The Jumpstart Our Business Startups Act (JOBS Act) went into effect in 2016 – opening up a new avenue startups looking to raise funds: equity crowdfunding. Under Title III of the JOBS Act, startups can use crowdfunding platforms to grant equity and raise funds from many smaller dispersed investors.
This grants access to investors that were previously not available to startups: crowdfunding platforms can be used to grant equity to, and raise funds from, investors that are non-accredited. In addition, equity crowdfunding under Title III is generally associated with less administrative overhead and regulations than traditional fundraising routes.
The Act was designed to open up easier and more accessible routes to finance, but also to protect investors and startups that want to use crowdfunding platforms. For this reason, there are some important regulatory provisions and limitations that have to be kept in mind if you are looking to raise funds under Title III.
Title III does allow equity crowdfunding amongst investors who are non-accredited, but that does not mean that there are no regulatory requirements for investors. For individual investors who have an annual income or net worth of less than $100,000, the investment limit is the greater of $2,000 or 5% of his or her annual income or net worth per year.
For individual investors with annual income or net worth of more than $100,000, the investment limit is 10% of his or her annual income or net worth. Regardless of an investor’s annual income or net worth, a startup can never raise more than $1000,000 from an individual investor in a year under Title III.
Title III requires that the intermediary that the startup uses to raise funds through equity crowdfunding must be a broker-dealer or intermediary that is registered with the Securities and Exchange Commission (SEC) as well as the Financial Industry Regulatory Authority (FINRA).
Crowdfunding for startups might be easier than getting funds from a VC, but it is not without its share of financial scrutiny and disclosure requirements.
If your startup is looking to raise less than $100,000, you are required to provide your financial statements as well as certain line items from your income tax returns to investors. Both of these must be certified by the principal executive officer of the startup.
If you are raising in between $100,000 and $500,000, you are required to have your financial statements reviewed by an independent public accountant. The review report must be made available to investors after being certified by the principal executive officer of the startup.
Startups looking to raise in between $500,000 and $1 million for the first time must provide investors with an independent public accountant’s review of all their financial statements. For subsequent rounds of fundraising in this range, investors must have access to a full audit.
Startups are not allowed to raise more than $1 million per year under Title III.
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