On October 30, the SEC approved final rules for securities crowdfunding under Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012. Title III lets startups raise up to $1 million per year by selling securities exclusively through registered online intermediaries, i.e., crowdfunding portals and broker-dealer offering platforms. And it permits all Americans to invest from $2,000 to $100,000 in those offerings per year, depending on their net worth and income. Title III offerings will launch in April 2016.
Also known as Regulation CF, Title III will attract millions of new, non-accredited angel investors (people worth less than $1 million and with less than $200,000 in income) over the next few years. Non-accredited investors, roughly 93 percent of Americans, had essentially been locked out of the private securities market under the Securities Act of 1933.
- Crowdfunding portals will have the ability to curate their offerings, which means they can select applicants based on subjective as well as objective criteria. Portals will be allowed to select, for example, only those applicants that they believe are most likely to succeed, be profitable, and result in a good return on investment, among other subjective measures.
- Most importantly for entrepreneurs, there is no required audit of financial statements for offerings at any level. The proposed rules had required audits for offerings over $500,000; but most commenters thought that was too large a burden, relative to the $1 million raise limit. This applies only the first time a company raises capital using the Title III exemption.
An unresolved problem for intermediaries, however, is the issue of statutory liability, where funding portals might share liability for misstatements or omissions made by issuers. The final rules gave intermediaries some latitude on this, but didn’t remove the liability burden entirely. Intermediaries are still covered by anti-fraud statutes that apply in all securities offerings.
The final rules also clarify investment limits over a 12-month period based on investors’ net worth and income:
- Individuals with income or net worth less than $100,000 may invest (a) the greater of $2,000 or 5 percent of the lesser of the investor’s annual income or net worth.
- Individuals with income or net worth of at least $100,000 may invest 10 percent of the lessor of the investor’s income or net worth, not to exceed $100,000.
Thus any American can invest at least $2,000 per year, and accredited investors may invest no more than $100,000 per year.
Disclaimer: I am not a lawyer, and I have not read the entire 680-page final-rule document that the SEC released a few days ago. My summary and interpretation of the rules is based on a selective reading of the SEC document and comments from lawyers and other professionals in the crowdfunding industry. I will update this summary with more details, and clarifications if necessary, in the weeks ahead.
— David M. Freedman has worked as a financial and legal journalist since 1978. He is a coauthor of Equity Crowdfunding for Investors: A Guide to Risks, Returns, Regulations, Funding Portals, Due Diligence, and Deal Terms, (Wiley & Sons, June 2015). Website: www.ec4i.com.