After years of ongoing regulatory debate, this morning at 8:00 AM PST the SEC has finally approved Title III of the JOBS Act in a 3:1 vote. Today marks a monumental time for the crowdfunding industry as access to venture as an asset class has opened up for non-accredited investors.

While there are still many factors to marinate on within our company internally, we’ve outlined the newly enacted Title III regulations accompanied by our initial reactions:

  • Regulations require annual financial audits for companies raising $500,000+; portals have issuer liabilities and will be required to use an established criteria to “vet” deals
    • Performing financial audits is a very costly process, typically costing issuers upwards of tens of thousands of dollars. This requirement will potentially cause a disincentive to issuers looking to fundraise and may ultimately deter innovation and scalability in the equity crowdfunding space. Enforcing quality control responsibilities onto the platforms is a potential rabbit hole as defining “quality” is very difficult for early stage companies.
  • Small businesses now would be allowed to raise upwards of $1 million per year from the general public via online platforms
    • $1M is low and insufficient beyond ideation. Ideally, businesses would be allowed to raise at least an upwards of $5M. $1M constricts the number of companies able to fundraise from unaccredited investors therefore limiting the size and scope of what the industry can provide to the small business community. Companies looking to expand will likely need to seek alternate means of raising capital.
  • If both your net worth and annual income are less than $100,000, you’ll only be able to invest $2,000 (or 5% of annual income or net worth) in each 12-month period. If your net worth and income are above that threshold, you would be able to invest the greater of 10% of annual income or net worth (but not to exceed $100,000).
    • While it is important that restrictions are in place to protect the un-accredited investor community, $2,000 (5%) is much lower than our initial expectation. A more realistic cap would have been $5,000-$10,000.
  • Platforms are required to provide adequate investor information and conduct background checks on issuers, their executives, and their officers. They also must make issuer information available on their platforms for at least 21 days before securities can be sold, and enable conversations “among the crowd” about each offering. Platforms also could be held liable for issuer fraud against investors.
    • At first glance this will add incremental costs and may negatively impact a platforms ability to work with more companies, however it’s important to note that 21 days can be a long time in the “startup world.”
  • These portals will be allowed to take their own equity stakes in issuers that crowdfund on their platforms, but only under the same terms and as compensation for their services. Such arrangements must also be disclosed.
    • This is concurrent with many platforms current compensation models and provides a good incentive for intermediaries to get on board with this legislation.
  • Companies raising $100,000 or less will only need to provide financial statements certified by their own financial officers. Those raising between $100,000 and $500,000 will need to have their finances reviewed by an outside accounting firm. Those raising between $500,000 and $1 million would need their finances reviewed by an outside auditor but would not need to obtain audited financial statements (so long as this is the issuer’s first time selling equity via crowdfunding).
    • While useful for very small raises, this regulation will likely impede early stage startups’ participation. Startups should inherently be fast and nimble and this regulation imposes a potentially unrealistic barrier and cost. This regulation also unfairly penalizes serial entrepreneurs. Forcing serial entrepreneurs to obtain audited financial statements will undoubtedly impede their participation in Title III limiting investors access to potentially high growth investment opportunities.
  • Issuers will be required to provide prospective investors with a basic description of their business and the offering, and they will have the option of a question-and-answer format.
    • This is a very straightforward and necessary rule. It’s imperative that issuers are transparent about their business and offering terms as their potential pool of capital sources broaden.