Although Title III equity crowdfunding finally, after much delay, has finally gone into effect this week, Title III itself and the related regulations adopted by the Securities and Exchange Commission have long been criticized for putting too much restriction on the companies that are likely to use Title III. However, members of Congress are already putting forward new legislation intended to address some of the widely-perceived shortcomings of Title III.
Congressman Patrick McHenry, a sponsor of one of the original bills that ultimately became the JOBS Act, has introduced the Fix Crowdfunding Act (H.R. 4855), which seeks to increase the utility of Title III equity crowdfunding and address some of the grey areas in the law and regulations, particularly where it comes to the responsibilities of the funding portals that will host equity crowdfunding offerings. Among the Fix Crowdfunding Act’s provisions:
Funding Cap: Title III currently limits companies to raising no more than $1 million in any 12 month period using equity crowdfunding (the cap is not exclusive to other exemptions, so companies can also raise additional money via Regulation D or Regulation A exemptions). The Fix Crowdfunding Act would raise the cap to $5 million in any 12 month period.
Funding Portal Liability: Title III imposes liability for material misstatements or omissions on an “issuer” that cannot show that it could not have known of the misstatement or omission despite the exercise of reasonable care. However, in its regulations the SEC declined to clarify whether funding portals would be considered “issuers” for the purpose of misstatement or omission liability. As a result, funding portals are currently liable for any misstatements or omissions made by issuers that use their platform; it is specifically this grey area that has dissuaded crowdfunding sites such as Indiegogo and EarlyShares from setting up Title III platforms. The Fix Crowdfunding Act clarifies that a funding platform is not considered an issuer, and has no liability unless the platform itself makes a material misstatement or omission or knowingly engages in fraudulent conduct; under this scheme, in order to make a portal liable for an issuer’s misstatement or omission, a plaintiff would have to prove that the funding portal had knowledge the issuer’s misstatement or omission.
Section 12(g) Investor Cap: While the JOBS Act raised the cap on shareholders to 2000 (including 500 non-accredited shareholder) before a company triggers reporting obligations under the Exchange Act, and specifically directed the SEC to conditionally or unconditionally exempt shareholders who purchase in a Title III offering, the SEC chose to impose a condition on this exemption, providing that a company with more than $25 million in assets could not exempt crowdfunding shareholders from the 12(g) cap. The Fix Crowdfunding Act would overrule this condition.
Special Purpose Vehicles: Some platforms, such as AngelList and OurCroud, use special purpose vehicles as part of their fund-style investment process — individuals place their money in a SPV, which bundles investors’ money that is then invested in a startup. SPVs have the benefit of streamlining startups’ cap tables, as there is legally only one investor. The Fix Crowdfunding Act would remove the exclusion on SPVs.
Testing the Waters: Finally, the Fix Crowdfunding Act would enable companies to “test the waters” — that is, to obtain non-binding investor interest in a potential equity crowdfunding offering without having to undertake the effort and expense of making the required regulatory filings with the SEC prior to soliciting interest.
The Fix Crowdfunding Act has been referred to the House Committee on Financial Services; keep an eye on the legislation to see if it makes it out of committee to the full House of Representatives.