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Title III of the JOBS Act: The Impact on Investors and Startups

JOBS Act Title IIIThe SEC voted on Title III of the JOBS Act on October 30, 2015, further opening equity crowdfunding to non-accredited investors and loosening restrictions on startups looking to raise funds of up to $1 million on FINRA-regulated equity crowdfunding platforms. We are excited about the new rule and plan on leveraging it to give our sophisticated investors access to more deal flow on our platform, alongside accredited investors, and to give promising young companies access to more financing options. Title III will take effect in approximately six months.

What Title III means for investors

Title III is a potential game-changer for non-accredited investors. Out of 160+ opportunities listed on the MicroVentures platform so far, only six have been open to non-accredited investors. We expect that our use of Title III will change that ratio dramatically by allowing us to give our non-accredited investors access to more investment opportunities.

However, the SEC is placing limits on the amount of money non-accredited investors can invest each year under Title III. Those limits are based on annual income or net worth, whichever is lower:

  • If the investor’s annual income or net worth is less than $100,000, no more than 5% of the annual income or net worth (whichever is lower) can be invested per year. There is a $2,000 floor, so anyone can invest a minimum of $2,000 per year in Title III investments, regardless of annual income or net worth.
  • If the investor’s annual income and net worth are each $100,000 or more, no more than 10% of the annual income or net worth (whichever is lower) can be invested per year. Total investments made under Title III cannot exceed $100,000 per year, regardless of annual income or net worth.

Keep in mind that MicroVentures currently makes investment opportunities available to non-accredited investors under Rule 506(b) of Regulation D, and we will continue to operate under that rule as appropriate after Title III goes into effect six months from now. Please note that any amounts you invest on the MicroVentures platform under the Reg D 506(b) rule will not count toward the investment limits imposed by Title III.

As a FINRA registered broker-dealer, MicroVentures will continue to vet companies seeking financing and will curate what we feel are only the most promising investment opportunities based on our research and due diligence. We also bring to the table an established equity crowdfunding platform that has successfully served both accredited and non-accredited investors.

What Title III means for startups

By making some investment opportunities available to non-accredited investors under Rule 506(b) of Regulation D, MicroVentures is able to allow up to 35 non-accredited investors to participate in those rounds, provided that we make additional required disclosures and conduct a financial audit of the company. Title III opens up financing options for startups by lowering the barrier to entry for equity crowdfunding. Especially when compared to fundraising under Title IV, Title III should entail much less administrative overhead.

The amount of money you want to raise impacts how much financial scrutiny you’ll be subjected to upfront under Title III:

  • If you’re raising less than $100,000, your financials must be certified by internal officers.
  • At between $100,000 and $500,000, an external financial review will be required.
  • If you’re a first-time issuer raising between $500,000 and $1 million, the external financial review must be conducted by an outside auditor. While not technically considered an audit, the scrutiny will be more intense than at lower funding levels. Future raises under Title III, however, will require an external audit.

It turns out that less than one percent of startups manage to get funding via traditional investment through a VC. No longer dependent on that long shot, todays’ young companies can pick and choose among fundraising strategies, including equity crowdfunding under Title III. That said, nothing will change about MicroVentures’ approach to companies seeking financing – we will continue to vet those companies and conduct the necessary due diligence using our established processes. Companies that do get listed on our platform have access to a membership base that includes tens of thousands of sophisticated investors.

What’s next?

As the Title III implementation date nears, we will keep our registered investors apprised of any relevant changes to our platform or processes. We expect that more deal flow will be made available to our sophisticated investors under Title III, alongside continued investment opportunities offered under Reg D 506(b).

Because we have prior experience listing opportunities for sophisticated investors, MicroVentures has an advantage over new funding portals that are just launching for the occasion of Title III, as well as over established crowdfunding platforms that are pivoting to take advantage of the new rule. We also have the benefit of extensive experience, having listed over 160 opportunities for both accredited and sophisticated investors. We will continue to leverage those advantages in ways that benefit both investors and startups.