JOBS Act Title III and Crowdfunding: What We Know So Far

By John Lion,

Waiting on Title III of the JOBS Act? Join the rest of the nation including equity crowdfunding platforms like Onevest, where currently only accredited investors are allowed to invest. Accredited investors are only 1% of the US population.

The SEC seems quite okay with postponing finalization until October 2015. Better late than never: an October implementation would be over 600 days since Congress’s initial deadline.

Garnishing media attention since before 2012, the JOBS Act’s Title III is among the most important landmarks in the history of modern crowdsourcing. It significantly broadens investment opportunities and a startup’s potential to raise capital through only a few legislative provisions. So why the hold up? More importantly, what can we expect if the SEC decides to pass Title III?

The JOBS Act and Title II

Startups are great for U.S. tax collectors and consumers alike. Even 2012’s Congress agreed, passing the JOBS Act with bipartisan support through both the House and Senate. Otherwise called the Jumpstart Our Business Startups Act, the legislation modifies a series of laws that enable startups to seek funds using methods that have been illegal since FDR’s Securities Act of 1933.

The Securities Act does many things, but one quite significant for startups is the classification of who can invest, how much they can invest, and where they can invest. Specifically, the act works within a broad, pre-existing distinction of potential investors.

  • Accredited investors have at least $1,000,000 in net worth (excluding primary residence) or an income of at least $200,000, annually, in the past two years

  • Non-accredited investors have a net worth of less than $1,000,000 or earned less than $200,000 annually in the last two years

Paying reverence to the age-old understanding that those good at making money and keeping it typically make sounder investments, the Securities Act severely limits startup businesses’ ability to solicit funds in exchange for equity or debt. Only companies that fit within the Securities Act’s exemptions, as defined inRegulation D, can accept funds without oversight (typically only from accredited investors partnering with the exempted business). There is some wiggle room, however, as organizations can include up to 35 non-accredited investors if offering full disclosure.

The JOBS Act refines Regulation D by progressively allowing more circulation, advertising, and inclusion of all manner of investors. The legislation itself has its advocates but also its detractors, with old guard unions and consumer protection groups particularly concerned about transparency and legitimacy. Still, a large number of outside investors and economists support the bill, as do younger folk less reverent towards the New Deal.

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Divided into seven titles, the SEC is progressively introducing the JOBS Act section by section. Only Titles I, V, and VII went into action immediately after the bill’s passage. Title II was not instituted until September 2013, a little more than a year after the SEC’s deadline assigned by Congress.

Title II modifies Regulation D’s 506(c) exemption to allow startups to solicit accredited investors and accept funds from them prior to being in “a substantial and pre-existing relationship,” opening front doors that would otherwise require back entry. SEC official Keith Higgins announced that after six months of its implementation, $10 billion went into about 900 companies. Those numbers were actually a tad disappointing to Keith, but since then startups have continually managed to find accredited investors.

Title III: Potential Manifest

Title III, meanwhile, allows startups to solicit and include as many unaccredited investors as they wish. They still need to follow a few provisions to remain eligible:

  • Organizations may only solicit $1 million annually

  • Only registered broker-dealers and funding portals may intermediate purchases or investments

  • Investors can make a maximum investment of $2000 or 5% of their income if their net worth and annual income are both less than $100,000

  • Investors with over $100,000 in net worth or income may invest up to 10% of either

  • Businesses must offer total disclosure to all investors

When enacted, potential startup investors within the U.S. will increase from 3.5 million to 233.7 million. Look at the visual scale above. That entire blue square accounts for the mass of unaccredited investors.

 

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