Regulations passed over the last decade have made it harder for smaller companies and startups without connections to venture capitalists or angels to raise necessary startup capital. Without such funding, some businesses simply cannot get off the ground.
Further, Main Street investors have fewer opportunities to invest in new public companies now compared to previous decades because fewer companies are conducting initial public offerings or “IPOs.” Companies engage in IPOs in order to raise money for their companies by offering shares to the public. When investors purchase these shares during an IPO and the companies increase in value, the investors’ wealth increases along with them.
Today, fewer companies find IPOs necessary. Uber and Airbnb, for example, were able to raise tens of billions of dollars while remaining private and private companies are swallowed up by public companies when venture capitalists sell their shares to public companies.
Most startups, however, are not Uber or Airbnb and have trouble raising money and Main Street investors now have fewer opportunities to invest in high growth companies. The Jumpstart our Business Startups Act or “JOBS Act” was signed into law in 2012 to address both issues.
The idealistic vision behind the JOBS Act was to help small businesses and entrepreneurs raise money and to allow Main Street investors to invest in private companies for the first time, helping create wealth for companies and the people who invest in them.
The JOBS Act fell short of its vision and some companies in the blockchain space began raising money through ICOs instead. In 2017, ICOs surged in popularity as a way to quickly and efficiently raise money from large groups of people, including Main Street investors, as was originally intended by the JOBS Act.
With the SEC’s crackdown on ICOs at the beginning of this year, blockchain companies have revisited raising money through traditional means, such as from venture capitalists or angels under Regulation D.
JOBS Act 3.0, which passed the House 406 to 4 and is awaiting the vote of the Senate this fall, is meant to expand on the original JOBS Act and can make it easier for startups to raise money within the confines of U.S. Securities laws. For companies just starting out, the most significant changes include the following:
1. Increased pitch opportunities
JOBS Act 3.0 revises the meaning of “general solicitation” under Regulation D to allow startups to pitch investment opportunities sponsored by certain groups, such as angel investor groups, a venture forum, venture capital association, a trade association, a college or university, or a nonprofit as long as certain communications guidelines are met and the sponsor does not charge certain fees or receive certain compensation.
Under Regulation D in its current form, a company is prohibited from engaging in general solicitation unless it conducts the offering under Rule 506(c), rather than Rule 506(b).
Rule 506(b) allows issuers to sell to up to 35 unaccredited investors and for investors to self-verify their status as accredited investors, but prohibits general solicitation. This means that, as long as you don’t talk to strangers about your securities offering, you can sell your securities to up to 35 of your friends and family who want to invest but don’t meet the definition of an accredited investor and simply have your investors fill out a questionnaire to verify their accredited investor status.
If you talk to even one stranger about your offering, you must conduct your offering under Rule 506(c). This means your friends and family who aren’t accredited can’t participate and you can’t simply have your investors verify their accredited investor status by filling out a questionnaire.
Instead, you must take “reasonable steps” to verify their status. This includes reviewing sensitive information such as tax returns, bank and brokerage statements, and credit reports or obtaining a letter from a lawyer, CPA, investment advisor, or broker dealer verifying the status of the investor.
You probably don’t want to take this task on yourself, so you have to hire a professional to do it for you. Not only is this more expensive, it can turn away investors who would rather keep sensitive information to themselves.
JOBS Act 3.0 allows you to pitch your offering to all investors at certain pitch events or demo days without losing the exemption under Rule 506(b).
2. An expanded definition of accredited investors, allowing more people to invest
JOBS Act 3.0 revises the definition of “accredited investor,” giving investors more opportunities to invest and companies a larger pool of potential investors.
Previously, the definition of accredited investor was based solely on annual income and net worth. The new definition of accredited investor also accounts for professional and educational experience. This includes people who have certain securities-related licenses and who the SEC deems to have sufficient education or job experience related to a particular investment.
3. The ability to create a crowd under Regulation Crowdfunding without having to manage one
Under Regulation Crowdfunding in its current form, a company raising equity can only accept investments from individual investors. Because Regulation Crowdfunding caps the amount that each investor can invest, this means keeping track of hundreds to thousands of investors in the Company’s cap table.
JOBS Act 3.0 resolves this issue by allowing investors to pool their money into a fund advised by a registered investment advisor. Instead of keeping track of hundreds or even thousands of investors, this allows a company to keep track of a single investor.
Even if the $1.07 million cap under Regulation Crowdfunding seems inadequate for your company’s capital needs, JOBS Act 3.0 can help create a market for your product by getting a crowd of everyday people backing your project and telling their friends and family about it.
4. Liquidity for investments in privately-held companies
Securities sold in private offerings are often illiquid, meaning once they are purchased, there is no market where you can sell them and a market may never develop.
JOBS Act 3.0 allows for the registration of venture exchanges, which provides a single exchange where securities of qualified small and emerging growth company securities can be traded. This provides liquidity for otherwise illiquid investments, making it more appealing for Main Street investors to invest in private companies.