Passed by Congress on March 27, 2012, and signed into law by President Obama on April 5, the JOBS Act makes it easier for startups and small businesses to raise capital from investors in both private offerings and IPOs. The federal government hopes this will result in faster economic growth and job creation. From accredited investors’ point of view, the JOBS Act will (a) boost the supply of private-company investment opportunities and alternative investment funds, like venture capital and hedge funds; (b) spur the availability of news, research, and data (and advice) about those investment opportunities; and (c) inevitably result in new scams and frauds, at least until the SEC and perhaps state regulators step in to promulgate new protections based on the JOBS Act’s rule-making provisions.
Deregulation The most important provision of the JOBS Act for accredited investors is that it lifts the ban on “general solicitation.” The Securities Act of 1933 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 investors. Now, thanks to the JOBS Act, such companies will soon 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 be flooded with PE and VC offers — including offers from funds as well as offers directly from companies selling equity.
* This is oversimplified a bit. Actually, the Securities Act requires that private companies either register their shares with the SEC or qualify for an exemption before offering shares to investors. Under the exemptions available prior to the enactment of the JOBS Act, general solicitation was prohibited.
The SEC issued final rules for general solicitation in July 2013, and they went into effect September 24. Quite possibly, people who never considered investing in PE and VC (and many who didn’t even realize they qualified to do so) will consider diversifying into these and other alternative asset classes. Innovation So along with a boost in the supply of deals, there will be an increased demand for high-quality deals. Result: a surging accredited investor market, with broader participation, greater innovation, and some new regulation. Other Provisions In addition to lifting the prohibition on general solicitation, the JOBS Act:
Most of the literature we found online about the JOBS Act comes from the corporate point of view, that is, how the Act affects emerging growth companies and their advisers and intermediaries. There is a dearth of good literature about how the Act will affect investors. Here are links to the two best summaries of the JOBS Act that we found, and how it will affect both emerging growth companies and the securities markets, from the corporate point of view:
AIMkts continues to research and highlight the topic of general solicitation and its implications for the accredited investor as part of an open and ongoing discussion for the purpose of information and education. You can read more here: May 28, 2013 – “Fraud using the JOBS Act is alive and well, but don’t let is scare you” Here are two articles about the general solicitation provision of the JOBS Act, written by New York securities lawyer Vanessa J. Schoenthaler:
Crowdfunding is a hot topic in alternative investments. How long it will stay that way remains to be seen. AIMkts will continue to follow its evolution and provide commentary, research, insight and information about regulations and trends affecting the crowdfunding vehicle. Here are some articles that will keep you ‘in the know’: April 30, 2013 – “Is NASDAQ getting into crowdfunding?” April 22, 2013 – “5 tips to help investors pick the right crowdfunding platform” April 17, 2013 – “More About Crowdfunding: Beyond the hype” April 15, 2013 – “Crowdfunding: How much of the hype is just hype?” Here is a cool infographic titled “The JOBS ACT & Crowdfunding,” at Forbes.com, September 21, 2012. And check out “8 Crowdfunding Sites to Watch,” published April 17, 2012, at CNN-Money.com.
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…