Title III is great in theory as it allows companies to raise up to $1 million in a period of a year from non-accredited investors without having to comply with state “blue sky” registration requirements (see below); however the compliance requirements are complex.
1. Financials. GAAP financial statements for the past two years required to be:
a. Certified by CEO if raising up to $100k
b. Reviewed by CPA if raising more than $100k and up to $500k
c. Audited by CPA if raising more than $500k and up to $1 million. First time crowdfunding issuers will be able to provide reviewed, rather than audited financials.
2. Investor limits. Investments are limited by an investors net worth / annual income
a. The greater of $2,000 or 5% of the lessor of the investor’s annual income or net worth if either annual income or net worth is less than $100,000
b. 10% of the lessor of the investor’s annual income or net worth, not to exceed $100,000 in a year.
3. Required use of Funding Portal that is a member of FINRA (Financial Industry Regulatory Authority).
Still to be determined is the total cost of the offering. If the company only has a year of financials to be reviewed and it is a first time issuer with a basic cap table total legal and accounting fees could be as low as $7,500. The real question is how much the portals are going to charge. The SEC’s original estimates for legal, accounting, annual compliance and portal fees for a raise up to $100k were a low of $6,727 and high of $11,727, for a raise from $100k – $500k a low of $33,577 and high of $57,743 and from $500k to $1 million a low of $74,593 and high of $118,343. That is a pretty big cost of capital.
It seems as though any Company who is just interested in raising efficient capital will try and use other exemptions and Title III can be used by Companies who want to both raise capital and leverage a broad-base of investors to complete test marketing / advertising or leverage community involvement. If a Company wants to raise both efficient capital and secure a large amount of investors at the same time it will be able to do so by conducting parallel offerings such as a Rule 506 offering and a Title III (also known as Section 4(a)(6) offering at the same time. Certain restrictions apply to keep both offerings separate and compliant with the applicable rules.
If this post did not scare you off then you might be asking when Title III goes into effect. Currently Title III is in a 60 day public comment period and publishing (~30 days) if the Securities Exchange Commission (the “Commission”) determines to adopt the proposed rules, the rules would be effective 180 after they are first published in the Federal Register – so around July 27, 2016.
A note on Blue Sky Registration – When selling a security, the issuer must either register or find both a federal exemption and a state exemption for each state in which the issuer is selling securities. One way to pre-empt state “blue sky” registration is by using a federal exemption that is considered a “covered security.” Securities issued under Section 4(a)(6) Title III Crowdfunding qualify as a covered security.