With the recent passing of the JOBS Act’s Title III, small businesses are now eligible to solicit investment capital from crowdfunding platforms. The advent of websites such as Kickstarter and GoFundMe gave small businesses the opportunity to raise funds to invest in specific products, rewards, donations, or services, but this new regulation allows their investors to invest directly in the business.
Crowdfunding as a Mainstream Source of Capital
While this newly opened door offers small businesses a chance to increase their capital and expand their business, it also introduces crowdfunding as a potential mainstream source of capital for many businesses.
How Crowdfunding Works
Companies seeking capital can solicit anyone, including non-accredited investors, to invest money in their company. This allows businesses to receive direct funding from their clients, fans, or other people who they entice to their company. The money invested generally will receive some sort of equity or debt or other promise of investment return from the company. This is very different from Kickstarter or GoFundMe, which did not allow for investments, but rather only allowed for purchases of goods or services, donations, or rewards.
Proving it Works
New industries can use crowdfunding as a platform to gain funding from their peers in related industries. A successful crowdfunding campaign shows that investors have validated a company. This not only provides much needed capital for a business to expand, but may lead to investment by other investors, such as venture capital firms, who are eager to invest in a company that’s already seen widespread support by the crowd.
Title III Investment Restrictions
Despite the benefits that come with Title III, certain restrictions limit the amount of money that can be invested through a Title III crowdfunding campaign. Larger investors can only invest a maximum of $100,000 of capital over a period of twelve months. Smaller investors can only invest a greater of $2,000 or 5% of the lesser of their annual income or net worth. In addition, the company (and key associated persons) using this type of capital raise must not be “bad actors” and are subject to certain disclosure and ongoing reporting requirements.
Further, a company utilizing a Title III crowdfunding campaign has significant burdens. They can only raise a maximum of $1,000,000 every twelve months, and they must provide certain disclosures as well as ongoing reporting. If they are raising over $100,000, they must provide reviewed financials, and if they are raising more than $500,000 and have used Title III before, the financials must be audited. That’s a lot of work for not that much money, so Title III is not a great fit for all companies.
Crowdfunding is much more practical with a Title IV or a Title II capital raise.
Whether you are an investor wishing to self-verify, or an issuer needing to accredit investors, as is required by Regulation D, Rule 506(c), VerifyInvestor.com can help. Visit us today.