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Crowdfunding Under Title III

We know that the JOBS Act has been officially confirmed by the government. We have written about the JOBS Act in the past, and Title III has provided various new rules regarding equity crowdfunding, specifically on who can donate, and where the participating entities can receive funds.  Yet, even with these developments, few issues have emerged with various blind spots in the law, prompting new efforts to patch them to make crowdfunding viable for startups.  So, what are the new rules? What are the blind spots? How are they being addressed by lawmakers?

What’s Title III?

As it stands, Title III allows entities to raise money for their projects, or business in general, through an equity format. This would differentiate itself from the more prominent crowdfunding platforms, like Kickstarter, which have projects that would not give an investor any stake in the company, instead selling copies of the product, akin to an advanced order. Instead, under Title III, unaccredited investors can invest over $2,000, or 5% of their annual income or net worth—whichever is higher—if they have an income under $100,000, or 10% of an individual’s net worth or income if they make $100,000 annually.  However, this is capped at $100,000 per investor, per year, with a larger cap of $1,000,000 in fundraising for the entity.  In addition, the money must be gathered through a fundraising portal, such as Crowdfunder, and those portals are not currently exempt from liability.  Unfortunately, while this law has been a positive step towards fundraising, however, it has fallen short on certain issues.  For example, there are issues with the fundraising caps, as well as, the responsibilities and liabilities of the portals.  In capping the investments, investors are limited in the aggregate to how many projects or entities they may wish to support, while an entity may need to undertake various crowdfunding efforts for larger projects costing over one million dollars.

What are the efforts to fix Title III?

In response to the errors and shortcomings, the House of Representatives began new legislation under H.R. 4855 (a/k/a “Fix Crowdfunding Act”) to patch the most-egregious issues.  For example, it plans to amend the cap, raising it from one to five million, and proposes to remove liability from the crowdfunding portal in most cases, unless it was contributing or aiding a fraudulent crowdfunding project. However, this language was struck from the bill, and passed on a vote of 57-2. Notably, it does pose a more definite description of a crowdfunding vehicle, with requirements such as issuing only one class of security, receiving no compensation in connection to purchases, and advisement by an investment advisor.

So, although the bill has not been passed by the Senate, and provisions may always be added, it may be changed to effectively raise the cap and keep liability from being forced upon crowdfunding portals.

At our law firm, we assist clients with legal issues related to business, technology, and crowdfunding.  You may contact us to set up an initial consultation.