Title II, III and IV Rules
The JOBS Act
The JOBS Act (Jumpstart Our Business Startups Act) was signed into law in an effort to loosen restrictions on capital raising for small business and startups. The JOBS Act allows small businesses to raise capital through public fundraising in a way that has not been allowed for decades. The ability to offer an investment publicly (under specific conditions described in the legislation) to accredited and non-accredited investors is a significant step in democratizing private investing. Your self-directed IRA can also take advantage of these opportunities!
Title II: Access to Capital for Job Creators - Reg D 506(c)
- Before the JOBS Act, 506b was the predecessor of Title II (Reg D 506(c)).
- Reg D was modified from limiting fundraising to pre-existing relationships to allowing solicitation openly.
- There are no general solicitation restrictions to Title II - companies can freely advertise.
- Issuer can raise up to $1 million currently. This will increase to $5 million in 2017.
- There is no cap on how much an individual accredited investor is allowed to invest. (If you are an accredited investor, then your IRA is accredited.)
- Non-accredited investors are allowed, but only up to 35 non-accredited investors max.
- There is no max on accredited investors, but the max on total investors is 2000.
Title II Considerations
- Title II allows accredited investors only, which must be verified through a third party. All non-accredited investors will lose exemption.
- Companies are allowed up to 2000 investors without going public.
- Companies can purchase real estate as security.
- Investors are not required to use a registered broker /dealer.
Title III: Crowdfunding (Reg CF)
- Title III allows non-accredited individuals to invest in private startups and small businesses via a crowdfunding platform.
- Before Title III, only accredited investors who earn more than $200k per year or have a net worth of over $1 million could participate in these types of investments. These opportunities were only offered privately to accredited investors.
- Now, investors who make over $100k per year can invest $2,000 (or 5% of their annual income; whichever is greater).
- Investors who make less than $100k per year can invest up to 10% of their annual income (SEC Guidelines).
- On the entrepreneurial side, startups can raise up to $1 million in a 12 month period.
- A registered platform does not need to be broker or dealer.
- Investors must register with FINRA
- Investment information must only be on a registered crowdfunding platform only.
- An investor must undergo education to understand risk. Disclosures must be provided by issuer, which must include:
- Fin statement or plan
- Bus plan
- Disclose the board of directors
- Undergo bad actor and securities check
- If the raise is over $100,000, an independent CPA must review and authenticate the financials
Title III Considerations
- There is a limit on the fundraising amount for startups. Many startups require more than $1 million for their “seed round” of investment.
- There are restrictions on how much an investor can invest, regardless of accreditation.
- Costs associated with fundraising for Title III could range between $50-100k.
- SEC regulations require businesses that want to create an equity crowdfunding campaign to comply with extensive regulations which are far stricter than the Regulation D offerings (Forbes).
Title IV: Small Company Capital Formation (Reg A)
- Accredited and non-accredited investors are allowed to participate under this title, they just need to provide a self-certification of income/net worth.
- There are no general solicitation restrictions with Title IV - investors can advertise freely.
- Offering circular requires SEC approval.
- Securities are unrestricted, but issuers can impose transfer restrictions.
- Issuer must use a registered broker/ dealer.
- There are two tiers to Title IV.
- Investors can raise up to 20 million in a twelve month rolling period
- Investments must follow state law- Blue Sky Law
- Investors must reside in the same state as the issuer
- An intermediary broker/dealer is required
- Non accredited investors can invest any amount
Tier Two (Mini IPO)
- Companies can raise up to 50 million over a twelve month period
- Investors can come from any state
- Tier two requires audited financials
- A crowd-funding platform not required
- Register- qualifying period with SEC and FINRA Non binding “test water” period
- Companies can advertise anywhere for investors
- Non-accredited investors can invest up to 10% of net worth or annual income