What is Title III?
Historically, investing in the next Uber or Slack has been reserved for Accredited Investors - people who earn $200,000 annually (or $300,000 if married) or who have a net worth of at least $1 million. There is an estimated 8.7 million Accredited Investors in the United States today - less than three percent of the country's population.
But the game is changing.
Equity crowdfunding is more accessible than ever, thanks to Title III of the JOBS Act, otherwise known as Regulation Crowdfunding, which became official on May 16. For startups, this means opening up a pool of over 300 million potential investors.
That's right - every American can be a startup investor. As opposed to 2.7% of the US population, startups can now engage 100% of it.
So, instead of simply receiving "perks" or "rewards" in exchange for a donation to a crowdfunding campaign, "backers" can now receive securities. They can own actual equity in the company - not just a product of it.
The rules of the game
With this newfound freedom to raise funding across state lines without prior approval from the SEC, there are, of course, regulations and rules with which a company must comply in order to take advantage of the new opportunity.
Here are the basics:
- The company must cap their equity crowdfunding at $1 million in a 12-month rolling period.
- The company must be a United States entity.
- The company must use a broker-dealer or an SEC and FINRA-approved and regulated online portal.
- First-time equity crowdfunders that raise over $500,000 must have an independent public accountant review their financial statements and produce the accountant's review report.
- There will be ongoing reporting requirements that the company must fulfill.
- The company can raise funding from both Accredited and Non-Accredited investors in their crowdfunding campaign.
- There are limits on how much an individual can invest. An investor who has a net worth or annual income of less than $100,000 can only invest $2,000 or 5% of their annual income or net worth, whichever is less.
The regulations on Title III are fierce.
They are a culmination of the SEC's three-and-a-half year rule-making session after legislation was originally passed in 2012. Even then, additional rules were still being added in the final days before its release.
The future of equity crowdfunding
The fact that the SEC has been treading lightly - and deliberately - makes sense. After all, this is the very first time the Securities Act of 1933 has been revised to be inclusive of modern approaches to capital fundraising.
We predict a bright future for equity crowdfunding and that regulations will ease up as more and more companies find success in it. In fact, there are already bills popping up that propose updates to Title III, such as raising the $1 million limit to $5 million and allowing companies to first "try" crowdfunding before fully committing to it, because crowdfunding isn't the best option for every entrepreneur seeking to launch or grow a business.
But, just like launching a crowdfunding program in a higher education institution, making crowdfunding commonplace for companies seeking investments will be slow moving. There is a lot of education that needs to happen - for both entrepreneurs and investors - to ensure all parties understand the risks and rewards in taking part.
We're excited to see how equity crowdfunding unfolds as we continue to support and train teams embarking on their own donation-based crowdfunding campaigns.
And who knows, with the new opportunities that Title III brings, maybe you can be USEED's next investor!