Title III of the Jumpstart Our Business Startups (JOBS) Act has significantly expanded investment opportunities by allowing non-accredited investors to participate in equity crowdfunding for private startups and small businesses. This democratization of investment enables a broader spectrum of individuals to support and potentially benefit from early-stage companies.

Overview of Title III of the JOBS Act

Enacted on April 5, 2012, and effective from May 16, 2016, Title III introduced Regulation Crowdfunding, creating an exemption from traditional securities registration for internet-based securities offerings. Initially, companies could raise up to $1 million over a 12-month period through SEC-registered platforms. In March 2021, the SEC increased this limit to $5 million, enhancing capital-raising capabilities for startups.

The Promise of Title III of the JOBS Act

Title III of the JOBS Act (Reg CF) has democratized investment opportunities, enabling a broader range of investors to participate in the growth of startups and small businesses. This shift has introduced a new asset class for investors, allowing them to diversify their portfolios beyond traditional stocks and bonds. For issuers (i.e. the companies and founders), it has provided access to more diverse and alternative sources of capital, reducing dependence on traditional funding networks such as angel investors, venture capitalists, and friends and family. By removing these traditional gatekeepers, a wider array of entrepreneurs can secure the funding necessary to bring their innovative ideas to market.

Investment crowdfunding empowers individuals to support ventures they believe in, fostering a more inclusive and dynamic startup ecosystem. This paradigm shift not only fuels economic growth but also allows investors to align their financial decisions with their personal values and interests.

Investor Participation and Limits

Title III opened investment opportunities to non-accredited investors, subject to certain annual limits to mitigate risk (updated as of 2022):

Non-Accredited Investors:

  • If annual income or net worth is less than $124,000:
    • Investment limit is the greater of:
      • $2,500, or
      • 5% of the greater of annual income or net worth.
  • If both annual income and net worth are $124,000 or more:
    • Investment limit is the lesser of:
      • 10% of annual income or net worth,
      • Up to a maximum of $124,000.

Accredited Investors: No investment limits under Reg CF.

Issuer Requirements

Companies seeking to raise capital via Reg CF must provide specific disclosures, including:

  • Business description and business plan.
  • Names of officers and directors.
  • Use of proceeds from the offering.
  • Target offering amount and deadline.
  • Financial condition discussion.

This information is filed with the SEC on Form C and made available to investors and intermediaries.

Financial Disclosure Requirements

The financial disclosure requirements for companies raising capital under Reg CF vary depending on the company’s incorporation date and the target [maximum] offering amount. These rules ensure transparency and investor protection:

For companies incorporated more than a year ago:

  • Raising less than $124,000:

    • Provide 2 years of GAAP financials (2022, 2023).
    • No CPA review required.

  • Raising $124,000 to $1.235 million:

    • Provide 2 years of GAAP financials (2022, 2023).
    • CPA Review Statement required.

  • Raising more than $1.235 million:

    • Provide 2 years of GAAP financials (2022, 2023).
    • Independent Auditor’s Report required.

For companies incorporated within the last 120 days:

  • Raising less than $124,000:

    • Provide a cover sheet, balance sheet, and footnotes.

  • Raising $124,000 to $1.235 million:

    • Provide a cover sheet, balance sheet, footnotes, and CPA Review Statement.

  • Raising more than $1.235 million:

    • Provide a cover sheet, balance sheet, footnotes, and Independent Auditor’s Report.

Special Case:

  • If the company has 2 years of operating history (e.g., LLC to C-Corp conversion), additional considerations may apply.

Note: These thresholds were updated for inflation as of October 2022. For the latest updates, always refer to the SEC website or the official investor bulletins.

Role of Intermediaries

All Reg CF offerings must occur through an online platform operated by a registered broker-dealer or funding portal, ensuring investor education and informed decision-making. These intermediaries provide educational materials, communication channels, and obtain investor acknowledgments regarding the risks of investment.

Conclusion

Title III of the JOBS Act has democratized access to investment in startups and small businesses, allowing non-accredited investors to participate in equity crowdfunding. While this opens new avenues for potential returns, investing in early-stage companies carries significant risks. Prospective investors should thoroughly understand these risks and perform due diligence before participating in crowdfunding offerings.