Crowdfunding and other forms of alternative finance are quickly redefining the capital market as we know it, by granting investors unprecedented access to previously exclusive markets. And with the passage of Title III, the crowdfunding’s reach has been expanded even further to include non-accredited investors. Here are some basics of the way the new crowdfunding works.
- Both accredited investors and non accredited investors may invest in Title III crowdfunding offerings – subject to caps based on their income and net worth.
- Individual investors, over a 12-month period, can invest in the aggregate across all crowdfunding offerings up to:
- If either their annual income or net worth is less than $100,000, than the greater of $2,000 or 5% of the lesser of their annual income or net worth.
- If both their annual income and net worth are equal to or more than $100,000, investors are allowed to invest up to 10% of the lesser of their annual income or net worth
- Income and net worth calculations are based on the same criteria as for determining income and net worth of accredited investors under Regulation D.
- During the 12-month period, the aggregate amount of securities sold to an individual investor through all crowdfunding offerings may not exceed $100,000.
- All transactions relying on the new rules would be required to take place through an SEC-registered intermediary, either a broker-dealer or a funding portal.
- Securities purchased in a crowdfunding transaction generally could not be resold for one year. Currently no secondary market yet available for crowdfunded securities.
SEC rules require that Title III platforms provide channels for investors to discuss investment opportunities listed on the platform. Without the platform itself vetting projects, this public vetting process is critical. There are numerous individuals who may not make the cutoff to be accredited investors but nevertheless wish to fund projects that catch their attention. Many accredited investors may also enjoy the benefit of diversifying with smaller buy-ins across many crowdfunding projects and enjoy finding the good deals, eliminating the bad deals, and sharing their opinions with other investors. In this manner, the wisdom of the crowd guides investments on a Title III platform for non-accredited investors.