Sheheryar Sardar and Benish Shah were recently on a panel regarding Equity Crowdfunding in the wake of the Jobs Act. As Title III of the Jobs Act is what directly affects most equity crowdfunding platforms and startups looking to use them, we thought it would be helpful to summarize some of the main points:
1. Deals will now allow investments from non-accredited investors. The term “non-accredited investor” is thrown around a lot, but most people don’t know what it means. Non-accredited investors are those that are below a certain threshold of income that prevents them from qualifying as accredited. In simple terms – it’s the SEC trying to protect people from losing all their money in a bad investment. To do that under Title III, there are camps on how much non-accredited investors are allowed to invest in a given year:
- For income below $100,000, invest a max of $2,000 or 5% of income or net worth
- For income over $100,000, invest a max of 10% of income or net worth
- Investments made in a Title III crowdfunding transaction can’t be resold for a period of one year
2. Restrictions on how much you can raise. Companies are restricted to raising $1 million in a 12-month period. For acceleration purposes, this limit may have larger consequences for companies.
3. High costs associated with raising under Title III. Higher compliance and reporting costs that in many instances require an audit. Let’s break this down in real world terms: your company is trying to raise $300,000. You will end up shelling out approximately $20K before you can get approved to raise, and then around $80K+ if you raise. For a startup looking to raise a seed round, almost half of it may end up going to fees.
4. Disclosures. Disclosures. Disclosures. Companies raising under Title III of the Jobs Act must disclose financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor. Disclose officers and directors information, and owners of 20 percent or more of the company. They must also disclose: use of proceeds, price to the public of the securities being offered, target offering amount, deadline to reach offering amount, and whether excess investments will be accepted.
Questions about equity crowdfunding? Email Sheheryar Sardar at sardar@sardarlawfirm.com.
Follow Sardar Law Firm on Twitter @CorpCounselNYC
Follow Social Media Legal Twitter @socialmedia_law
