If you're interested in starting a business, you've probably got a few items on your to-do list. For one thing, you need to complete a comprehensive business plan that lays out your proposal for starting and managing your venture for the next 1-5 years.
You may also want to hire a small business lawyer, a CPA, and a variety of other professional consultants to ensure you've got all your legal, financial, and other preparations well in hand. Finally, you're going to need some funding to get your business off the ground.
This could come from a variety of sources, such as your own savings, equity in your home, money from family members and friends, and of course, traditional bank loans. But, what if all that isn't enough, or you're unable to secure a loan?
Well, the good news is, thanks to the JOBS Act (Jumpstart Our Business Startups Act), you now have a number of fantastic options for obtaining funding from investors, including Rule 506(c) of Regulation D and now Regulation Crowdfunding under Title III.
Unlike a Kickstarter-style of crowdfunding, which involves you offering products in exchange for small contributions, under Title III you'll offer equity (essentially shares of stock) in your company for much more substantial funding. How does this work? Who is it for? Is it a good idea? Here are a few things you need to know before hanging your hopes on Regulation Crowdfunding under Title III.
What is Title III Crowdfunding?
Before you get too far ahead of yourself down the road of equity crowdfunding, you need to first truly understand what it is and what it entails. Think about finding a crowdfunding lawyer to walk you through the process and make sure you have all you need to succeed in your venture.
In the most basic sense, this type of crowdfunding is a simple exchange. Your investors provide you with funding needed to start your business and in exchange they receive equity in your company, usually in the form of shares which may or may not produce dividends or become salable should you launch an IPO.
Title III is a provision under the JOBS Act passed by the Obama administration in an effort to support the creation of new startup businesses and jobs. In 2015, the SEC adopted final rules for Title III and it went into effect May 16, 2016. So, Regulation Crowdfunding under Title III is now live!
Prior to Title III, startups could only raise capital through general solicitation and public crowdfunding from very wealthy investors (accredited investors) under Rule 506(c) of Regulation D. But now, under Title III, anyone can invest, not just rich people, so startups have access to capital from virtually every adult in the U.S.!
Although the SEC has allowed for equity crowdfunding for small businesses pursuant to Title III of the JOBS Act, there are a variety of requirements that must be met in order to ensure such operations are legal. First, a business needs to make sure it is eligible for the Title III exemption.
In addition, proper paperwork must be filed with the SEC, and there are rules regarding disclosures related to the business and the securities being offered. An experienced corporate securities lawyer can give you the information, advice, and services needed to ensure that you fulfill all of your business obligations.
Crowdfunding Platform Obligations
Title III also imposes requirements on the crowdfunding platforms and websites that facilitate equity crowdfunding arrangements (i.e. find investors for your startup). The crowdfunding services that facilitate transactions between startups and investors via funding portals must adhere to the regulatory framework of the law.
Because of the exemptions that make Title III so favorable, it should come as no surprise that there are also limitations both in regard to the amount of money a business can receive through equity crowdfunding and the amount of money investors can invest.
Over a 12-month period an eligible business startup may raise no more than an aggregate of $1 million through Title III crowdfunding.
Of course, any startup able to raise this amount of money through equity crowdfunding is unlikely to complain about the restrictions. The benefits to using this type of funding are enough to prompt any startup to at least consider the possibility of using crowdfunding solutions.