Title III funding is not like venture capital

Title III is coming, but you have time to prepare, you won't be able to really do anything until Q2 2016 unless you're operating a funding portal, in which case forms to get registered will be available January 29, 2016. To put Title III into context - it's a new funding source. It's in addition to pre-selling products on platforms like Kickstarter or IndieGogo, selling equity to accredited investors on platforms like DreamFunded, AngelList, or OurCrowd, and borrowing money as debt.

For many companies - crowdfunding won't change a thing. If you're planning to merge onto the venture capital freeway, taking the surface streets through Title III's neighborhood may feel like your avoiding the traffic but at the end of the day the surface streets will never be as fast as the average freeway traveler. That's not to say that Title III isn't going to create opportunities to invest in new businesses and get a great return... It is to say that there are speed limits in Title III's neighborhood and the types of businesses that do well on VC Freeway have benefited from not having these types of speed limits placed on them in the past.

It's difficult to say if raising $1M in a 12 month period as an upper limit will be a good or bad thing for founders. In many high growth businesses, this type of speed limit to capital raising can be problematic. If founders find they need more than $1M in a 12 month period and they don't have any accredited investors backing them, what option do they have to raise that capital? Considering it takes 3-6 months to raise capital from accredited investors, at what point would a founder need to decide if they're limited Title III raise was sufficient?

On the other hand, if you've developed a product, perhaps pre-sold the first run of your innovative phone case with a solar charger on the back through a site like IndieGogo, and now you want to take it to the next level. Today the only option to scale is to either keep pre-selling or raise capital. Tomorrow, you'd have a third option to sell a small equity stake to the most loyal customers from your 'crowdfunding' campaign so that you can build a company with a repeatable sales cycle that accredited investors will see and recognize as the type of company they want to invest in.

Founders...

  • ...can raise up to $1M every 12 months from non-accredited investors.
  • ...must comply with offering and ongoing annual disclosure guidelines.
  • ...must offer securities through a registered funding portal or broker dealer.
  • ...generally won't count Title III investors against their public reporting limit.
  • ...must disclose a description of the business, officers, directors, 20%+ owners, financial condition (see next item), certain related-party transactions, the selling price, and the purchase deadline.
  • ...don't need financial review under $100k, need an external review for $100k-$500k, and need an audit for $500k-$1M

Investors...

  • ...are capped at how much they may invest per 12month period in Title III offerings - the greater of $2k or 5% for earners under $100k and 10% w/$100k cap for earners between $100k and $200k.
  • ...may not transfer their securities for one year from the time of purchase.
  • ...can trust their crowdfunding portals to verify compliance of companies and investors, have all company material available, disclose compensation arrangement, and provide the conduit for communication/investment.
  • ...should read through Startup Wealth: How the Best Angel Investors Make Money in Startups to get an early edge in this new market.

 

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  1. Pingback: Mattermark Daily - Monday, November 2nd, 2015 | Mattermark

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