JOBS Act: Everything You Need to KnowStartup Law ResourcesVenture Capital, Financing
The JOBS Act makes it easier for startups to raise the money and equity they need to grow and give startups and small businesses more access to capital. 5 min read
2. Title II — Accredited Investors
3. Titles III and IV — Equity Crowdfunding
4. Reasons to Raise Funds Using the New Provisions
5. Reasons Not to Raise Funds Using the New Provisions
6. Examples of What You Can Do Under the JOBS Act
7. Equity Crowdfunding Limits
8. Steps to Take
9. Title II
10. Title III
11. SEC Registration and Reporting
12. Contact an Attorney
The Jumpstart Our Business Startups Act, or JOBS Act, is a law signed into effect by President Obama in 2012, designed to promote the growth of jobs in small businesses. Its goal is to make it easier for startups to raise the money and equity they need to grow, and give startups and small businesses more access to capital.
Why Is the JOBS Act Important?
The JOBS Act has seven sections overall, but three key sections are pertinent to investors.
Title II allows public advertisements of securities offerings to accredited investors.
Title III opens the door to equity crowdfunding directed at the general public and gives non-accredited investors more opportunities to invest in startups.
Title IV provides additional guidelines for companies seeking to use Title III.
Title II — Accredited Investors
Accredited investors are high-net-worth individuals who meet certain SEC requirements. These investors are presumed to have a higher level of investment knowledge. The regulations regarding securities offerings to accredited investors are generally relaxed.
Under the JOBS Act, a new securities exemption (Rule 506(c) of Regulation D) allows startups to make general advertisements seeking investments by accredited investors. Previously, such an action would likely have been considered a public offering, subject to a higher degree of scrutiny and regulation. The main rule is that you must screen all people who respond to ensure they are accredited investors.
Business opportunities before the JOBS act were made available only to small networks of people who had previous business relationships selling securities. The use of media or internet to solicit investors was forbidden.
However, there are still financial restrictions - investors must still be accredited. This means having a net worth greater than $1M, excluding the primary residence or someone whose income exceeded $200k, or $300k if filing jointly with their spouse, for the past 2 years.
Titles III and IV — Equity Crowdfunding
Crowdfunding has become so popular that it's expected to overtake venture capital funding in the near future, even despite the fact that equity crowdfunding is only just now being permitted.
Crowdfunding means companies no longer depend solely on accredited investors- they can be funded by regular people on the street. Previous crowdfunding models relied on rewards-based systems. Participants received early access or a discount in exchange for their "investment." The investment was really a donation or prepaid purchase.
Offering equity would have been considered a public offering. Companies would have had to go through the full process of making a public offering.
Under the new rules, companies can raise up to $1 million per year through equity crowdfunding. The disclosure and filing requirements are relaxed. To protect investors, individuals can only invest a certain percentage of their income.
The JOBS act requires certain standards of SEC-approved crowdfunding platforms, such as:
Providing investors with educational materials
Taking measures to reduce the risk of fraud
Provide communication channels to permit discussions about offerings on the platform
They are also forbidden from:
Offering investment advice or making recommendations
Soliciting purchases, sales, or offers to buy securities offered on its website
Holding, possessing, or handling investor funds of securities.
Reasons to Raise Funds Using the New Provisions
The JOBS Act provides several advantages for companies seeking investments.
Access to a broader pool of investors.
Potentially reduced compliance and administrative requirements.
Possible avoidance of venture capital firms that place short-term returns over long-term growth.
Crowdfunding investors may become loyal customers and brand champions.
Reasons Not to Raise Funds Using the New Provisions
Not every company will benefit from using the JOBS Act provisions.
Other fundraising options, such as Regulation D offerings, may be more cost-effective.
The investment limits may be too low for your fundraising goals.
Multiple rounds of equity crowdfunding may subject you to higher disclosure requirements.
Equity crowdfunding is only permitted through a broker-dealer or funding portal. This adds additional cost.
Fraud can occur - it can be difficult to assess who is a legitimate investor or not on the Internet.
Examples of What You Can Do Under the JOBS Act
The following actions would have been questionable prior to the JOBS Act. They are now permissible as long as you meet the other requirements of the Act.
Advertisements in trade magazines seeking investments from accredited investors.
A page on your website seeking investments from accredited investors.
A page on your website directing the general public to your equity crowdfunding campaign.
Social media posts with a similar purpose as above.
Equity Crowdfunding Limits
The following dollar limits apply to equity crowdfunding campaigns.
Maximum $1 million raised within 12 months.
Maximum investment of the greater of $2,000 or 5 percent of income for investors making less than $100,000 per year.
Maximum investment of 10 percent of income for investors making more than $100,000 per year.
You are still required to provide detailed financial disclosures to potential investors. They must be reviewed by the following individuals.
Company officers for campaigns raising less than $100,000.
Public accountants for campaigns between $100,000 and $500,000.
Larger campaigns must be initially reviewed by a public accountant. They are later subject to a formal audit by a public accountant.
Steps to Take
Take the following steps if you are seeking to take advantage of the JOBS Act.
Remember that Title II carves out an exception to strict regulations on public offerings. You must take care to avoid violating other securities laws. Start by reviewing the SEC FAQ on Title II.
You should have an attorney review your communications before sending them. You should also have an attorney help you set up your screening process to qualify accredited investors.
The Title III process begins with a standard set of disclosures. You will need to release information about the following.
Officers, directors and large shareholders.
Your business plan.
How you will use the proceeds.
Other material information.
Under Title III, you may not run your own equity crowdfunding campaign. You must use a broker-dealer or an SEC-registered funding portal. As with traditional crowdfunding campaigns, expect to pay a percentage of each transaction.
After your campaign is complete, your obligations don't end. Be sure to comply with ongoing disclosure requirements and other regulations.
SEC Registration and Reporting
Companies who are initially exempt from SEC registration and reporting may later lose their exemption. Be aware of the following:
Amount of time you've been seeking investments.
Total number of investors (limit of 500 unaccredited shareholders or 2,000 total shareholders)
Total amount of funds raised.
Additional investment rounds using the same or different methods.
Crossing certain thresholds may subject you to additional requirements.
You can see the embedded version of the text of the JOBS Act here.
The full SEC document for the Jumpstart Our Business Startups (JOBS) Act can be found here.
Contact an Attorney
To learn more or to start the process, search for a local securities lawyer near you. UpCounsel screens for top attorneys who are familiar with the requirements of the SEC and your state.