In my previous blog, I covered the requirements for a company to raise capital via equity-based crowdfunding under Title II and Title IV of the JOBS Act.
In this last blog of my four part series on crowdfunding, I will discuss what a company has to do to raise capital via equity-based crowdfunding under Title III of the JOBS Act.
As I mentioned previously in this series of blog, in my opinion Title III helps to bridge some of the gaps that exist in Title II and Title IV of the JOBS Act. Title III creates an avenue for companies to raise capital through the public at large and does so in such a way that is not overly burdensome on companies from a regulatory perspective.
Under Title III a company has the ability to raise up to $1,000,000 in any twelve month period and this money can be raised from both accredited and non-accredited investors which means that a company does not have to limit its potential investor pool as it would have to do under Title II. In addition, under Title III the steps that a company has to go through to participate are more streamlined and easier than the requirements of Title IV.
Let’s now specifically discuss those steps and what a company has to do to participate under Title III.
As with the other titles discussed, Title III requires that a company submit various disclosures regarding the company to the SEC. These disclosures are submitted to the SEC via a new SEC form called Form C.
The list of disclosures required under Form C can be broken into two categories. The first category of disclosures are general information disclosures which are comprised of information about the company as a whole and deal with many of the non-financial aspects of the business. Some examples of the types of general information disclosures that are required are: (i) ownership and capital structure; (ii) directors and officers; (iii) risk factors; (iv) type of business and business plan; and (v) plan for use of the proceeds related to the Title III offering. There are a whole host of other general information disclosures required but this list of examples hopefully shows in general what the SEC is looking for in this area.
The financial disclosures required to be made by a company under Title III are primarily composed of disclosures related to the company’s tax returns and financial statements. As far as the tax return disclosures go, a company must disclose its total income, taxable income, and total tax as reported on its prior year’s tax return.
On the financial statement disclosure front, depending on the level of capital that a company is seeking to raise under Title III, the requirements for the type of financial statements that need to be submitted to the SEC will differ. If a company is trying to raise $100,000 or less, then the financial statements to be submitted do not need to be audited or reviewed and only need to be certified by the principal executive officer of the company. If a company is trying to raise between $100,000 and $500,000, then the financial statements must have been reviewed by an independent CPA and the CPA must certify his or her review. If a company is trying to raise more than $500,000 and this is the company’s first Title III offering then similar to the previous level the company only has to submit reviewed financial statements. However, if this is not a company’s first Title III offering and the company is trying to raise more than $500,000, then the company is required to submit financial statements that have been audited and certified by an independent CPA.
There is a significant cost difference in hiring a CPA to perform a review vs. an audit of financial statements so it is very important for a company to carefully consider the level of funding they are seeking in their Title III offering. Often times the company’s legal and financial advisors can greatly assist in this regard.
The ongoing reporting requirements of a company under Title III are limited to the filing of an annual report with the SEC which will include submitting current year financial statements and a list of disclosures regarding the company’s business operations during the current year. Regardless of the level of capital raised in the Title III offering, the financial statements to be submitted as part of the annual report do not need to be reviewed or audited by an independent CPA thereby saving the company this cost on an annual basis. In addition, if the company has submitted three annual reports and has total assets of $10,000,000 or less, the annual reporting requirement will no longer apply for the company.
One of the best parts of the regulatory process under Title III is that a company can start selling securities immediately after the company has filed Form C with the SEC and the company does not need to wait for approval of their filing by the SEC. This is different from a Title IV Regulation A+ offering in which a company cannot start selling securities until the SEC approves the filing. This nuance under Title III is significant because it can significantly cut down the amount of time a company has to wait before being able to raise the capital it needs.
However it is important to note that under Title III a company can be sued by an investor for any material misstatements or omissions made in its filing with the SEC. The liability related to this is not limited to just the company but also includes the company’s directors and/or officers who could be held personally liable for any such material misstatements or omissions. Therefore, while a company can start selling right away after submitting its filing to the SEC, the company and its officers/directors must be very careful that no material misstatements or omissions are made in their filings. Working closely with your legal and financial advisors will greatly help to mitigate this liability risk.
One of the biggest restrictions under Title III is that a company may only conduct its Title III offering on a qualified portal. The qualified portal becomes the marketplace through which prospective investors may review and consider various Title III offerings. There are a whole host of requirements for a portal to be considered a qualified portal by the SEC but I will save those requirements for a future blog since this blog is focused on the company requirements under Title III. The main takeaway for a company as related to portals is to ensure you are listed on a portal that has been appropriately classified as a qualified portal by the SEC.
While all of this may seem overwhelming and you may be thinking how I am going to be handle all of this, please rest assured that we at Hunter Business Law are ready to help you. We can assist your company with first determining whether Title II, Title III, or Title IV of the JOBS Act makes the most sense for your company and then helping your company prepare all the necessary filings and disclosures needed for participating under these titles.
While equity-based crowdfunding is a whole new frontier right now, it is something that I predict will become the norm as we move into the future. I strongly suggest that you don’t miss out on this tremendous opportunity for raising the necessary capital your company needs because as I said at the outset of this crowdfunding blog series: A company’s ability to raise the necessary capital it needs is often the difference between the company failing or the company surviving and thriving.
There is lots of devil in the details within all parts of the JOBS Act and other securities laws. These blogs provide only an overview and should not be relied upon solely without consultation with a legal or financial professional.
This Blog was written by Hunter Business Law Attorney Ajay K. Singh. Profile