Title III of the JOBS Act: A New Funding Strategy for Startups to Consider
On May 16, Title III of the JOBS Act went into effect. This enables startups to raise capital from individual investors with income of less than $200,000 per year and with net worth of less than $1 million. Previously, individual investors were required to meet or exceed these income or net worth thresholds and qualify as “accredited investors” to be eligible to invest in startups.
While these new provisions open a new avenue for fundraising, as with any fundraising strategy, the pros and cons of raising funds under Title III need to be carefully weighed. The following are just a few of the important considerations relative to raising funds under Title III of the JOBS Act:
- Individuals with income of less than $100,000 per year can invest the greater of $2000 or 5% of their annual income; individuals with income of over $100,000 can invest 10% of their annual income, up to a maximum of $100,000.
Limitations on the amounts that individual investors are permitted to invest could result in investments of a size that makes it difficult to raise the targeted round size, which may be an inefficient approach to raising capital as a startup would likely exert significant effort to raise a relatively small amount of capital.
- Startups are limited to raising a maximum of $1 million in a 12-month period under the Title III exemption. This limitation may further add to the inefficiency of this fundraising approach if capital needs over the next 12-month horizon exceed this threshold.
- When a startup raises relatively small amounts of equity capital from a large number of individual investors, this creates a cap table (with a large number of investors) which could be both cumbersome to manage for the startup and less attractive to institutional venture capitalists who tend to prefer streamlined cap tables with fewer rather than a larger numbers of investors.
- Fundraising costs may be higher as startups are required to disclose financial statements, tax returns, use of proceeds, and other financial disclosures to prospective investors. This will require the startup to engage attorneys and accountants to prepare the required information and disclosures, which can take significant time and cost thousands (maybe tens of thousands) of dollars—all to raise what could be a fairly small amount of capital in proportion to these costs.
These considerations may make fully private offerings with the startup raising funds from accredited investors, institutional investors (such as Rev1 and Ohio TechAngel Funds), and strategic investors a more attractive and cost-effective fundraising strategy.
Read the final rules here.
The information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice. Rev1 Ventures strongly encourages entrepreneurs to seek appropriate legal counsel in connection with planning and undertaking fundraising activities.