The Launch of Title III

Todd Crosland Ernst & Young Entrepreneur of the Year

2009 Ernst & Young Entrepreneur of the Year

The middle of May marked the implementation of Title III of the JOBS Act, which radically altered the world of startup funding. The basic premise of this implementation is the allowance of any investors, even unaccredited ones, to be able to invest in startup companies. This opens companies in their early stages to the possibility of raising a substantial amount more than they have in the past. Title III was formed in part as a response to the growing popularity of social networking over the past decade. Since startup companies operate on the internet more often than not, it makes sense to allow them to offer equity in a more social manner.

The SEC was reluctant to pass Title III for a long period of time. They were concerned that it would raise levels of fraud in investing, as well as raise the risk of abuse. Only after a long period of negotiation and rule-making was Title III allowed to become a reality. Of course, there are quite a few regulations. Internet portals, intermediaries, and maximum amounts raised will all try to make this new way of fundraising as safe for investors as possible.

One such regulation has to do with the amount investors can give. Title III takes into account every individual investor’s net worth or income to put a cap on how much he or she can invest. For example, if an investor has a net worth less than $1,000, he or she can only invest 5% of the lesser of their worth. The issuers also have their own limitations. The regulations make it so that, over one year, they can raise up to one million dollars from an online platform.

Additionally, any company planning to use Title III to raise funds has to follow a strict reporting system. The SEC has an electronic filing system with various forms issuers have to fill out before beginning to request offers. These forms will ask the issuer to state a wealth of information, such as their business plan and the risks of investing in their business. Issuers also must share all financial information with potential investors. The SEC wants there to be full disclosure on all sides, so investors know what they are getting into.

Despite the several rules and regulations involved in Title III, early stage companies are very excited about its May 16th implementation. The ability to open up offerings to the public will help these companies sell more securities. Better yet, there will be open communication between the companies and their investors. Companies and investors alike will have full access to information about one another. They will know all the information they need to know before striking an agreement.

The startup world has waited a long time for Title III, and I am excited to see where this provision will lead.