If you’re an entrepreneur or looking to launch a new startup, I have a huge announcement for you. Title III of the JOBS Act goes into effect on May 16, 2016. That’s less than two months away!
If you haven’t heard of Title III or you’re not familiar with these new rules, here’s why it’s exciting. Soon, you will be able to raise up to $1 million from both accredited and unaccredited investors!
This post takes a closer look at the pros and cons of Title III (also known as Regulation CF), what it takes to qualify, how to get started, and what platforms plan on offering Title III deals in 2016.
Pros
- Entrepreneurs can raise up to $1 million without having to file with the SEC for approval
- Startups can raise equity or debt investments from accredited and unaccredited investors
- Only have to file Form C
- No state registration (blue sky law)
- Good for startups seeking seed and scale stage funding
- Investors can self-certify
Cons
- Investors making less than $100,000 per year can only invest the greater of $2,000 or 5% of annual income
- Investors making over $100,000 per year can only invest up to 10% of their annual income
- Information required of companies has to be made available 21 days before any investments are made and while the offering is available
- There are annual audits/financial reports
- Can be expensive for companies raising over $500K, with some costs estimates ranging from $5 to $25K
- Only $1 million can be raised in a 12/month period
What it Takes to Qualify
There are some companies that are ineligible when it comes to Title III exemptions. This is intended to speed up innovation for startups and small business. These include:
- Non-U.S. companies
- Exchange Act reporting companies
- Some investment companies
- Regulation Crowdfunding companies that haven’t complied with reporting requirements
Companies must also have a detailed business plan. They shouldn’t be planning any vague acquisitions or mergers.
Title III transactions must take place via an SEC-registered intermediary. This could be either a broker-dealer or a funding portal.
Disclosure Requirements
Like most equity and debt investments, companies must be willing to make certain information available to investors and regulators when looking to make large raises. Companies taking advantage of Title III rules will be required to disclose the following information with the SEC, investors, and the intermediary:
- The price of securities, target offering amount, deadline, and if they will accept excess investments
- A discussion of the company’s financial condition
- Financial statements. For first-time Title III raises these may be reviewed financial statements and for larger raises, companies may require independently audited tax returns.
- Description of the business you run and how the investment will be used
- Information about officers, directors, and owners of 20% or more or the company
How to Get Started
- Prepare and wait for March 16, 2016
- Choose a platform
- File a form C with SEC (you can access here on SEC’s Edgar filing website)
- Raise investments from accredited and unaccredited investors!
- Follow reporting requirements and repay your investors
- Reap the benefits of the investment and grow your business!
Which Platforms Plan on Offering Title III Deals in 2016?
Since the SEC is not disclosing which crowdfunding platforms that have filed Form Funding Portal, we can’t say for sure how many have started this process. There are two platforms that have stated their interest in facilitating Title III deals that I know of. These are SeedInvest and StartEngine:
1. SeedInvest
SeedInvest has made their interest in Title III public, and is one of the platforms that is actively providing information on how it all works. With a network of over 17,000 investors, SeedInvest has helped over 60 vetted startups raise money on their investment platform.
2. StartEngine
StartEngine has also filed with the SEC to make Title III offerings when they go into effect. The platform, like SeedInvest, is currently using Regulation A+ to help companies raise up to $50 million. CrowdfundingPR reported a $5.5 million dollar raise from StartEngine in February 2016, which suggests that we should expect some innovation and growth from the platform in the coming months.
Platform Requirements
Even if thousands of entrepreneurs are lining up ready to pursue Title III offerings, it really comes down to whether or not portals will choose to become intermediaries for these deals. Here is what the SEC will require of platforms offering Title III deals:
- Portals are required to register with the SEC using Form Funding Portal and become a member of FINRA
- They must provide investors with all of the educational materials they need to make smart, informed investments
- Take measures to reduce the risk of fraud
- Provide the required company disclosure information on all deals 21 days before securities are sold and while a platform hosts offerings
- Provide communication channels for users to discuss offerings
- Disclose the platform’s compensation to investors
- Accept investments only once investors open an account
- Have reason to believe investors are following investment limitations
- Notify investors of their commitments and confirm the investment before the transaction is finished
- Comply with maintenance, transmission of funds, and other offerings requirements
Platforms must not:
- Provide access to companies they suspect of fraud or would go against investors’ best interests
- Have, “financial interest in a company that is offering or selling securities on its platform unless the intermediary receives the financial interest as compensation for the services, subject to certain conditions.”
- Compensate anyone for providing them with personal information on investors or potential investors
Conclusion
Title III gives entrepreneurs an unprecedented chance to include unaccredited investors in their equity and debt deals, in a way that was once reserved to friends, family, and people with connections. It also gives platforms a chance to advertise these deals to the general public, as long as they follow strict rules meant to keep investors safe.
Some people are very excited to see what the future of Title III of the JOBS Act holds, hoping that it will help give startups easier access to the capital they need to grow. Others are wary of Title III. Even though the intentions behind these new rules are good, the cost to platforms and companies raising money might be too large to draw much interest.
What do you think?
