Title III Update – timeline, rules and unclear issues

The good news is that Title III is now the law of the land. However, everyone needs to take a deep breath as the rules don’t become effective until early May, 2016.

A few quick personal thoughts…

Credit Cards – I can’t believe they are going to allow the use of these. The first time some investor pulls his $ back (anytime within 6 months), thus deeming the offering to have not met the minimum and thus voiding it 6 months after completion, complications are going to be insane from a regulatory and tort perspective. And how does this affect issuer/portal/BD liability?

Accredited Investors – are capped at $100,000 per year, all deals combined! This will require some nifty software from platforms so issuers can always concurrently conduct a 506(c) alongside a 4(a)(6), moving the “excess” of an accred’s commitment over to the 506. Makes zero sense to me why the SEC is prohibiting the most sophisticated investors, the ones who would help protect non-accredited investors the best, from participating (in a meaningful way).

Portal Comp – can be a % of the offering, as well as interests in the businesses they are helping raise capital.

Liability 1 – I love this sentence in the rules: “While the intermediary plays an important gatekeeper function, the investor has responsibility for his or her actions as well.”

Liability 2 – “…we are not requiring that an intermediary ensure that an investor has actually reviewed the relevant issuer information.”

Investor Limits – portals can rely 100% on investor self-attestations. No add’l verification or confirmation is required. No requirement to participate in central databases, just for investments made on its platform.
* The bad news here is they switched the “greater of income or net-worth” test in the proposed rules to “lesser of” in the final rules. Ouch.

Audit Not Required – issuers can raise up to $1M per year and, if it’s their first time, then no audit is required (just “reviewed” financials). Huge win for small businesses; can you imagine what it’d cost to get an audit for, say, a 15 year old machine shop who needs $750,000 for new tools and has never really focused on detailed recordkeeping?

Debt or Equity – as expected, this is not just “equity crowdfunding“. Issuers can sell debt, not just equity. Much more practical for the overwhelming majority of small businesses, I believe (e.g. I would never want equity in a machine shop, but would gladly invest in their debt securities).

Regulatory – portals will have to be SEC registered, FINRA member firms, though subject to less regulatory burden than full broker-dealers. They will have to ensure the offerings have enough disclosure to comply with the ’33 Act, maintain records, and use both escrow and a registered transfer agent (FundAmerica provides those, of course).

Want more detailed information?
Summary – check out this summary handbook written by Mark Roderick
Details – check out the final rules by clicking here (page with links for rules for Titles II, III & IV)

What happens now?

• The executive team at CFIRA will be putting together a list of issues to discuss with the SEC (e.g. asking for a safe harbor re the credit card problems).
• People who want to operate portals can start applying to the SEC and FINRA on January 29th, 2016.
• Issuers can get ready to initiate offerings starting, most likely, the 2nd week of May 2016.

Exciting times to be in FinTech, and at long last we have hope and opportunity for both small-medium sized businesses and investors alike!

http://www.fundamerica.com/blog/

Mentions

• FINRA - Financial Industry Regulatory Authority
• UNITED STATES SECURITIES AND EXCHANGE COMMISSION
• Scott Purcell