Since the JOBS Act was signed by President Obama in 2012, advocates have been urging Congress to increase the overall limit of $1 million (now $1.07 million, after adjustment for inflation) to $5 million. But for many issuers, the overall limit is less important than the per-investor limits.
The maximum an investor can invest in all Title III offerings during any period of 12 months is:
- If the investor’s annual income or net worth is less than $107,000, she may invest the greater of:
- $2,200; or
- 5% of the lesser of her annual income or net worth.
- If the investor’s annual income and net worth are both at least $107,000, she can invest the lesser of:
- $107,000; or
- 10% of the lesser of her annual income or net worth.
These limits apply to everyone, including “accredited investors.” They’re adjusted periodically by the SEC based on inflation.
These limits make Title III much less attractive than it should be relative to Title II. Consider the typical small issuer, NewCo, LLC, deciding whether to use Title II or Title III to raise $1 million or less. On one hand, the CEO of NewCo might like the idea of raising money from non-accredited investors, whether because investors might also become customers (e.g., a restaurant or brewery), because the CEO is ideologically committed to making a good investment available to ordinary people, or otherwise. Yet by using Title III, NewCo is hurting its chances of raising capital.
Suppose a typical accredited investor has income of $300,000 and a net worth of $750,000. During any 12-month period she can invest only $30,000 in all Title III offerings. How much of that will she invest in NewCo? Half? A third? A quarter? In a Title II offering she could invest any amount.
Because of the per-investor limits, a Title III issuer has to attract a lot more investors than a Title II issuer. That drives up investor-acquisition costs and makes Title III more expensive than Title II, even before you get to the disclosures.
The solution, of course, is that Congress should make the Title III rule the same as the Tier 2 rule in Regulation A: namely, that non-accredited investors are limited, but accredited investors are not. I can’t see any policy argument against that rule.
In the meantime, almost every Title III issuer should conduct a concurrent Title II offering, and every Title III funding portal should build concurrent offerings into its functionality.