It took four years for the Title III of the Jumpstart Our Business Startups Act (JOBS Act) to be officially enforced on May 16, 2016. Investment crowdfunding in the US is heavily regulated as compared to the UK, where regulators have been slightly more lenient which has resulted in Crowdfunding being widely viewed as a success in the UK.
The Congressional “Father” of Title III of the JOBS Act, Rep. Patrick McHenry, introduced the “Fix Crowdfunding Act” into the House of Representatives. Its provisions are focused on jumpstarting Title III, including increasing the annual offering limit from $1 million to $5 million, allowing special purpose vehicles (SPV’s), or syndicates, and allowing a company to “test the waters” for its proposed offering. Here is what it seeks to do:
- Expand the amount companies can raise
Under Title III, businesses can raise up to $1 million from unaccredited investors in any 12-month period. The bill would increase that cap to $5 million.
- Give individual investors more flexibility
Under the current rules; individual investors can invest the greater of $2,000, or up to 5% of their income if their annual income is less than $100,000, during a 12-month period. Investors with annual income or a net worth of more than $100,000 can invest up to 10% of their income, but not more than $100,000 during the same time period. The bill would change the investment cap, allowing investors who earn $100,000 or less and investors earning more than $100,000 to invest up to the greater of 5% and 10%, respectively, of their annual income or net worth.
- Gauging potential investor interest
The bill will provide opportunities to measure the interest from investors prior to fundraising – “test the waters”. This would allow companies to go out to the public and determine if there is interest in an offer before they go through the process.
- More investor protections
The bill wants to reduce fraud in deals by requiring funding portals to obtain background checks on company officers and directors. It also clarifies what the liability is for funding portals for any fraud or misleading statements made by the issuers. Currently, fundraising portals have potentially more liability for a company’s actions. It also gives equity fundraising portals a five-year grace period to make a good-faith effort to comply with all new requirements.
Meanwhile, The White House’s position is: “America’s entrepreneurs are our engines of economic growth, innovation, and job creation, and crowdfunding has the potential to become the 21st century equivalent of barn-raising. We can use it to help our neighbors and fellow citizens start a business, enrich our communities, and apply grassroots creativity and imagination to challenges big and small.”