Risk, Reward: Howard Marks at Santa Monica crowdfunding platform StartEngine.

Risk, Reward: Howard Marks at Santa Monica crowdfunding platform StartEngine. Photo by Thomas Wasper

Until Title IV of the Jobs Act passed in June of last year, private companies could only sell stakes in their companies to accredited investors, those with a net worth of at least $1 million or who make at least $200,000 a year.

Title IV, however, allows for two tiers of offerings to unaccredited investors. Under Tier 1, companies can raise a maximum of $20 million worth of securities in a 12-month period, while Tier 2 allows offerings of up to $50 million over the course of a year.

The SEC approved Title III of the act in May, which allows companies to raise up to $1 million from unaccredited investors through a registered broker-dealer or internet funding portal, while capping individual investments for those making less than $100,000 a year at either $2,000 or 5 percent of their income, whichever is greater. Like Title IV, it also requires companies to submit financial documents to the SEC.

Local online crowdfunding platforms include FlashFunders and StartEngine, both of Santa Monica, as well as Century City’s Indie Crowd Funder, among others.

Crowd costs

Crowdfunding experts said these platforms have a number of benefits to companies seeking cash from unaccredited investors. First, they offer a sense of legitimacy through the vetting process that precedes a campaign’s launch on their site. Additionally, some platforms also provide marketing services to help get the word out. StartEngine, for example, produces a professional video for each campaign. In exchange for its efforts, the company takes a 5 percent cut of the money raised by Title III campaigns. For Title IV campaigns, it takes a fee of $50 per investor plus warrants to buy stock in the company.

“We still get paid, even if the deal doesn’t go through,” said Howard Marks, co-founder of StartEngine. “Companies that raise money with us are at risk if they’re not successful.”

SeedInvest, meanwhile, takes a performance-based cash and equity fee that is a percentage of the amount raised on the platform.

“We think this is the best alignment of interests between the platform, companies, and investors,” said Andrés Diana, managing partner of SeedInvest’s L.A. office.

Companies also face the burden of reporting reviewed or audited financials to the SEC, which can be costly. The level of accounting and legal scrutiny required depends on the type of campaign and how much money is being sought.

For example, Title III campaigns can necessitate annual legal costs of at least $10,000, according to San Francisco’s Bend Law Group, a small-business and startup law firm in San Francisco.

For reprint and licensing requests for this article, CLICK HERE.