Key Concepts in Title III Crowdfunding
Title III Crowdfunding (Will not become effective until the SEC issues final regulations) will allow companies to raise up to $1 million per year from an unlimited number of investors. However, the amount that each investor may invest will be limited based on the investor's income and net worth:
- For those whose income or net worth is less than $100,000, the limit is the greater of $2,000 or 5% of income or net worth.
- For those earning more, the limit is 10% of annual income or net worth, with an upper limit of $100,000.
These limits refer to the total invested in all Title III Crowdfunding investments during any 12 month period.
A company seeking investors will be required to provide extensive information to potential investors, including:
- Its name, legal status, physical address and website address
- The names of its directors, officers and 20% stockholders
- A description of its business and anticipated business plan
- A description of its financial condition
- A description of the intended use of the proceeds of the offering
- The price of the securities or the method for determining the price
- A description of the ownership and capital structure of the issuer
Title III Crowdfunding will be conducted through Internet portals. Unlike Title II portals, the portals used for Title III Crowdfunding will themselves be highly regulated and have extensive obligations in their own right, including to:
- Register with the SEC
- Ensure that each investor:
- Reviews investor education information
- Confirms that he or she understands that he or she is risking the loss of the entire investment and can bear such a loss; and
- Answers questions demonstrating an understanding of the level of risk generally applicable to investments in startups and small issuers, the risk of illiquidity and any other matters that the SEC requires
- Take measures to reduce the risk of fraud, including background and securities enforcement regulatory checks on the officers, directors and 20% shareholders of each issuer whose securities it offers
- No later than 21 days before the first day on which securities are sold to any investor (or other period that the SEC establishes), make available to the SEC and to potential investors any information provided by the issuer per the SEC requirements
- Ensure that the issuer may only receive the offering proceeds when the aggregate capital raised from all investors equals or exceeds a targeted offering amount, and permit all investors to cancel their commitments to invest, as the SEC determines appropriate by rule
- Undertake any efforts the SEC requires to ensure that no investor purchases an amount of Crowdfunding securities during any 12-month period that, in the aggregate, from all issuers, exceeds the per-investor limit.
