Last week the SEC approved Title III, thereby giving non-accredited investors (those who have a net worth of less than $1 million, including spouse, and those who earned less than $200,000 annually or $300,000 with spouse in the last two years) the opportunity to invest in start-up companies in early 2016. Ideally, opening the gates to non-accredited investors will expand the potential investor base and will create a greater capital pool for issuers. Based on the nearly 700-page final rules and the surrounding commentary, we’ve compiled what we think are 10(+) important pieces from the new rules.

  1. The source: The crowdfunding exemption falls under the exemption under Section 4(a)(6) of the Securities Act of 1933
    1. Companies can invest a maximum aggregate of $1 million over a 12-month period
    2. Anyone can invest $2,000 or 5% of the lesser of his/her annual income or net worth into a company engaged in equity crowdfunding and for investors with an income and net worth equal to or more than $100,000, they can invest up to 10% of the lesser of their annual income or net worth
  2. Not welcome to the party: Non-U.S. companies, Exchange Act reporting companies, certain investment companies, companies disqualified under Regulation Crowdfunding, and companies that have failed to comply with annual reporting requirements, and companies that no specific business plan are ineligible
  3. Disclosures: Companies are required to disclose certain information, including the price of the securities/method for determining the price, company’s financial condition, financial statements, description of the business and planned use of the proceeds from the offering; information about the officers, directors and those who own 20% or more of the company, and certain related-party transactions
  4. Get close with numbers: Issuers with a target offering exceeding $100,000 but less than $500,000, must have a public accountant reviewed their financial statements
  5. Relief for newbies: Issuers with a target offering more than $500,000 must file audited financial statements BUT
    1. For issuers undertaking a first-time crowdfunding between $500,000 and $1 million are not required to produce upfront audited financial statements, just those reviewed by an accountant
  6. Maintaining compliance: Issuers have ongoing reporting requirements to file and post on their website an annual report along with financial statements certified by the principal executive officer
  7. The fine print: Investors have the right to rescind their investment 48 hours prior to an offering closing
  8. Middleman: The transactions must take place through a registered B-D or funding portal – this is called the intermediary
    1. The funding portal cannot hold money and must direct the transactions to a qualified third party (B-D, bank, or credit union)
  9. Risk-adverse responsibilities: Intermediaries have the authority to curate companies subjectively, are responsible to provide educational materials to investors in establishing an account for them (via electronic media messages), and maintain records about the investors transactions
    1. They are also permitted to take equity stakes under certain conditions (e.g. as a method to pay the intermediary for its services)
  10. The Countdown: The new rules and forms will take effective 180 days after they are published in the Federal Register and the form enabling funding portals to register with the Commission will take effect Jan. 29, 2016

Based on the new rules, some areas that we are excited to see develop include who will fill the intermediary role, that is, the funding portals, and most importantly, what companies will take advantage of the new rules.  Indiegogo, one of the most popular crowdfunding websites, explained in a blog post yesterday that the company’s idea originated as a marketplace for people to invest in companies but that the idea could not be fulfilled based on existing securities laws so they developed the donation-based money raising platform.  With the new rules, platforms like Indiegogo may enter the funding portal space.  Other more traditional broker-dealers or existing platforms for accredited investors, like Circleup, may also fill the role.  As for the start-ups, some companies may jump on the opportunity to raise new capital but others may be too concerned about the cost of compliance and risk of engaging investors in such a new territory where protections haven’t been completely ironed out. In any capacity, these new rules create an added layer of compliance for intermediaries and start-ups, which means that both groups will be turning to the legal world for guidance.  NextGen Crowdfunding has established a Title III webinar series for your viewing pleasure and we’re sure that more will arise in the coming weeks so stay posted.