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The JOBS Act: Sliding Scale Income Rules Under Title III Crowdfunding

William Carleton, Contributing Editor, VCExperts



Interesting Reuters article by Dave Michaels this week, suggesting that, when it comes to figuring out a particular investor's annual limit under Title III crowdfunding, the amount of an investor's income may be a matter of self-policing, not subject to anything like the 506(c) verification rules.

There are many, many flaws in Title III. Although the House passed a more implementable bill, when the final JOBS Act was said and signed and done, the Senate had effectively gutted it, almost cynically substituting for McHenry's popular bill a grab bag of every possible impediment. Maybe that was a good thing, maybe that was not a good thing. Depends on what you think about non-accredited people investing in startups.

Having a sliding scale of what people could invest, tied to their income, was always a stupid idea. The meaningful investor protection was in the concept of an annual cap. "An investor may invest no more than X dollars per year."

Of course, accredited investors may under a 506 deal invest how much they desire, there is no cap. Accredited investors can fend for themselves. But nonaccrediteds may not participate in 506(c) deals.

The dividing line – are you accredited, or are you just pretending to be accredited – is critical in determining whether or not you can participate in 506 deals. So verification of income (or net worth) for purposes of 506(c) crowdfunding actually makes sense.

If the Reuter's article is right, it suggests the SEC may be trying to make workable rules under Title III. (Though I'm not sure Title III is really workable.) But I'm sure the Commission will not be proposing to give up on the idea of an annual cap.

Implementing and verifying that the annual cap (across all Title III deals) is not exceeded for each individual, that is going to be a tough task in and of itself. The better project would be to throw out what Title III wanted and go with my Individual Crowdfunding Account idea.

Photo: Dominic Alves / Flickr.


William Carleton

Bill is a member of McNaul Ebel Nawrot & Helgren PLLC, a Seattle law firm. He blogs every day at http://wac6.com.