Proposed Law Would Let Accredited Investors Bypass Equity Crowdfunding Portals in Title III Offerings
By David M. Freedman
AIs would be allowed to deal directly with issuers offline, while non-accredited investors must participate via registered intermediaries
Proposed legislation in the U.S. Congress would revise the Title III equity crowdfunding landscape by roping off a restricted, sky-box-like section just for accredited investors. Some securities professionals expect Congress to enact this legislation by summer 2015.
The tectonic thrust of Title III of the JOBS Act of 2012 is that it opens angel investing to tens of millions of non-accredited investors. Before Title III, investment in startups and early-stage companies had been limited to founders and their friends and family (the three Fs) and accredited investors who had existing relationships with those companies or their intermediaries.
Accredited investors may not have paid much attention to Title III, which limits raises to $1 million, and limits investment amounts based on investors’ income and net worth. Accredited investors, for example, can invest up to $100,000, per year in Title III offerings.
For accredited investors, Title II of the JOBS Act was much more interesting than Title III. Title II lifted the ban on general solicitation for issuers that used the new Rule 506(c) exemption. Rule 506(c) of Regulation D, promulgated by the SEC in 2013, allows private companies to sell securities through online offering platforms (like MicroVentures and CircleUp), and advertise many details of those offerings off-platform. Rule 506(c) also requires that issuers sell securities only to accredited investors, even if their solicitation (whether intentionally or not) reaches the non-accredited masses.
Improved Version of Title III
New legislation that was first proposed in the House of Representatives last year would revise Title III to make it less expensive and less burdensome for issuers, and provide better deal flow and more options for investors. The two most important features of the new law (let’s call it Title III 2.0) are the following:
- The raise limit would increase from $1 million to $5 million per year. This would probably attract more established and later-stage companies to the equity crowdfunding landscape. Moreover, the threshold at which issuers would have to provide audited financial statements would increase from $500,000 to $3 million, greatly reducing the cost of capital for smaller companies.
- Intermediaries (equity crowdfunding portals and broker-dealer offering platforms) would be able to pool investors’ funds into single-entity investment vehicles (in the manner of MicroVentures and the UK platform Seedrs, for example) to invest in a single offering, rather than facilitate the participation of hundreds or even thousands of individual investors in a single deal. This would help issuers who want to simplify their capitalization tables for future angel capital and VC raises, possibly attracting more fast-growth issuers; and create a buffer between the companies and their “crowd” of investors.
One of the less publicized provisions of Title III 2.0, which I want to focus on here, is Section 4A(e), which lifts the requirement for using an intermediary when selling to accredited investors only.
Note that the original version of Title III required that all offerings must be made exclusively through SEC-registered intermediaries.
According to proposed Section 4A(e), if a Title III offering is open to both accredited and non-accredited investors, the offering must still be routed through a registered crowdfunding portal or B-D platform for participation by non-accredited investors. But the issuer can “bypass the intermediary” to deal with accredited investors, and vice-versa, for the same offering, according to securities lawyer Samuel S. Guzik.
Benefits for Accredited Investors
Being able to bypass the intermediary and deal directly with the issuer would not only allow an issuer to solicit accredited investors offline, but would also allow the issuer and the accredited investor to communicate with each other offline, something not allowed under the original Title III proposed SEC rules for either accredited or unaccredited investors.. At the same time, accredited investors would still be able to register on the crowdfunding portals and platforms in order to collaborate with the crowd on due diligence—they would still have the option to buy Title III securities through the intermediaries.
Knowledgeable securities lawyers and equity crowdfunding professionals expect Title III 2.0 to be enacted in 2015, maybe in summer. Most importantly, we hope it will be enacted before the SEC issues final rules under Title III 1.0. Thanks to proposed Section 4A(e), Title III may be more interesting for accredited investors than originally expected.
 Here is the discussion draft of the bill, dated 4/23/14: http://financialservices.house.gov/uploadedfiles/bills-113hr-pih-crwdfnd-m001156.pdf. This bill was introduced by Rep. Patrick McHenry of North Carolina, who is vice chair of the House Financial Services Committee.
 Guzik’s law firm, Guzik & Associates, has offices in Los Angeles and New York City. See his Corporate Securities Lawyer Blog: http://corporatesecuritieslawyerblog.com/.