Title III is Finally Here: What You Need to Know About Equity Crowdfunding

Henry Truc  |

For investors interested in investing in early stage startups and entrepreneurs seeking a new avenue of fundraising, today marks a historic milestone. With the long-awaited Title III of the JOBS Act coming into effect, the private markets have been forever changed through this democratization of capital. Four years since the JOBS Act was signed into law, the most exciting provision has now finally come to fruition. So what is Title III and what can you (investor or entrepreneur) do with it?

Title III Equity Crowdfunding Basics

For entrepreneurs, the new rule allows them to raise up to $1 million per 12-month period by offering equity in their startup or small business to a large pool of average investors. Before Title III only institutional (think mutual funds, venture capital, hedge funds) and accredited investors (rich people) could do this. For investors, the new rule opens up private market investment opportunities like never before. However, investors are subject to certain limits that are dependent of their income. For those who have an annual income or net worth of under $100,000, they can invest up to a max of $2,000 or 5% of their annual income or net worth. Those that earn or have over $100,000 can invest up to 10% or a max of $100,000 per 12 months.

How Will This Be Done?

Generally speaking, the idea of Title III–as well as other JOBS Act provisions that have long been in effect like Reg A+ and Title III–is to leverage modern communication and online technology to reach a greater audience of potential investors. Similar to donation-based crowdfunding, early-stage companies and entrepreneurs can try to raise money online by digitally communicating their stories and trying attracting interest from everyday people. The only difference, in theory, is that instead of donations, they would be accepting investors with actual skin in the game for their business. The key to this structure will be equity crowdfunding portals being able to facilitate that connection between companies and investors.

What Are People Saying About Title III?

Depending on who you ask, there is a lot of excitement regarding the potential of Title III, primarily as a way to democratize capital (spreading the opportunity to create wealth) to your typical investor. More options should be great for businesses and investors alike, which in turn, should also be good for the economy. However, Title III is not without its detractors, mainly those that believe the $1 million limit for companies is too low for the rule to become truly effective. There are also concerns whether "mom-and-pop" investors should even be involved in the private markets given the increased risk and lack of liquidity traditionally involved in this segment of the market. But Title III was created to provide more options for investors and businesses, and should not be seen as a panacea.

Yes, there is more opportunity, but like anything else in the financial markets and business, there is risk. That is why understanding the details and the latest on-goings of equity crowdfunding, whether you're an investor or an entrepreneur, is essential to deciding whether utilizing the new Title III rule is right for you.

Equities.com has been covering the Equity Crowdfunding, Reg A+ and the JOBS Act rules as to how they affect investors and emerging growth companies extensively. Be sure to read all of our coverage and insights from our community of expert contributors in our Crowdfunding and Private Markets sections.

Tell us what you think of Title III in the comments below.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.



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