is a faster way to raise capital. Startups do not need to   deal with strict regulations and attract large investors. The money is raised from investors who are already willing and enthusiastic, which makes the process  faster and less complicated.


    • A Reg A+ offering helps startups to retain control of their business. Through an IPO, a large stake may be transferred to certain investors. However,  with a mini-IPO, capital is raised from a large number of small investors. There is a very low probability of a single investor gaining a controlling interest.


    • The Reg A+ offering also helps startups to build a user base. The investors not only help in raising capital but also become brand enthusiasts and brand testers. The equity crowdfunding raises awareness about the company and also helps in the marketing and promotion of the products. The Reg A+ offerings can be used as the platforms for product launches.


    • The Reg A+ offering costs less than an IPO. It involves fewer intermediaries,  which reduces the complications.


The Drawbacks of Title IV of the JOBS Act


The Reg A+ offering under Title IV of the JOBS Act is an effective way to raise capital for early- stage companies. However, there are several drawbacks that should be evaluated.


    • A Reg A+ offering is not cost-effective for capital raises below $4 million. The legal and accounting fees are higher than the fees paid under a traditional raise, and the process  is expensive.


    • The Reg A+ offering requires regulatory approvals that can take approximately two to three months.


    • Due to the large number of investors/shareholders, they can become difficult to manage.


    • The capital raise under Title IV of the JOBS Act may not be suitable for  companies that do not have a strong user base and brand recognition. They may struggle to attract the requisite investment due to the lack of followers.


The Bottom Line


Title IV of the JOBS Act provides for an excellent opportunity for startups to raise capital from both accredited and non-accredited investors.  It also gives the general public an opportunity to be a part of a later stage startups that are in the fast growth phase of the business.


It is a nice compliment to Regulation Crowdfunding and can act as a way for startups that raise their seed round through Regulation Crowdfunding to follow on with a larger Regulation A+ offering.


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