Title III of the JOBS (Jumpstart Our Business Startups) Act offers an enormous opportunity for entrepreneurs and investors alike. Letting non-accredited investors into the equity crowdfunding arena sounds that the SEC has brought some equality into the world of investing. But the SEC has implemented numerous regulations, so before jumping into this new option, each party must look into the fine print to see how Title III both helps and hinders.
The most notable aspect of Title III lies in the opportunities it is said to create. Since the JOBS act passed in 2012, entrepreneurs and investors have been looking forward to the eventual implementation of Title III because the inclusion of non-accredited investors creates an entirely new revenue source for the startup industry and should provide millions more in investable money for entrepreneurs. The sheer volume of new investors willing to provide funds for startups can breathe new life into the movement, creating a second pop for the industry.
There is no saying whether or not these smaller investors will follow the overall trend of VCs and Angels who have been holding back on their funding money in recent quarters. But, the smaller amounts that can be invested could encourage non-accredited investors to use their money for startups, especially since the SEC's regulations help them to understand the risks and make informed choices.
However, startups looking for seed, and even Series A, funding may very well be hindered by the new regulations that limit fundraising amounts through Title III to $1 million. When Title II came into effect, there was a surge in the amount that accredited investors and institutions were investing in startups, bringing the average amount raised in a seed round from $750,000 in 2012 to an average predicted amount of $2.5 million in 2016. For small companies with a strong following, this $1 million limit can be more than enough to get their company off the ground and ready for higher funding rounds. And even larger companies looking to attract VCs or Angels can use Title III-regulated equity crowdfunding as a stepping stone and raise pre-seed rounds simply to prove that their company is of interest to a larger audience and, subsequently, worth the larger investment.
The largest drawbacks of Title III for entrepreneurs are the regulations surrounding what information their companies must disclose while trying to raise money. The SEC regulates that all companies must disclose:
- Information about officers and directors as well as owners of 20 percent or more of the company.
- A description of the company's business and the use of proceeds from the offering.
- The price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount.
- Certain related-party transactions.
- A description of the financial condition of the company.
- Financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company's tax returns or reviewed or audited by an independent public accountant or auditor.
While all of this information is useful for investors, there is a privacy issue over the fact that this information must be shared publicly through SEC-regulated broker-dealers and portals. Therefore, this information is now also available for competitors, customers and partners to see during the step-by-step process while a company receives funds.
Title III has many pros and cons. Like any other decision made surrounding startups and fundraising, deciding to use non-accredited investors requires research and planning to decide if this is what is right for their startup. Equity crowdfunding under Title III regulation is not for all companies looking to raise funds, but there is no denying that this opens new opportunities for many entrepreneurs that may have felt traditional equity fundraising was out of reach.