On October 23, 2013 the SEC proposed regulations to implement Title III Crowdfunding.
There are two extremely important things about the proposed regulations:
- That they were issued. After a 90 day public comment period, it seems likely that Title III Crowdfunding will finally come into effect in the first quarter of 2014.
- That they run to almost 600 pages. Given the complexity, there is some question whether, in the end, a company trying to raise money will find Title III Crowdfunding worthwhile.
Recall that the JOBS Act provides for two kinds of Crowdfunding:
- Title II Crowdfunding allows companies to raise an unlimited amount of money from an unlimited number of accredited investors using general soliciting and advertising. That kind of Crowdfunding came into effect on September 23, 2013 and is now in full swing.
- Title III Crowdfunding is a different animal. It allows companies to:
- Raise up to $1 million per year;
- On an SEC-registered internet portal;
- From a unlimited number of investors who do not have to be accredited;
- But with strict limits on the amount each investor can invest.
For a detailed outline of the Title III statute itself, click here.
Despite their length, the proposed regulations do not add much to the statute. There are just a few points worth noting for a company looking to raise money:
- The company can use only one portal at a time.
- The company must file information via EDGAR, the SEC’s electronic database.
- The $1 million-per-year limit applies only to money raised in Title III offerings. Thus, a company could raise $3 million in a traditional private placement (or a Title II offering) while still raising $1 million in a Title III offering.
- Investors can change their minds up to 48 hours before the investment deadline, in all circumstances, and must also be given the right to terminate in the event of a material change in the investment opportunity.
- The company must disclose not only its own prior offerings, but the prior offerings in which its directors and other principals were involved.
- The SEC has created a new Form C to report Title III offerings.
- The company may advertise, but only to direct potential investors to the portal’s website. The company may not use general solicitation and advertising, as it can in a Title II offering.
- “Bad actors” are excluded from Title III Crowdfunding, as they are from Title II Crowdfunding.
The proposed regulations are even more important for portals, or would-be portals. The portal is designated as the virtual policeman for ensuring compliance with the law. For example, the proposed regulations provide that the portal must have a reasonable basis for believing that company is complying with the law, and must deny access to the issuer under certain circumstances. In effect, the portal is required to act as an arm of the SEC itself.
Just as a company trying to raise money might decide that Title III is too onerous, an entrepreneur thinking about forming a Title III portal might decide that the fruit are a little too high and a little too green.