On May 16th, Title III of the JOBS (Jumpstart Our Business Startups) Act came into effect. This final ruling expanded the capabilities of equity crowdfunding platforms, allowing non-accredited investors the opportunity to privately invest in companies for the first time in over 80 years. Title III poses significant shifts for the early-stage venture capital industry, entrepreneurs, and retail investors. As more startups will be able to receive funding from a larger pool of investors, it should provide a capital infusion for new businesses who may not fit the models of traditional VC players while creating new opportunities for investors to invest in young companies for equity instead of products or special pricing (like Kickstarter, IndieGoGo, etc.).
For those who are looking to invest in startups, here are six things investors need to know:
1. Strict Regulations
Under Title III, all equity crowdfunding transactions by a non-accredited investor must take place within a SEC-regulated intermediary, either a broker-dealer or a funding portal.
2. Fundraising Cycles
Fundraising cycles will become shorter. The SEC has put a limit on the amount a company can receive within a year. So if companies are looking to raise more than $1 million through non-accredited investors, they will have to start this cycle annually.
3. Investment Limits
The SEC will now regulate the amount individuals can invest. Investors making less than $100,000 per year are able to invest up to $2,000 or 5% of annual income through equity crowdfunding. Investors making over $100,000 per year can invest up to 10% of their annual income, but no more than $100,000 per year.
4. Company Disclosures
Companies must disclose an extensive amount of information surrounding the company and the company's financial data, such as the price to the public of the securities, the target offering amount, the deadline to reach the target offering amount, a discussion of the company's financial condition, and financial statements of the company.
5. Portal Offerings
The platforms approved by the SEC must have a variety of resources and guidance to ensure that non-accredited investors are able to make the most informed decisions about their investments. These resources will include guides to investing, providing the necessary research to ensure minimum risk for investors, and publicly publishing all necessary documents that a company must disclose.
6. Resale Regulations
Non-accredited investors can only sell their shares after one year. Because of the smaller amounts of money being invested, a non-accredited investor's investment is not liquid. Therefore, they must wait at least one year before the investment is eligible to be sold. If an investment needs to be sold, an accredited investor may purchase it from the non-accredited investor before one year.
The SEC has equity crowdfunding under much tighter regulations than before, but the outlook of Title III is bright. There's no denying that Title III creates a vast number of opportunities for both entrepreneurs looking to find investors and non-accredited individuals looking to build a portfolio. With a sound understanding of the regulations, investors can make the most of Title III and grow their investment portfolio in new ways.