Crowdfunding Attorney

Equity Crowdfunding Under the JOBS Act

Entrepreneurs often struggle to raise sufficient capital to launch and operate their businesses until they become cash-flow positive. Fundraising is made even more challenging by traditional funding options, which can be extremely complicated, time-consuming, and often prohibitively expensive with regulatory compliance governed by the Securities Act.

For example, conducting an initial public offering (IPO) requires registration with the Securities and Exchange Commission (SEC), a complex process that can cost hundreds of thousands of dollars. Private placement, while not requiring SEC registration, forces businesses to sell shares exclusively to accredited investors. These are investors that meet the following stringent income and net worth requirements:

  • Have earned at least $200,000 in each of the last two years

  • Have a net worth of over $1 million

Additionally, private placement offerings under Regulation D, Rule 506 of the Securities Act were not allowed to be publicly advertised, even further limiting the pool of possible investors.

The Jumpstart Our Business Startups (“JOBS”) Act of 2012 was passed in order to reduce these obstacles to fundraising and has opened up new ways for entrepreneurs to access capital. This includes crowdfunding (aka crowd investing), in which companies may raise funds from the general public, including non-accredited investors, through online funding portals. While there are many business advantages to the new capital-raising tools available under these rules, some limitations remain, along with legal requirements that you might need to consult with a lawyer to meet.

How to Take Advantage of the JOBS Act and Regulation A+

Title II, Title III, and Title IV  of the JOBS Act each make changes to previous provisions of the Securities Act and allow for new, innovative ways for small companies to raise the capital they need. Each Title enables different types of fundraising tools:

Title II - Investing

The changes implemented by Title II allow issuers today to market their offerings as long as they take reasonable steps to confirm that buyers are accredited. There is no limit to how much a company may raise annually using this type of standard fundraising through accredited investment.

Title III - Crowd Investing (Crowdfunding)

Title III was one of the most exciting provision of the JOBS Act for entrepreneurs as it legalized securities crowd investing. This is not to be confused with donation-based crowdfunding conducted through platforms like Indiegogo and Kickstarter, in which pooled financial contributions do not function as actual investments in a company. Crowd investing was made exempt from complicated SEC registration requirements, a process that can cost hundreds of thousands of dollars.

Here are some features of Title III you should be familiar with:

  • A company may raise up to $1 million within a 12 month period through securities crowd investing;

  • This form of fundraising is conducted through new online intermediaries, broker-dealers or “funding portal’ websites;

  • Each individual investor can only invest up to an absolute maximum of $100,000 per year, with different tiers based on each investor’s income or net worth;

  • These funds may be raised from the general public as an issuer is not required to sell exclusively to accredited investors; and

  • Before you begin, you will need to establish a total investment goal and a deadline for your campaign. If you are unable to meet your goal by that deadline, the intermediary will not provide the funds to your company and will cancel the commitments of any purchases in the offering.

Title IV - Regulation A+ Investing

Under the Old Regulations:

Regulation A under Section 3(b) of the Securities Act allowed issuers to raise up to $5 million in a 12-month period through the sale of securities to both accredited and unaccredited investors. To accept this type of investment, an issuer was required to complete a “mini-registration” with the SEC and comply with state requirements.

Regulation A+ Amendments:

The changes required under Title IV, known as Regulation A+, increased the threshold for this type of fundraising to $50 million through two Tiers in a 12-month period. However, the “mini” SEC registration is still a requirement for this type of fundraising. A lawyer can provide invaluable assistance in navigating the intricacies of this registration to prevent any problems during fundraising.

The two fundraising Tiers differ in their annual fundraising threshold, as well as state registration requirements. Companies that anticipate raising up to $20 million in a 12-month period  fall under Tier 1 and are required to file their offerings and comply with requirements in every state in which they offer shares. Meanwhile, companies that anticipate raising between $20 million and $50 million in a 12-month period fall under Tier 2 and are exempt from state-by-state registration.

Summary

 

Title II

Title III

Title IV

Annual Fundraising Threshold

No restriction

$1 million

Tier 1: $20 million

Tier 2: $50 million

General Solicitation Allowed

Yes

Yes

Yes

Yes

Online Crowdfunding Sites Allowed

Yes

Yes

Yes

Yes

Intermediary Required

Not Required

Internet Portal Required

Not Required

Not Required

SEC Registration

Only Form D

Only Form D

Yes

Yes

How a Lawyer Can Help You

  • An attorney can assist you in selecting an intermediary that meets your business’s needs, as well as ensure that you meet the criteria to be listed on their website.

  • Working with an attorney can also be helpful in making sure that you meet all financial disclosure requirements before your campaign begins.

  • A business lawyer can furthermore help structure any investments in your company to prevent you from giving up too much control to outside investors.

  • If you choose to proceed with Title IV fundraising, a lawyer can help ensure that you successfully complete your “mini-registration” with the SEC.

  • Companies who are crowdfunding are also required to file audited financial statements with the SEC annually. A lawyer that understands your business and your campaign can assist you in preparing the appropriate documentation, and make sure that your recordkeeping system is adequate.

  • Should you encounter a dispute, litigation, or action from a purchaser for rescission, a lawyer can also help protect your business.

A Priori business lawyer can assist you every step of the way throughout the fundraising process under the JOBS Act and Regulation A+.

 

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