During its Open Meeting on Friday, the Securities and Exchange Commission (SEC) voted to implement Title III of the Jumpstart our Business Startups Act (JOBS Act). After a three-and-a-half year wait, startups eager to raise capital through crowdfunding will now have access to a new crop of potential investors: the everyday American.
Prior to Friday’s vote, startup investment was limited to accredited investors, which predominately includes high-net-worth individuals, companies, and banks. With Title III on the books, startups can crowd-fund from the entire public.
With predictions that funding volumes through crowdfunding channels will eventually surpass those raised through traditional venture capital channels, regulation appears to be moving in the right direction.
Massolution, a crowdfunding service provider reported that the industry grew by 167 percent during 2014, reaching $16.2 billion, in its 2015CF – Crowdfunding Industry Report. The report predicts that crowdfunding will double that figure by 2016, reaching over $34 billion in investments.
“There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need,” said SEC Chair Mary Jo White in a press release detailing the vote. “With these rules, the Commission has completed all of the major rulemaking mandated under the JOBS Act.”
Under today's unique circumstances, AgFunder is re-opening Fund III for a limited time to enable investors to join our mission and invest alongside us as LPs in a second close. Learn more here.
But what exactly are the rules? While Title III opens up the crowdfunding market to more potential investors, there are a number of restrictions on the amount of investment they can make.
1. The amount raised cannot exceed $1 million during a 12-month period.
2. Individual investments during that period are limited to either $2,000 or 5 percent annual income or net worth where the investor’s annual income or net worth is less than $100,000. The limit is raised to 10 percent where the investor’s annual income and net worth exceed $100,000, but not exceeding a total amount sold of $100,000.
During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings cannot exceed $100,000.
3. Either a registered broker-dealer or a new type of entity that has appropriately registered as a funding portal must handle the transactions.
The process for startups is also relatively onerous, some in the industry argue, including a 21-day cooling off period for startups after they apply for approval to raise capital through crowdfunding and before they can go to market. And companies raising more than $500k will be required to have annual financial audits.
Crowdfunding portals also face multiple burdens and red tape including an issuer liability allocation, and prepackaged, mandatory deal-vetting criteria. All this has pushed some in the industry to argue that Title III is no easier than the existing Reg A+ rule for attracting unaccredited investors under Title IV.
“Unfortunately this will not mean much,” Rory Eakin, founder and chief operating officer of CircleUp, said in an interview with TechCrunch. “Do [entrepreneurs] want to go down a path that has much more time, and cost, and uncertainty, or do [they] want to raise capital?”
The slow pace of implementing Title III has been another criticism, as it was arguably the most hotly anticipated segment of the JOBS Act. The act has been implemented in phases starting with Title I in 2012. Title I relaxes prerequisites for emerging growth companies — those with less than $1 billion in revenue. Title I primarily removed disclosure requirements for emerging growth companies that previously acted as deterrents to IPO.
The following year, the SEC rolled out Title II and allowed public advertising of private offerings to accredited investors. Title IV went into action earlier this year, enabling companies to raise more funds under limited public offerings while raising the small-fundings cap from $5 million to $50 million. Companies that comply with additional filing and audit requirements can attract capital from accredited and unaccredited investors.
And now the SEC must hold one last round of public comment before Title III can go live. The new crowdfunding rules and forms will be effective 180 days after they are published in the Federal Register. The forms enabling funding portals to register with the Commission will be effective Jan. 29, 2016.
For more information on the SEC’s final version of Title III regs, click here.
What do you think? Will Title III make a noticeable difference to the crowdfunding market? Email LManning@AgFunder.com
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