50. The 3-year Wait is Over | SEC Vote on JOBS Act Title III (David S. Rose)

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David S. Rose is back on the program.  He is Managing Partner of Rose Tech Ventures, Founder & Chairman Emeritus of New York Angels, Associate Founder of Singularity University and, of course, Founder & CEO of Gust.  David joins us to cover recent news that the SEC has finally adopted rules on title 3 of the JOBS regarding crowdfunding.  We will address questions including:

  • Crowdfunding Jobs Act Title III SEC VoteToday’s topic is the JOBS Act Title III, which the SEC finally voted on on October 30. Can we start off w/ a quick recap on what title III of the JOBS Act includes?
  • Let’s start with the facts on the unaccredited investor-side… Can you highlight the specific rules by which an individual may invest in private equities?
  • Transitioning to the startup-side… If a founder decides to make a securities offering to the non-accredited, what rules, restrictions and processes will they have to follow?
  • Many are claiming that this goes into effect in 90 days. The official press release from the SEC states that “The new crowdfunding rules and forms will be effective 180 days after they are published in the Federal Register.” Can you talk about when we expect this to officially go into effect?
  • In your estimation… How will the ruling impact the startup investing/fundraising environment?
  • Who do you think will benefit most and least from this?
  • Are there potential unintended consequences that you are wary of?
  • Will Gust change/adapt its approach in light of this?
  • Out of the four SEC commissioners on the committee, there was one dissenting vote from commissioner Michael S. Piwowar. Piwowar position is as follows:
    • The complexity of the new fundraising tool will ultimately render it inefficient and useless. “The rules will spin a complex web of provisions and requirements for compliance. I fear that many traps for the unwary are hidden in the regulations, creating potential nightmares for small business owners that fail to place regulatory compliance at the top of their business plans,” Piwowar said. “Such burdens will spook many small businesses from pursuing crowdfunding as a viable path to raising capital.”
    • David, what’s your take on Piwowar’s statement?
  • Any final thoughts on what you’d like to see happen moving forward that could help yield more positive outcomes for everyone involved?
  • Prediction?  How many years until a company, crowfunded under Title III, files for an IPO?

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Key Takeaways:


1- Unaccredited Investor Rules

The SEC will restrict the amount that can be invested over a 12-month period. The rules are as follows…

If annual income or net worth is less than $100,000, than
the greater of:
$2,000 or
the lessor of 5 percent of net worth or 5 percent of annual income

So if one’s salary is $90k
and their net worth is $50kFirst compute the lessor of salary or net worth
5% * net worth of $50k = $2,500
5% * annual income of $90k – $4,500The lessor of these two is $2,500
then it’s the greater of that figure or $2,000
So, in this case, the unaccredited investor can invest $2,500

Now the second part of the provision relates to those that have an annual income or net worth that is equal to or greater than $100,000. In this case the rule stipulates that one can invest the lessor of 10 percent of annual income or net worth.Also, the total amount of securities purchased via crowdfunding during a 12-month period may not exceed $100,000.

So, in this case let’s assume that one has a salary of $190k and a net worth of $990k.

We need to compute the lessor of salary or net worth
10% * net worth of $990k = $99k
10% * annual income of $190k – $19k

In this case, the lessor is $19k, so the investor would be able to invest 19,000 over twelve months.


2- Startup Rules

-Fundraise Channel: Must issue equity through a broker dealer or one of these online portals setup and approved for title III crowdfunding.
-Disclosures: Have to File a Form C. As David mentioned, this is not nearly as onerous as a public filing, but serves as a mini offering memorandum. This covers what you’re going to use the money for, the amount of the raise, the price, description of business, names and history of directors and officers, any owners of 20% or more, company debt, related offerings, detailed list of risks, restrictions on transfer of stock, financials and a number of other business specifics. The startup executive will also need to file an annual report with the Commission and provide it to their investors. If they do a subsequent raise, they will also have to file a Form CU and povide it to the commission and investors.
-Amount: Startups will be limted to raising $1M in a 12-month period. And as David mentioned, regardless of the raise amount, the financial statements will have to be prepared under GAAP. If the raise amount is between $100k – $500k then they’ll also have to be reviewed by a public accountant. And if the raise amount is between $500k-$1M, they will need to be audited by a public accountant.
-Promotion: Remember that there are strict limitations on advertising and promoting a fundraise. So, don’t expect to see Tweets and mass emails promoting a startup fundraise campaign like you’d see for a kickstarter campaign.

The last thing I wanted to mention here is not a rule for startups but has to do w/ cost.  Directionally, David gave us some guidance on the cost of launching one of these offerings. He cited that the standard IPO costs around $1M
The Reg A, sort of mini-IPO costs around $100k
and now this new Title 3 securities offering, he is estimating will cost around $10k or more
3- Potential Outcomes


From David’s standpoint, he thinks that the biggest effect, from the vote, will be to legalize friends and family rounds. Currently, over 90% of startup funding is from very early-stage friends and family. These are not being done legally, in most cases, as the startups are not taking this capital from accredited investors and securing the right documentation. This has had negative effects in later-stage rounds and IPOs when investors on the cap table are discovered to be unaccredited, although I have not ever experienced this first-hand.And in terms of who benefits here, he believes that startups and founders that have businesses, not traditionally fundable by VC or Angel standards, will benefit most. While, the unaccredited investors that choose to make investments through Title III will benefit least. Certainly, after investing full-time for a couple years and publishing over 65 episodes and investor stories, it’s pretty clear that it’s easy to lose money in this asset class and those that want to make money have to be very educated and disciplined in their approach. While it’s nice to think that unaccrediteds will become sophisticated startup investors en mass, behaviors in public stock market investing demonstrate that this is very unlikely.


Tip of the Week:   Title III:  Issues, Opportunities and Gatekeepers