Signed into law by President Obama on April 5, 2012, the Jumpstart Our Business Startups Act (or JOBS Act) made it somewhat easier, and often less costly, for many startups and small businesses to raise capital from investors in private securities offerings. The act also helps growth-stage businesses raise capital in “mini-IPOs” with a scaled-down registration process.
The stated goal of the act was to boost economic recovery and help create new jobs. It does that by enhancing the flow of capital. While it helps growing companies reach out to more investors, it also helps angel investors find more growing companies in which to invest.
Indeed, from the point of view of an investor, the JOBS Act has (a) modestly increased the supply of private-company investment opportunities; and (b) resulted in a surge in the number of both accredited and non-accredited investors who participate in private securities offerings (including both equity and debt securities).
The JOBS Act comprises six provisions to help startups and growing businesses raise capital in the U.S. financial markets:
Crowdfunding can be done through two kinds of online intermediaries:
Under Title III, issuers may publicize their offerings only on the funding platform or portal where the offerings are listed; they may not generally solicit. We’ll talk more about Title III below.
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The most important provision of the JOBS Act for accredited investors is Title II, which lifts the ban on general solicitation. The Securities Act of 1933 (as clarified by subsequent SEC regulations and court rulings) required that when a private company, or a person or entity acting on behalf of the company, offered or sold equity in its business to investors, it could solicit only those people with whom they had preexisting, established relationships, and whom they knew to be accredited or sophisticated investors.
Now, thanks to Title II of the JOBS Act, such companies have the option to solicit the public generally, although they still must restrict the sale of equity to accredited investors. That means investors in general, even those who have no relationship with anyone in the private capital markets, may receive Regulation D Rule 506(b) offerings.
Now, thanks to Title II of the JOBS Act, such companies have the option to solicit the public generally, although they still must restrict the sale of equity to accredited investors.
The SEC issued final rules for general solicitation in 2013. Thousands of people who never considered diversifying into alternative asset classes, and many who didn’t even realize they could, have done so since 2013.
Title III of the JOBS Act created an exemption to the registration requirements of the Securities Act of 1933 to allow startups and growing businesses to sell equity to all investors, not just accredited ones, through online broker-dealer platforms and crowdfunding portals.
This “crowdfunding exemption” became known as Section 4(a)(6) of the Securities Act.
In 2014, the Securities and Exchange Commission, alongside the Financial Industry Regulatory Authority, issued rules for the operation of securities crowdfunding portals, swinging the door to online angel investing wide open.
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The SEC and FINRA will continue to regulate equity crowdfunding, adjusting the rules and attempting to police the system against any fraud.
The new Section 4(a)(6) of the Securities Act limits the amount of capital that a company can raise via equity crowdfunding to $1 million per year. It also limits the amount of money that non-accredited investors can invest based on their net worth or income to make sure nobody goes broke via crowdfunding. It does not, however, limit the number of investors to whom a company can sell shares via a funding portal.
The new Section 4(a)(6) of the Securities Act limits the amount of capital that a company can raise via equity crowdfunding to $1 million per year.
Whereas traditional angel deals typically required investors to put up tens or hundreds of thousands of dollars apiece just to walk in the door, equity crowdfunding investors can buy shares for less than $1,000 (in some cases less than $100).
So, companies that issue shares on crowdfunding portals or through broker-dealers, based on Section 4(a)(6), can expect to receive many smaller investments from a much larger number of investors. This essentially turns the traditional angel deal on its head: from a small group of “large” dollar amount investors to a big group—a crowd—of “small” dollar amount investors. For purposes of the 2,000 shareholder threshold, shareholders who received securities pursuant to an employee stock ownership plan (ESOP) or other employee compensation plan and crowdfunding investors will not be counted as shareholders of record.  Some members of Congress have already proposed increasing the capital-raise limit to as much as $5 million; but we are not optimistic about this happening soon.
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David M. Freedman has worked as a financial and legal journalist since 1978. He has served on the editorial staffs of business, trade and professional journals, most recently as senior editor of The Value Examiner (National Association of Certified Valuators and Analysts). He is coauthor of Equity Crowdfunding for Investors, published in June 2015 by…
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