The popular television show Shark Tank and non-equity crowdfunding platforms such as Kickstarter have piqued the interest of entrepreneurs looking for investors and has founders dreaming of easy capital-raising through the sale of stock. Unfortunately, until recently there was no regulatory framework for private companies to raise money by selling stock to the general public.
This changed in May when the SEC rolled out the latest of its highly anticipated equity crowdfunding regulations under the JOBS Act. Title III allows anyone to invest in an early-stage company regardless of their net worth– and has resulted in tremendous growth in the pool of eligible investors. With this increased opportunity for funding, however, come regulatory restrictions. First, Title III only permits a company to raise up to $1 million. Second, the offering must be conducted through an intermediary, either an approved online portal or a registered broker-dealer. Third, before being listed on a portal or making any offers to prospective investors, a company is required to undertake certain filing and disclosure obligations. These include making filings with the SEC and compiling reviewed or audited financial statements. The company must also provide an offering document to every potential investor which contains certain required disclosure information and complies with securities laws.
Finally, once a company completes a Title III offering, it must continue to file an annual report with the SEC thereafter. These restrictions present several drawbacks for companies considering using Title III. The legal and accounting work necessary to complete the financial reports, SEC filings and disclosure document must be done prior to the actual offering going live. This means that the company incurs significant costs before knowing whether the offering will be successful. Compared to a Reg D private offering, which is restricted to high net worth individuals, Title III is an expensive and risky proposition. Reg D has minimal disclosure requirements and no limit on the amount of money that can be raised. Additionally, under Reg D, no costs are incurred until the source and amount of funding have been identified. There are also state law considerations a company should be aware of when engaging in capital raising efforts. For more information about crowdfunding, capital raising and securities offerings, please contact Lisa Bashinsky in the Nashville office of Hall Booth Smith. firstname.lastname@example.org