The JOBS Act bill has seven separate parts, called titles. The SEC was tasked with taking the general law and create all the very specific rules and processes to enable it. One by one, very slowly, each of these titles has been enacted by the SEC.
|JOBS Act Title 1: “Reopening American Capital Markets to Emerging Growth Companies”|
|Title I provides streamlined reduced disclosure rules for emerging growth companies, defined as US companies with annual gross revenue below one billion dollars per year. Also allows emerging growth companies to “test the waters” by talking to potential institutional investors to gauge interest before registering with the SEC. More Info.|
|Status: Enacted April 5, 2012|
|JOBS Act Title 2: “Access to Capital for Job Creators”|
|Allows private companies filing under 506(c) to raise an unlimited amount of money from accredited investors online. Allows public and online advertising of investment opportunities, which is called “General Solicitation”. Relatively streamlined registration process, filing of Form D with the SEC within 14 days of receiving its first funding. Requires the company raising funds to perform additional checks to verify accredited investor status.|
|Status: Enacted September 23, 2013|
|Registration Exemption: Regulation D rule 506(c)|
|JOBS Act Title 3: “Crowdfunding”|
|Will allow for investment crowdfunding opportunities to be made available online to unaccredited investors via crowdfunding portals registered with the SEC.
Businesses may raise up to $1 million annually via registered crowdfunding portals. Businesses must offer total disclosure to all investors.
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
|Status: Implemented May 16th 2016|
|JOBS Act Title 4: “Small Company Capital Formation”|
|Sometimes referred to as a “Mini I.P.O.” Title 4 updated the existing underutilized Regulation A framework for raising money. Now dubbed Regulation “A+”, it allows issuers to raise up to $50million from accredited and non-accredited investors (unaccredited investors are limited to investing 10% of their self-reported income or net worth), advertise online, avoid individual state’s financial regulations, file confidentially, and to “test the waters” to gauge potential investor interest before filing with the SEC. Raising money with Regulation A+ does still involve quite a bit of work and expense for the issuer, approx $50k-$100k, and ongoing bi-annual audited financial reporting.|
|Status: Enacted June 19th, 2015|
|Registration Exemption: Regulation A+|
|JOBS Act Title 5: “Private Company Flexibility and Growth”|
|Raises the threshold on the number of shareholders a company can have before it is required to register as a public company under Securities Exchange Act of 1934. Previously a company could remain private only as long as it has 500 or fewer shareholders. Title 5 increaseses the limit to 2,000 shareholders of which up to 500 shareholders can be unaccredited.|
|Status: Effective April 5, 2012 (Exact SEC rules still pending)|
|JOBS Act Title 6: “Capital Expansion”|
|Similar to Title 5, Title 6 raises the number of shareholders a bank or bank holding company can have from 500 to 2000. Also allows securities to be de-registered when shareholders fall below threshold limits. More Info.|
|Status: Effective April 5, 2012 (Exact SEC rules still pending)|
|JOBS Act Title 7: “Outreach on Changes to the Law”|
|Tells the SEC to conduct outreach regarding the new legislation to small businesses, businesses owned by women, veterans, and minorities.|
|Status: Effective April 5, 2012|
In the SEC’s view, if you’re a company trying to raise investment money from the public, you should normally be default be going through the entire IPO process, submitted audited financial statements, and following all the rules set forth by the Securities Act of 1933, Sarbanes-Oxley, Dodd Frank acts, which exist to protect investors from losing money and prevent systemic risk in the economy.
A full IPO costs the company raising money on average $2.6 million dollars in registration, legal and financial service fees, in order to raise on average $100 million dollars. This system doesn’t work for startups that are usually only trying to raise a few million dollars or less.
Before the JOBS Act private companies were only allowed to raise money from accredited investors, with a net worth of above $1 million or an income above $200,000 per year, that they had a substantial pre-existing relationship with or were introduced to via a registered broker-dealer.
These new sets of rules in the JOBS Act create new “registration exemptions” that companies can operate under to raise money from investors without going through the full IPO process. It’s called an exemption because it allows you, by carefully following these new sets of rules, to avoid full IPO registration with the SEC.
Three of JOBS Act titles, Title II, Title III, and Title IV, created three different new sets of rules under which companies can raise investment money online. Two of these three, Title II and Title IV, have been enacted by the SEC so far. Title III, the one that’s actually called “Crowdfunding” is still pending.
Title II creates a new registration exemption called “Regulation D rule 506(c)”. Often referred to as “Accredited Crowdfunding”, 506(c) creates a streamlined registration process for startups and private companies to raise any amount of money online as long as they raise it only from accredited investors and go through extra steps to verify their investors accredited status. 506(c) also allows them to publicly advertise investment opportunities online via crowdfunding platforms such as the ones listed above as accredited only platforms, and their own communications. Companies that raise money in this way are sometimes called “PIPR”s which means a Private Issuer Publicly Raising. Interestingly the investment crowdfunding platforms utilizing rule 506(c) have just as many offerings listed under the old framework for private offerings, now called 506(b), which doesn’t require rigorus verification of accredited investor status, but also doesn’t allow for public advertising, so these investments are only available to view if you have self-certified as an accredited investor when signing up.
Title IV, sometimes called a “mini I.P.O.” or “registered crowdfunding”, allows startups and private companies to raise up to $50million per year from both unaccredited and accredited investors via an update to Regulation A, now referred to as Regulation A+. This option is mostly for later stage startups as there is significant time and cost involved (6-8 months, $50-$150k) in the initial SEC registration and ongoing financial reporting, while still being much less than a full IPO ($2.6m). Title IV also allows Reg A+ companies to avoid individual state securities laws, and gauge investor interest before formally filing with the SEC. While title IV allows unaccredited investor to participate, so far there are only a few investment crowdfunding platform catering to unaccredited investors, though offerings do not need to be made through a crowdfunding portal, and can also be done offline.
Title III, the one that is actually called “crowdfunding” in the JOBS Act, would allow smaller companies to raise money from unaccredited investors online through registered crowdfunding portals. But Title III rules have been released and we are waiting for them to take effect.
The primary appeal of Title III is it’s written with normal unaccredited investors and smaller startups raising money in mind. Critics fear that the rules may prove be too limiting and demand too much of smaller companies and startups to be useful. Also, because Title III limits companies to raising $1million per year, while Title IV allows $50million, and Title II allows for unlimited fundraising, it might end up being the less important of the three in the long term.