crowdfunding under title iii of the jobs acT: HOW IT CAN HELP SMALL BUSINESSES AND START-UPS

 As of this past May 2016, business are now able to fundraise from a broader pool of investors pursuant to Title III of the Jumpstart Our Business Startups (“JOBS”) Act, otherwise known as Regulation Crowdfunding or Reg CF, which legalizes retail investment crowdfunding. This new regulation aims to stimulate the growth of small businesses.  For the first time, these businesses are able to fundraise from ordinary people, not just the super rich.  

Essentially, this regulation creates an exception to the Securities Act of 1933.  Previously, only accredited investors who, at the minimum, earned $200,000 (if single) to $300,000 (if married) were allowed to invest their money in startups.  This new regulation allows the “average Joe’s” of the world to invest, with some limitations.  If the potential investor’s annual income or net worth is less than $100,000, then s/he can only invest the greater of $2,000 or 5% of his or her annual income or net worth, whichever is less.  If his or her income and net worth is $100,000 or more, the potential investor can invest 10% of his or her income or net worth, whichever is less, and subject to a maximum $100,000.  Notably, all of the aforementioned figures are applied on an annual basis.

Pursuant to Title III, fundraising businesses are capped at raising a maximum of $1 million over a rolling, 12-month period.  Since some entrepreneurs have successfully built their businesses using capital acquired through small business loans which, generally speaking, max out at $250,000, this amount of money - $1 million - may provide even further growth opportunities for small busineses.  

However, formalities with which a small business must comply under Title III may make compliance with Title III slightly more complicated than simply obtaining a small business loan.  For example, small businesses looking to fundraise under this regulation must provide detailed disclosure documents to the Securities and Exchange Commission (“SEC”) and investors; obtain funding through an online intermediary that is registered by the SEC and the Financial Industry Regulatory Authority (“FINRA”); disclose financial information about the company and, as necessary, provide financial statements for auditing purposes; comply with annual SEC reporting requirements, etc.

While fundraising under Title III is not for every company, there are certain types of businesses which may benefit from this new manner of acquiring capital:

• Consumer products companies with loyal fans who would invest in the company to ensure further supply of existing products and development of new products;
• Women and minority-owned businesses which are, unfortunately, statistically less likely to receive funding from venture capital firms or other investors;
• Small local brick and mortar businesses, specifically, “mom-and pop” coffee shops, nail salons, restaurants, etc. which are low-growth and lack other financing alternatives, but which nevertheless have a loyal customer base willing to invest in order to keep doors open; and
• Businesses that are not based in areas of the country where venture capitalists and investors are generally located, such as Silicon Valley, Austin, or New York.

Finally, the House of Representatives is expected to vote on the Fix Crowdfunding Act (HR 4855), a bill that was sponsored by Congressman Patrick McHenry, one of the original creators of the JOBS Act.  The new bill is expected to, among other things, allow businesses to gauge investor interest up front; raise the funding cap from $1 million to $5 million; minimize liability for funding portals so that funding portals will not share in issuer liability unless they knowingly make an untrue statement, omit material facts, or engage in fraudulent or deceitful conduct; etc.

Smith Shapourian & Mignano LLP is here to help your business navigate and comply with Title III and the anticipated Fix Crowdfunding Act in a cost-sensitive and effective manner.  Please contact our office to learn more.

This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.