Though Title III of the Jumpstart Our Business Startups Act legalized equity crowdfunding, final regulations on this point remain unissued. A recent Celent report gets granular on Title III of the Act, where this liberating language is to be found, and gets granular as well as on the proposed regulations.
Title II of the JOBS Act has probably received more attention than Title III, though readers of AllAboutAlpha have heard from Jenny Kassan, one of the original petitioners whose idea led to Title III.
It was Title II that lifted the general solicitation ban for issuers offering private securities by way of rule 506(c).
A Query About MS Word
By the way, does anyone know an easy way of modifying MS Word so that I can type 506(c) without seeing the (c) instantly transform into the copyright sign?
I take your point, Microsoft. Some people often do make reference to copyright ©, and for them this is probably a feature, not a bug. Still, I hardly ever allude to copyrights © whereas I often need to refer to legislative or regulatory sections in which the lower cap letter “c” appears within parentheses. So for me, it is a bug that in order to do so I have to type (c/), then go back and remove the slash. That always works but, still, having to do so is a nuisance.
Let me crowdsource this problem to our readers: is there an easy once-and-forever solution that will turn off the quick transition from (c) to ©?
Titles II and III
Having gotten that off my chest, I return to the Celent report. Title II, as I was saying, lists a ban that was a given in the world of private offerings for a long time, a ban on solicitations. Thus, it opens the way for some crowdsourcing, at least with regard to accredited investors. The regulations under that mandate have been in effect since September 2013.
Title III, on the other hand, seems in some respects a more radical change from the preceding legal structure. It allows equity crowdfunding for all investor classes and types. It does not do so, though, for every offering. An issuer can use Title III only to raise up to $1 million in any rolling 12-month period. [A caveat to the caveat, the issuer can concurrently raise money through Reg D, which is not counted against this limit.]
There is also a maximum limit per investor. If an investor’s income and net worth are both below $100,000, that investor may not invest through a Title III issuance more than the higher of $2,000 or 5% of that investor’s income or net worth in a 12-month period. On the other hand, if either the net worth or income is above that threshold, the investor may ante up more than those amounts. There will still be a limit: the higher of $100,000 or 10% of investor income or net worth.
Moderate Degree of Disruption
One key, in the analysis that Isabella Fonseca has now done for Celent, is that issuers within this $1 million limit can draw upon any class of investor under Title III.
Another key point: The offering must be conducted online through a platform conducted by a particular intermediary.
So what’s the bottom line? Can we expect a major “disruption of the mass market segment”? Fonseca asks this question and answers it somewhat equivocally.
Anyone who hopes to create an online platform that can act as an intermediary for investors and startups under Title III will have to recognize that the regulations have not been finalized, and that they’re likely to turn out “both ambiguous and stringent, creating a heavy regulatory burden.”
Celent expects that existing online platforms – already in place to service accredited investors under Title II, will expand once the final rules have been issued , adding services for Title III investors. This report discusses the opportunities both for wealth manages and for technology providers.
Again, what’s the bottom line? Fonseca answers as follows, “Given the high regulatory burden and availability of other methods of raising capital, we are unlikely to see major disruption among venture capital businesses. Rather, opportunity will be found in previously underserved segments.”
The regulatory burden will create an opportunity for technology providers, who can support regulatory and compliance workflow for issuers.
The best bet for wealth managers is probably to partner with funding portals “and provide online social communities … regular investor verification support, or … mutual fund-like products of start-up offerings.”