IPOs aren’t going anywhere, but gone are the days when only the companies big enough, and with pockets deep enough, could raise capital from everyday investors. Good IPO investment opportunities are often hard to get in on if demand is strong.
Thanks to Title III of the Jumpstart Our Business Startups (JOBS) Act, private companies, including small businesses, are free to raise capital from retail investors – everyday Americans –with the help of online “intermediaries”, aka crowdfunding portals. It’s a whole new ballgame, giving small business a whole new audience and new potential source of much-needed capital to fuel growth. But this new freedom does come with boundaries.
The Million Dollar Limit
Title III regulations limit the amount of money that small business can raise to $1 million in any 12-month period. Many observers claim that’s not a lot if a crowdfunding campaign really takes off, and there are strings attached. Companies are required to submit disclosure details to the Securities and Exchange Commission as well as to potential investors, and there are ongoing reporting requirements thereafter.
Investor Protection
At least partially as a means to fulfill its investor protection role, the SEC requires investors who earn less than $100,000 per year to limit crowdfunding investments each year to $2,000, or 5 percent of their annual income, whichever is lower. Investors who enjoy net worth and an annual income of more than $100,000 are permitted to invest via crowdfunding each year up to 10 percent of either income or net worth – whichever is lowest, subject to an absolute maximum of $100,000 in any year.
Online Platforms
Small businesses taking advantage of this crowdfunding opportunity offered by Title III must use an SEC- or FINRA-registered online intermediary. These online platforms have obligations to potential investors as well. They must help educate potential and actual investors on the process, the risks, and act as a conduit between the issuer and investor.
Title III is a fairly onerous route for many small businesses, and it’s not going to be the right option for all. But it does open the door to some companies that would not otherwise have other sources to raise capital.
Title III too limiting? Take a look at Rule 506(c) which requires verification of accredited investor status but is a much more powerful tool to raise capital. VerifyInvestor.com provides a confidential, safe and secure method of self-verification and accreditation of potential investors.
