In April 2012, the JOBS Act was signed in to law. And with it came various changes to how companies raise money, including Title III (otherwise known as Regulation Crowdfunding). Navigating the new and unchartered waters of Title III can be overwhelming for any entrepreneur. While the regulatory changes intend to aide in capital formation, it’s not without its challenges.
The content portrayed here is intended to provide broad strokes for the basic understanding of Title III. It is not intended to be complete nor nearly enough information for anyone to rely on in executing a crowdfunded campaign. For a thorough discussion please contact us here.
Q: What is equity crowdfunding?
A: Equity crowdfunding is a financing method that involves funding a company with relatively modest amounts of money from a large number of individuals, rather than seeking substantial sums from a few investors (typically institutions). The small investors get a share of the company in return for their investment.
Q: What has changed about crowdfunding recently?
A: Non-equity crowdfunding has been around for years. Now, under the Jumpstart Our Business Startups Act (JOBS Act), which was signed into law in 2012, equity crowdfunding is open to all investors. Over the last 4 years, various provisions of the JOBS Act have been working their way through the SEC implementation process. On May 16, 2016, the last piece, Title III (otherwise known as Regulation Crowdfunding or Reg CF), went in to effect. Title III created a federal exemption under the securities laws that significantly changed the type of investor that companies can solicit in raising money (selling securities). In short, it opened the door for non-accredited investors to invest in entrepreneurial ventures.
Q: Who is a non-accredited investor?
A: An individual who has a net worth of less than $1 million (including spouse, but excluding home equity) and who earned less than $200,000 annually ($300,000 with spouse) in the last two years.
Q: Are there other rules in crowdfunding that need to be followed?
A: The short answer is yes. There are numerous issues related to permissible social media campaigns, timing of investing, amounts of money from each individual that can be raised, and total amount raised. Getting legal counsel to navigate a crowdfunded financing is imperative.
Q: Do I have other options for raising capital from non-accredited investors?
A: No, not without qualifying or registering the offering with the SEC in the same way that a later-stage company conducts an IPO.
Q: Is this really the best route to finance my company?
A: While not the only option, if you’re looking to raise less than $1 million crowdfunding it’s a great one, if done properly.
Q: How do I get started?
A: Portals have been created on the Internet that match entrepreneurs interested in raising crowdfunded money with non-accredited investors. The law requires you to run your crowdfunding campaign through an online portal or through a registered broker dealer. We can assist in guiding you to several resources. Additionally, getting legal counsel involved early in the crowdfunding process is important.
Q: What are the rules surrounding advertising my offering?
A: Reg CF prohibits any general solicitation of your offering. So now what? What can you do? Knowing exactly what is and isn’t permitted will enable you to conduct effective social media campaigns and maneuver the information on your offering into the right hands. For example: not only is advertising your offering restricted, but you must take caution in publishing even general information about your startup once you begin conducting a crowdfunding offering. The rate at which you promote your startup must remain the same both before and after your offering is made public. Thus a PR campaign roll out six months prior to your equity crowdfunding campaign may be advisable. MSK securities-law attorney Mark Hiraide speaks regularly on tips and suggestions to successfully conduct an equity crowdfunding campaign as safely and efficiently as possible. Speaking of which…
Q: How do I raise capital the right way?
A: As an entrepreneur, it’s easy to feel overwhelmed by your funding options. The most important thing to ask yourself is, “How do I incentivize the investment? What’s in it for my investors?”
Q: What’s it going to cost me?
A: Recognizing that Title III financings bring in less than $1 million our firm has structured its fees accordingly to be favorable to entrepreneurs.
Entrepreneurialism has been a bedrock principle of the U.S. economy since before the Country was founded. And the formation of capital and funding of businesses has been inextricably linked to that principle. Until recently, the laws that govern capital raising and the regulation of disclosures have been static and slow to change. With the signing of the bill in 2012, so began the journey of the JumpStart Our Business Startup Act (a.k.a. the JOBS Act) with hopes of modernizing and improving access to capital for thirsty entrepreneurs, while still safeguarding the American public through appropriate regulatory measures.
The JOBS Act journey was filled with innovative, inquisitive and invested thinking. Not surprisingly MSK, emblematic of its values, was involved from the beginning. Providing input on legislative efforts, hosting round-table discussions with capital market’s experts, sponsoring webinars to educate and advocate, and actively engaging with members of Congress, our corporate and securities lawyers had an important role in giving birth to the JOBS Act.
Title III, the specific section of the JOBS Act known as “crowdfunding”, significantly increases the opportunity for entrepreneurs to access capital and fund their dreams from a source previously unavailable to them. MSK is proud to have played such a pivotal role in changing the landscape for the betterment of our economy. As is the case in many areas of the law our firm practices, having a hand in this monumental legislation affords us an ability to better serve our clients with greater insight and understanding.
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