What is Equity Crowdfunding?
Equity crowdfunding is on the rise after the signing of the Jumpstart Our Business Startups (JOBS) Act was signed by President Obama in April 2012.
Simply put, it is a type of crowdfunding that enables broad groups of investors to fund startup companies and small businesses in return for equity.
Three years after the JOBS Act was initially passed, Title IV (Regulation A+) went into effect, allowing larger companies to accept capital from both accredited investors (the wealthiest 2% of Americans) and non-accredited investors (the other 98% of Americans). This expanded when Title III (Regulation CF) was enacted in October 2015, which also allowed early stage companies to accept capital from both accredited and non-accredited investors.
More About Title III (Reg CF)
Title III allows startups and small businesses to raise up to $1M from the general public – an unprecedented way to raise capital. More specifically, investors who have less than $100,000 in both income and net worth may invest at least $2,000 per year, and as much as 5 percent of their income or net worth (whichever is less) per year.
Investors whose income or net worth is greater than $100,000 may invest up to 10 percent of their income or net worth (whichever is less) per year.
Thus, Title III gives companies that are historically underserved by the current capital markets an equal opportunity to equity financing.
On May 16th, Title III will officially go into effect.
Process
Choosing a Funding Portal
Under Title III, companies must use an online intermediary (either a broker-
dealer or crowdfunding portal registered with the SEC and FINRA), to facilitate a
fundraise. Experienced portals with a deep understanding of the regulations
surrounding Reg CF can help ensure that their campaigns are compliant with SEC rules.
Filing a Form C
Companies raising under Title III do not need to get SEC approval to initiate their
raise. They must, however, prepare a Form C and file it with the SEC 21 days prior to launching an offering. This form includes basic information about the company, its employees and the terms of the raise.
Disclosure Requirements – Financial Information
In addition to Form C, necessary financial information will depend on the size of
the intended investment needs:
Under $100k – Internal financial statement review
$100k-500k – CPA reviewed financial statements
500k-1M – 3rd Party audited financial statements
1st time crowdfunding issuers offering more than $500,000 would be permitted to provide reviewed, rather than audited, financial statements.
Disclosure Requirements – Ongoing Reporting
Providing progress reports not only build trust with investors and keep them informed, but they’re also a very much required part of the disclosure requirements. Upon the successful closure of your campaign, you will be required to provide ongoing updates to your investors in the form of an annual report, which will include similar information that was included on the Form C.
In summary, what are the benefits and pitfalls of Title III?
Benefits:
Title III can be an efficient way to quickly startups raise capital from the crowd
More investors equate to more supporters in your startup
Reporting requirements give founders and investors an opportunity to
Pitfalls:
Current statutory disclosure obligations and costs are overly burdensome
Legal and accounting fees may be higher than traditional capital-raising
Title III does not include a “testing the waters” provision (like Reg A+ maintain a more open and transparent dialogue methods does) so that issuers can gauge interest before incurring burdensome filing and preparation costs
Remember, Regulation CF will become effective 180 days after the final rules are published in
the Federal Register on May 16, 2016.
