Although Title III of the JOBS Act is considered to be a bit “limiting and inefficient”, it does allow non-accredited individuals to invest in private startups and small businesses through equity crowdfunding.
The Jumpstart Our Business Startups (JOBS) Act was enacted on April 5, 2012, when it was signed into law by President Barack Obama. Title III of the JOBS Act amended Section 4 of the Securities Act of 1933 (Securities Act), creating a new exemption from registration for Internet-based securities, with offerings of up to $1 million over a 12-month period.
With the growing popularity of equity crowdfunding, the intent of Title III was to help small businesses and startups by giving them the opportunity to raise capital using Securities and Exchange Commission-registered websites.
Before Title III went into effect, these investments were only open to accredited investors. They are individuals who earn more than $200,000 per year or have a net worth of over $1 million. However, because of Title III, anyone can invest in crowdfunding offerings. Due to the risks of these securities, there are caps on the investment capital during any 12-month period.
As per Title III of the JOBS Act, the inflation-adjusted investment caps depend on the net worth and annual income of the individual investor. During any 12-month period, as per the Regulation Crowdfunding terms, an investor can invest the following amounts each year across all crowdfunding offerings:
If an investor’s annual income or net worth is less than $107K, an investor can deploy the greater of $2,200 or 5% of annual income or net worth (whichever is less).
If an investors annual income and net worth are both more than $107K, an investor can deploy up to 10% of her annual income or net worth, whichever is less, but not to exceed $107,000.
Raising Regulation and Rules
A startup planning to raise capital via offerings under Regulation Crowdfunding, is required to disclose certain key business information, among other things. Primary information you must disclose includes description of the company’s business, the anticipated plan of the business, a discussion of the material factors that include comments on investment in the company being speculative or risky, the names of the officers and directors of the company, the proposed use of the proceeds, the target offering amount, the deadline, the method for determining the price and a discussion of the company’s financial condition.
All of this information is required to be filed in a Form C document, which is uploaded to the SEC website for access by investors and crowdfunding intermediaries.
The type and details of the financial informat ion disclosure required by a startup, depends upon the target amount offering and the round of offering under Title III.
In the situation when a company has a target offering of $107,000 or less, the mandate is to disclose 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.
In the situation where a company has a target offering between $107,000.01 and $535,000, the regulation requires the company to disclose its financial statements reviewed by an independent public accountant and certified by the principal executive officer of the company.
If a startup is raising from $535,000.01 to $1M in capital for the first time, the regulation is to provide the investors with a review report of the independent public accountant who reviewed the financial statements of the company.
For the businesses who are planning to raise capital for a subsequent time, as part of Title III, they must have the financial statements audited by an independent public accountant, with the accountant’s audit report to be provided to investors.
Mode of Investment for Investors
Any regulation crowdfunding offering must be exclusively conducted via one online platform which not only provides investors with the required resources, but also educates them to ensure that investors are able to make informed decisions.
This platform must be a broker-dealer or a funding portal that is registered with the SEC and FINRA. The Regulation Crowdfunding also requires broker-dealers and funding portals that provide platforms for crowdfunding offerings to provide educational material regarding the startup, communication channels for discussions related to offerings on the platform, representation from investors on understanding over bearing of loss of investment, etc.
The Bottom Line
Title III of the Business Startups Act improves greatly the interests of the non-accredited and other investors to infuse capital into startups and small businesses. However, investing in early-stage businesses might attract substantial rewards, but it comes with an equal level of risks. Therefore, an investor should ensure that they understand the risks and rewards involved with early stage investing, before deciding on investing through crowdfunding offerings.
About: Chris lustrino
A Boston College Eagle for life, on a mission to democratize startup investing for all people at KingsCrowd, with a passion for Fintech, investing, social impact, doing well and doing good, and an avid runner, cyclist and writer.