The JOBS Act Title III is A Step In The Right Direction, But Comes Up Short

At this point, CircleUp has decided not to actively pursue fundraises under Title III. We are excited about the promise of a more accessible private equity market, but believe that the Title’s regulations create too many burdens for entrepreneurs and adverse selection for investors.

What is Title III?

The JOBS (Jumpstart Our Business Startups) Act Title III lets unaccredited investors invest into private companies, making private raises inclusive of the investing public.

Those with an annual income or net worth of less than $100,000 will be allowed to invest up to the greater of $2,000 or 5 percent of the lesser of the investor’s annual income or net worth in a 12-month period. Those with an annual income and net worth of more than $100,000 can invest up to 10 percent of the lesser of the investor’s annual income or net worth, to a maximum of $100,000, in a 12-month period.

Under Title III, entrepreneurs can seek out investments from sources outside traditional means, from anyone considered an unaccredited investor. Specifically, entrepreneurs can raise up to $1 million in a 12-month period.

What it Means For Entrepreneurs

To pursue this kind of capital raising, entrepreneurs need to abide by specific regulations and requirements. This includes publicly sharing financial information, such as revenue, much like a public company is required to do. These regulations are in place to inform and protect unaccredited investors as they make investment decisions.

These requirements will be the responsibility of the small business, entailing the costs and dedicated time needed for certifying, reviewing, or auditing, as appropriate. We believe this will make Title III more expensive and time-consuming for issuers than traditional capital raising with institutional and accredited investors. Fundraising is already very challenging, so we anticipate many entrepreneurs will choose to avoid the more time-consuming, expensive route.

What it Means For Investors

Title III is an important step in the right direction for the investing public, as we believe a more accessible private market would be a very positive development.

However, we believe that Title III will be used less frequently because of the regulations in place for small businesses, or because it may be pursued only as a last resort by entrepreneurs. This dynamic will create adverse selection for unaccredited investors, leaving them with a pool of lower quality deals involving companies that could not obtain funding through the more efficient process. While these regulations are in place to protect unaccredited investors, we fear it will only disadvantage them in the long run.

What it Means For CircleUp

While CircleUp is currently not actively pursuing deals under Title III, we understand there are cases when Title III raises may be attractive, primarily for marketing purposes where businesses can seek funding from a wide audience. We will consider companies wishing to raise under Title III on a case by case basis, and if regulations for Title III change to be more beneficial for entrepreneurs and investors — specifically with the upcoming JOBS Act 2.0 — we may reassess our position.

Raising capital for private companies is an incredibly important issue. Today, our private markets are insular and inefficient. This is precisely why we created our model of marketplace investing — to provide a more open, transparent process for fundraising.

With 30 million privately-held companies in the world, making up ⅔ of our economy’s workforce, we are committed to making fundraising more efficient for entrepreneurs. There is much more work to be done in enabling a more open, transparent private market, but we are excited to help pave the way.