by Jenny Kassan
June 30, 2016
In 2010, I was running the Community Supported Enterprise program at the Sustainable Economies Law Center (SELC). I partnered with attorney Janelle Orsi to co-found the non-profit with the goal of helping changemakers better understand and navigate legal rules to advance their work of building a healthy, just, and sustainable economy.
The Community Supported Enterprise program had some great law student interns our first summer. We decided to focus on changing the securities laws – laws that govern how enterprises can raise capital from investors.
The interns drafted a petition for rulemaking to the Securities and Exchange Commission that I signed. Our request was simple: exempt from any regulatory requirements an offering of an investment opportunity in which no person could invest more than $100. We thought if the most anyone possibly could lose was $100, requiring the enterprise to jump through a bunch of regulatory hoops was unnecessary.
Amazingly enough, the idea started spreading, and the White House endorsed an exemption from securities law requirements for investment crowdfunding. On April 5, 2012, President Obama signed the JOBS Act. It changed quite a bit from our original proposal, but it created several new exemptions for different types of investment crowdfunding.
Below is a summary of the new crowdfunding tools created under the JOBS Act. Note that even before the JOBS Act passed, investment crowdfunding was legal and had been legal for decades (see more on the pre- versus post-JOBS Act options). However, the JOBS Act added some new legal compliance options for enterprises wanting the ability to advertise their investment opportunities to everyone.
Title II of the JOBS Act – Rule 506(c)
This exemption allows a company to publicly advertise an investment opportunity, and there is no cap on the amount that can be invested by each investor or the total amount raised. However, under this Rule, all the investors must be accredited (i.e. wealthy). Accredited generally means individuals with at least $1 million in net worth (excluding their primary residence) or $200,000 in annual income.
Title IV of the JOBS Act – Regulation A+
This exemption allows a company to raise up to $50 million and anyone can invest – not just accredited investors. The offering may be advertised publicly in all 50 states. The downside is the company must have audited financials and must complete a filing process with the Securities and Exchange Commission that can take approximately four months and costs $75-$125,000 in legal fees. Once a company has raised money under Regulation A+, it may file to become a public company and its securities may be traded freely on an exchange.
Title III of the JOBS Act – Crowdfunding Exemption
The Securities and Exchange Commission took more than four years to complete the detailed rules governing the use of this exemption and for the crowdfunding platforms authorized by the law to launch.
On May 16, 2016 title III of the JOBS Act — which offers the most affordable and flexible option for smaller businesses — finally became available. Here are the basics:
- Entities may raise up to $1 million per year
- The individual investment amount is capped: 5% of the lesser of the investor’s annual income or net worth (or 10% if the investor’s net worth and annual income are greater than $100,000)
- Offerings must be conducted through a registered intermediary – you are not allowed to promote the offering outside of the registered online crowdfunding portal
- Entities may accept investors from all 50 states
- Entities raising more than $100,000 must get reviewed financials from a CPA
- The entity’s financials are public and must be available on their web site
These three new tools all have their pros and cons, as all capital raising strategies do. It’s important to understand each option before choosing your strategy. Our website and some resources below will help you explore further.
The author is an attorney and the founder of Jenny Kassan Consulting, a business advisory firm. She is also a member of the Advisory Committee on Small and Emerging Companies at the Securities and Exchange Commission.
The JOBS Act at Four: A Status Report from Locavesting
Community Capital Toolkit from Be a Localist
A comparison chart of various crowdfunding options is offered free via email from JennyKassan.com