In a previous blog post, I spoke about a government policy called Title III of the JOBS Act which would make equity crowdfunding available to startups and small companies. While the law has not yet come to pass, it will open the door for a number of aspiring entrepreneurs to partake in crowdfunding on the equity level, rather than simply doing regular crowdfunding. Equity crowdfunding is more beneficial because, when an investor gives money to a business, said investor will then have ownership of a small portion of the business. Equity crowdfunding has become very popular due to its mutually beneficial nature. It has been met with some incredible results and it is exciting to think that soon a law will allow small companies to invest as well. Here are a few things to keep in mind about Title III of the JOBS Act:

1) What information is required of a company that is gaining investors?

When a company gains investors, there is a certain amount of information that, by law, this company must reveal. It must tell investors the price of securities, the method by which they determined the price, the target offering amount, the deadline by which to reach that target, and whether or not the company will be willing to accept investments that exceed their target. This information must also be filed with the SEC. In addition, a company must provide a description of the product or business and have a discussion regarding the financial condition of the company. Lastly, companies must provide information about directors, officers, and owners of 20 percent or more of the company, as well as yearly financial statements.

2) What can we as the “crowd” invest?

One legal restriction placed on investors is that if either the net worth or the annual income of the investor is less than $100,000, investors are limited to the greater of $2,000, or 5 percent of the lesser of their annual income or net worth. In the case that both the net worth and the annual income of the investor are greater than or equal to $100,000, there is a different restriction. In this case, investors are limited to one tenth of the lesser of their net worth or annual income. 

3) Under equity crowdfunding, what liability will a company and its officer have?

Unlike Kickstarter, equity crowdfunding involves selling securities rather than simply the pre-sale of a product. There are both state and federal laws in place that restrict the sale of securities. If you do something against these laws, it is possible for your company, along with its directors and officers, to be sued. In some cases, people have even gone to jail for breaking these regulations. Essentially, telling the truth is absolutely mandatory because, if you lie, you can get in some serious legal trouble. 

These are just a few pointers to keep in mind when Title III of the Jobs Act comes into play. This law will play a large role in the growth of equity crowdfunding by opening the playing field to small businesses rather than just large companies.