Crowdfunding and Title III of the JOBS Act

Guest Post by Expert Greg Kyle

Crowdfunding is the practice of raising funds from a large number of people, often in small amounts. Historically, it is best known as a way for political candidates to raise funds from their supporters. Recently, crowdfunding has been associated with companies using internet portals such as Kickstarter or Indiegogo to raise funds or accept donations in order to launch a new product or support an idea. Some of the more notable examples of these are the Pebble smartwatch which raised over $20 million, the Coolest Cooler which raised over $13 million, and Oculus Rift which raised $2.4 million before it was later bought by Facebook for $2 billion.

On May 16, 2016, Title III of the Jumpstart Our Business Startups (JOBS) Act took effect, which allows companies for the first time to offer securities through crowdfunding and Internet funding portals to individual or non-accredited investors. This is a significant shift by the federal government and the SEC in their stance on the way startup and emerging-growth companies could raise funds.  Previously, investment opportunities – and risks – were only available to accredited investors, also known as “angel investors.” Now, any individual can invest in start-up companies, with certain limitations as outlined below.

Highlights of Title III of the JOBS Act

For Companies:

• Companies can raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period. Non-U.S. companies are excluded.
• Companies must provide basic information about the company including a business description and address, names of executive officers, anticipated use of funds, and material risk disclosures
• Companies must disclose the following financial information depending on the amount of funds being raised or have been raised by the company over the prior 12 months:
  • >$100,000: Financial statements and specific line items from tax returns, certified by the principal executive officer
  • $100,000 - $500,000: Financial statements reviewed by an independent public accountant and the accountant’s review report
  • $500,000 - $1,000,000: If first funding round, financial statements reviewed by an independent public accountant, otherwise financial statements audited by an independent public accountant and the accountant’s review report.
• Companies are only required to provide annual financial statements and results of operations.

For Investors:

• If either an individual’s annual income or net worth is less than $100,000, the maximum that person can invest in a 12-month period is either $2,000 or 5% of their annual income or net worth.
• If both an individual’s annual income and net worth is equal to or greater than $100,000, then the maximum amount a person can invest is 10% of their annual income or net worth, to a maximum of $100,000.
• Investments can only be made through an online platform offered either by a broker-dealer or a new funding portal which must be registered with the SEC and be a member of FINRA.
• Crowdfunded shares carry significant liquidity risk. For the first year, the shares may not be resold, or with few exceptions transferred to another party.
• After the first year, there could be no active market for the shares and they may be difficult to resell, requiring investors to hold onto the shares for an indefinite period of time.

Sources:

SEC Investor Bulletin: Crowdfunding for Investors

FINRA Investor Alert: Crowdfunding and the JOBS Act: What Investors Should Know