Equity Crowdfunding The Stage Is Now Set

Final Rules for Title III of the JOBS Act Are Set

This sets the stage for equity crowdfunding to continue its exponential growth over the next 3-5 years, on top of the existing market for accredited investors.With Title III passed on Friday, the next 3-5 years are going to see exponential growth in equity crowdfunding as non-accredited investors as well as accredited investors can invest in start-ups.

Title III equity crowdfunding will kick off and go live in 90 days, once a commenting period takes place and the new final rulings are published in the federal register.

Crowdfunding is expected to surpass VC in 2016 at $34B a year in total crowdfunding online, across all types of crowdfunding. By bringing in a new class of investors with Title III, we can expect further growth of the equity market as venture capital continues to move online.

The public has been waiting on Title III equity crowdfunding for three and a half years now, as the SEC continuously stalled in finalizing rules to allow non-accredited investors to come into the market and invest in startups under Title III.

As equity crowdfunding with non-accredited investors under Title III comes into effect, it will have massive implications for startups and investors alike, allowing everyday citizens to invest in startups. This will open up a tremendous amount of capital available to early stage companies.

equity crowdfundingTitle III Quick Summary of Contents

  • Equity crowdfunding expands to include non-accredited investor participation
  • The new rules will go into place after a 90 day commenting period and publishing
  • Startups and small businesses can raise up to $1M in a period of a year
  • Investors making <$100,000 per year can invest the greater of $2,000 or 5% of annual income
  • Investors making >$100,000 per year can invest up to 10% of their annual income
  • Offerings must be made via Broker-Dealer or Portal Intermediary
  • Significant disclosures are required for companies to help provide transparency

Read The Full SEC Guidelines Here

Implications for Equity Crowdfunding and Venture Capital

This marks the first time in over eighty years that everyday citizens will have access to investing in early stage companies. The barriers everyday citizens have experienced in participating in early stage private investing are slowly but surely going away.

Wealthy institutions, VCs, and Angels have had exclusive access to investing in high-growth startups, but with Title III we see the beginning of a more level playing field for information and access for everyday investors to early stage private investments.

This isn’t to say that VC and angel investing as we know it will die. Rather, a hybrid model will emerge where VC’s and Angels will lead and set the terms at which they want to invest, and then leverage equity crowdfunding platforms for distribution to a much larger set of investors.

Disclosure by Companies

Consistent with Title III of the JOBS Act, the proposed rules would require companies conducting a crowdfunding offering to file certain information with the SEC, provide it to investors and the relevant intermediary facilitating the crowdfunding offering, and make it available to potential investors.

In its offering documents, among the things the company would be required to disclose:

  • Information about officers and directors as well as owners of 20 percent or more of the company.
  • A description of the company’s business and the use of proceeds from the offering.
  • The price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount.
  • Certain related-party transactions.
  • A description of the financial condition of the company.
  • Financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor.
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