Crowdfund Investing Limits
Title III equity crowdfunding starts May 16, 2016. Under Title III, companies can raise up to $1 million online per12-month period by selling debt or equity securities of the company. Best of all, anybody can invest: friends, family, customers, vendors, social media connections…anyone. There are however crowdfund investing limits.
If the investor’s annual income or net worth is less than $100,000, then the investor is limited to the greater of $2,000, or 5% of the lesser of the investor’s annual income or net worth. If the investor’s annual income and net worth are both equal to or greater than $100,000, then the investor is limited to 10% of the lesser of the investor’s annual income or net worth. No one, including Warren Buffett, can invest more than $100,000 per 12 months in Title III crowdfunding deals. These crowdfund investing limits apply to the aggregate of the current transaction and all of the investor’s Title III crowdfunding investments that occurred during the previous 12-months, regardless of whether the investor bought securities in just one company during that 12-month period or in more than one company.
Calculating the Crowdfund Investing Limits
How do you calculate annual income and net worth under the crowdfunding rules? Although it’s not quite clear, it appears that for a natural person, annual income and net worth are calculated for the most recent 12 months previous to when the investment is to be made. In other words, annual income, net worth and the investable amount would all seem to roll on a 12-month basis. Additionally, the annual income of a spouse can be included in calculating the investor’s annual income. However, the spouses together are then capped at the joint crowdfund investing limit.
Additionally, the fair market value of the investor’s primary residence is excluded as an asset in calculating net worth. Debt secured by such residence, though, is included in calculating the liabilities portion of net worth to the extent it exceeds the fair market value of the residence. Likewise, the net worth of a spouse can be included in calculating the investor’s net worth, but then the spouses together are capped at the joint crowdfund investing limit.
Corporations, LLCs, partnerships, trusts and other entities can also invest under Title III crowdfunding. The crowdfunding rules don’t distinguish between natural persons and these other entities. Presumably these other entities must have gross revenue and capital assets are synonymous with annual income and net worth.
Who has to determine whether the investor is within these crowdfund investing limits? That’s the job of the funding portal hosting the deal. Although it can, the funding portal is not obligated to collect or review any financial information about the investor. It can simply rely on the word of the investor. The company selling its securities on the funding portal can rely on the reasonable belief of the funding portal that the investor will remain within the crowdfund investing limits when the investor purchases the company’s securities. However, the company cannot rely on the reasonable belief of the funding portal if the company executives know that the investor will exceed the investor’s limit by purchasing the company’s securities on the portal.
Michael Sewell, JD, MBA has practiced law in Missouri since 2005, and he is the owner of St. Louis based Sewell Law, LC, which provides legal services in the areas of equity crowdfunding, business formation and litigation. The information provided in this article is intended for informational purposes only, it is not intended as legal advice, and it should not be construed as such.
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Published on April 26, 2016. © 2016 All rights reserved worldwide.
