With this vote, a big milestone was achieved and interested stakeholder, that have been waiting it for roughly 3 years can now cheer. Title III is also the last part of the JOBS Act, signed by President Obama back in 2012, to be voted on. Prior to this, the SEC voted Title I in 2012, which eased requirements on emerging growth companies, defined as companies with less than $1 billion in revenues. Then, in 2013, the US Financial Authority approved Title II, which allowed public advertising of private offerings to accredited investors. Earlier this year, instead, the SEC passed Title IV which enables companies to raise more money under a limited public offering, raising the cap on small fundings from $5 million to $50 million in a 12-month period, from both accredited and unaccredited investors if the company complies with certain filings and audits.
However, Title III has been probably the most challenging part for SEC, as it can expose the general public to risky investments. Therefore the financial authority has taken time to come up with rules that could allow companies to offer investments to US citizens, while protecting the latter from taking on too much risk. In particular, the recently approved rules include the following main points:
Investors. Individual investors cannot invest more than $100,000 in crowdfunding offerings, over a 12-month period. More precisely, the SEC distinguishes between those investors whose annual income or net worth is less than $100,000 and those whose annual income or net worth is instead equal or bigger than $100,000. In the former case, the investor can invest the greater of $2,000 or 5 percent of the lesser of its annual income or net worth. In the latter case, instead, it is possible to invest 10 percent of the lesser of their annual income or net worth, without, however, exceeding $100,000 in the 12-month period.
Companies. Private companies can raise via online investing maximum $1 million in a 12-month period. They are then subject to series of disclosure requirements, such as the price to the public of the securities or the method for determining the price, 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. Furthermore, to be eligible to issue securities via online investing, companies have to make available financial statements and, depending on the amount sought, also information from the company’s tax returns, reviewed by an independent public accountant. In addition, fundraisers will have to file an annual report with the SEC and send it to investors.
Funding Portals. Online investing portals are required to register with the SEC on new Form Funding Portal, and become a member of a national securities association (currently, FINRA). They also have to comply with various transparency requirements, for instance, providing educational material to investors on the process of online investing and its risks or making available on the website information fundraisers have to disclose 21 days prior to the start of the offer. Portals will also have to adopt reasonable anti-fraud measures and can neither engage in any financial advising activity nor have any financial interest in the fundraising company (except for the compensation fee).
The rules will enter into effect within 6 months. However, the Crowdfunding Regulations have been welcomed by many stakeholders but others have expressed some criticism. In particular, some believe that the rules are too restrictive, both for investors, which no matter how wealthy and sophisticated they are, they are allowed to invest maximum $100,000 per year; and for companies, for which complying with so many requirements can be too costly, especially compared with the maximum amount they can raise in this way (i.e. $1 million).
Nevertheless, the US online investing sector has just achieved a big milestone and only time will tell if these crowdfunding rules are really beneficial for companies in search of early stage capital.
SEC Adopts Rules to Permit Crowdfunding. www.sec.gov
Shieber, J. (2015).As SEC Votes On Title III Crowdfunding Regulations, Investment Platforms Are Divided On Impact. Techcrunch
Photo credit to: cgc76
About the author - Irene Tordera
Born and raised in Milan, Italy, Irene is an International Business graduate, with a strong interest for innovative ideas that can simplify our lives.
During her studies, she co-founded an online community for sportspeople and worked in marketing positions at Ogilvy & Mather Advertising and at the European Business Angel Network, in Brussels. She is a passionate blogger about crowdfunding and the startup ecosystem and she works also for the European Crowdfunding Network.