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.


New SEC Rules Are Being Touted As The Reg A+ Bombshell – $50M Equity Crowding Funding option

Todd Crosland Reg A CrowdfundingBig news out of the crowdfunding sector, as the SEC released rule changes to Title IV of the JOBS Act regarding businesses raising capital through Regulation A offerings. The new rules are being touted as the Reg A+ Bombshell. The $50M Equity Crowding Funding option. The Securities Act of 1933 requires businesses selling or offering securities to be registered with the SEC. Regulation A offerings are an exemption from certain requirements mandated by the Securities Act for offerings less than $5 million in a 12-month period. Through this method, smaller companies are able to minimize the bureaucratic process of filing their public offerings. Though the intentions were to minimize the bureaucratic process, there was still a mandate that forced companies raising capital through Reg A offerings to go though separate state review processes. So, if a company were to offer shares to investors in 20 different states, they would be subject to 21 reviews of distinct securities laws. This processes has deterred businesses from using Reg A offerings, as there are typically only about a dozen Reg A deals a year.

The big uproar in these rule changes has placed a spotlight on pre-emption: federal law superseding state law. Investors like the idea of going through a more deliberate SEC validation because there is an increased due diligence process for their investment. This protects investor’s interest, while the business community believes that the Internet has blurred state lines, and the process is antiquated. Thus, states have adopted a more coordinated review process to expedite the review process while still protecting the investor. The recent rulings have also split the due diligence process into two tiers. Tier I includes companies raising $20 – $50 million in a 12 month period and keeps pre-emption intact. Tier II, companies raising between $5 – $20 million in a 12 month period, will go through the new state coordinated review process.

Companies raising capital through Reg A will also be able to file with the SEC several weeks in advance, allowing for state regulators to review the documents well in advance.

One of the more anticipated rule changes to be used in Reg A offerings is the acceptance of companies raising capital via unaccredited investors. Unaccredited investors, also called mom-and-pop investors, are your everyday average individuals who have the financial capacity to invest companies; normally through online equity crowdfunding portals like Seed Equity Ventures. This will give growth companies another option for raising capital and increase the significance of equity crowdfunding websites. SEC Chair, Mary Jo White said, “These new rules provide an effective, workable path to raising capital that also provides strong investor protections.”

In effect, we should see more companies turning towards using Regulation A offerings to raise capital. Crowdfunding websites have been trying to expand initial investment opportunities from the thousands of venture capitalists to the billions of individuals with Internet access. The new regulation changes will not only streamline the bureaucracy of public offerings, but it will also give startup companies greater access towards the capital they need to grow.