Internet Lawyer Blog
Since the 1930s, the act of publicly raising money for a startup business has been outlawed. Now, with the implementation of the Jumpstart Our Business Startups Act (“JOBS Act”), in 2012, public crowdfunding is legal and encouraged. Startup companies are no longer confined in the resources and opportunities available to raise capital. Private companies can now publicly advertise that they are raising capital and collect investment funds through online crowdfunding services. The JOBS Act allows for two different ways in which a company can utilize this new crowdfunding opportunity. Is your startup looking for an infusion of capital? Are you considering crowdfunding as an option? If so, then you must understand how Title II and Title III of the JOBS Act apply to your startup.
What is Title II?
Title II of the JOBS Act now allows a private company to solicit and advertise investment opportunities to the general public. But, Congress left it up to the Securities and Exchange Commission (“SEC”) to regulate the rules. The SEC has changed Rule 506 of the Securities Act of 1933 to allow for this new public advertising provided that, “the issuer takes reasonable steps to verify that the investors are accredited investors.” Rule 501 defines accredited investor in three different ways: (1) an individual whose net worth or joint net worth with a spouse exceeds $1 million; (2) an individual with an annual income more than $200,000; or (3) a joint annual income with a spouse over $300,000. In addition, issuers must previously file with the SEC that they are claiming this new public solicitation exemption. The penalty for not following these requirements is being banned from fundraising for a year.
What is Title III?
Title III of the JOBS Act will remove the accredited investor requirement under Title II, but will add new red tape. Non-accredited investors with an income below $100,000 can invest a maximum of $2,000 or 5% of their income or net worth. Non-accredited investors with an income above $100,000 can invest a maximum of 10% of their income or net worth. Further, investments made under Title III cannot be resold for at least one year. Issuers must use the services of a broker or a “funding portal” registered with the SEC. A funding portal is a neutral third-party service (e.g., Kickstarter, Indiegogo). There are also limitations on companies raising funds under Title III. Companies are limited to $1 million a year in fundraising when using the Title III exemption. There are also many required disclosures to the SEC. You must disclose financial statements and tax returns, or be audited by an independent public accountant or auditor. Companies must disclose information about executives and any individuals who own more than 20% of the organization. Further, companies must disclose the use of all proceeds, price of the securities offered to the public, target offering amount, timetable for reaching the target amount, and any excess acquired above the target amount. Finally, companies raising money under Title III must file an annual report with the SEC. While Title III allows for a larger pool of investors, the disclosure requirements may be so cumbersome that the costs outweigh the benefits if you are not aware of all the requirements.
As such, the JOBS Act seems to provide new opportunities for private startups to gain capital, but they must pass through certain bureaucracies. You may contact us to discuss how you can utilize the provisions of the JOBS Act to raise capital for your startup.