Introduced with bipartisan support in 2012, the JOBS Act eased Securities and Exchange Commission (SEC) restrictions on investing in small- to medium-sized businesses. The act intended to reinvigorate the ability of small businesses to raise capital as the country reeled from the 2008 financial crisis.
Most notably, the JOBS Act made it possible for small companies and startups to raise money by offering stock through online crowdfunding. But, how does that work, and what impact does crowdfunding have on businesses and investors?
What is the JOBS Act?
The JOBS — Jumpstart Our Businesses Startups — Act encourages small businesses and startup investment by easing various SEC restrictions. For example, the act lowers reporting requirements and allows companies worth less than $1 billion to issue stock without going public or being registered with the SEC.
One of the more noteworthy changes in the bill, Title III, enables these businesses to issue securities through online crowdfunding.
Although companies don’t need to be registered with the SEC to sell shares through crowdfunding, Title III equity crowdfunding is still regulated by the SEC in many ways. For example, the SEC requires companies to disclose certain information to potential stockholders.
Additionally, the JOBS Act places caps on the number of nonaccredited investors a company can sell shares to and the amount of money a company can raise through crowdfunding at $5 million. Finally, all equity crowdfunding transactions must also take place through an SEC-approved funding portal.
What Does the JOBS Act Do?
Relaxed government regulations
The JOBS Act significantly changes several laws that traditionally presented barriers for smaller companies and startups to grow. One of the substantial changes the JOBS Act brings is that companies can have an increased number of shareholders before registering as a common stock with the SEC.
Prior to the JOBS act, when a company's assets reached $10 million and 500 total shareholders, this requirement would be triggered. The bill changes this trigger point where the SEC becomes involved to 500 unaccredited shareholders or 2,000 shareholders total.
Notably, the bill also provides relief from the notoriously stringent Section 404 of the Sarbanes-Oxley Act. With the changes brought about by the JOBS Act, emerging growth companies are exempt from the previously rigorous reporting required by the Sarbanes-Oxley Act.
Government Regulated Funding Portals
The JOBS Act establishes government-regulated crowdfunding portals. Many of the regulations surrounding crowdfunding target these funding portals. According to the SEC, these online platforms cannot engage in solicitation, offer advice or investment suggestions, incentivize purchasing particular stock, or engage in any other behavior deemed inappropriate by the SEC.
There are limits for investors looking into crowdfunding investments, which are determined by the individual investor’s income. For individuals who earn less than $100,000, the limit is $2,000 or 5% of their income, whichever number is greater. For individual investors making more than $100,000, the limit is raised to $10,000 per year or %10 of their income, whichever value is less.
Defines Emerging Growth Companies
The JOBS Act defines a company as an emerging growth company if its total gross revenue was below $1 billion the previous fiscal year. The JOBS Act aims to make it easier for emerging growth companies to raise funds by placing fewer restrictions on a company’s stock offerings.
General Solicitation
Another noteworthy change brought forth from the JOBS Act is that companies can now market, advertise and participate in the general solicitation for securities. This change allows companies to market more generally and with fewer restrictions, so long as they only offer securities to accredited investors.
Under the JOBS Act, Regulation A raises the total amount a company can offer in securities from $5 million to $50 million. With this increase, companies can raise a significantly larger amount of capital while adhering to weaker regulations and restrictions that would have previously slowed down this process.
Finally, the bill also increases the total number of shareholders a community bank can have from 500 to 2,000. The crowdfunding of investment funds is also prohibited under the JOBS Act.
The Titles of the JOBS Act are as follows:
- TITLE I - REOPENING AMERICAN CAPITAL MARKETS TO EMERGING GROWTH COMPANIES
2. TITLE II - ACCESS TO CAPITAL FOR JOB CREATORS
3. TITLE III - CROWDFUNDING
4. TITLE IV - SMALL COMPANY CAPITAL FORMATION
5. TITLE V - PRIVATE COMPANY FLEXIBILITY AND GROWTH
6. TITLE VI - CAPITAL EXPANSION
TITLE VII - OUTREACH ON CHANGES TO THE LAW OR COMMISSION
How is the JOBS Act Different from Kickstarter?
Originally based on funding and donating to artists, causes and designers, sites like Kickstarter don’t offer equity. This is the main reason why the SEC is only involved with equity crowdfunding.
Types of Crowdfunding Allowed Under the JOBS Act
Companies can participate in regular crowdfunding and can raise up to $1 million. After this million-dollar threshold, regulations kick in.
Regulation D
Regulation D allows small or medium-sized businesses to raise funds without going through an IPO. Given the various legal and financial headaches of filing and reporting to the SEC, Reg D gives private companies the option to efficiently raise funds without going public.
Companies that file Reg D can fundraise from accredited investors and up to 35 unaccredited investors. However, these unaccredited investors must be deemed ‘sophisticated’ and possess the net worth, experience and background knowledge needed to take on more complicated investment opportunities.
Companies that choose to file Reg D electronically with the SEC have an easier opportunity to raise capital while offering protection for their investors.
Regulation CF
Added to the JOBS Act in 2016, Regulation CF, or Title III of Regulation A, allows companies to raise a set amount of money from an unlimited number of shareholders. Initially, this number was set at $1 million, but beginning in March 2021, companies are able to sell up to $5 million of stock.
Given the advent of crowdfunding, this is a significant change. As discussed, crowdfunding provides companies the chance to raise a substantial amount of funding from a range of investors they previously didn’t have access to. For example, a company approved for Reg CF crowdfunding can sell stock to nonaccredited and accredited investors.
Reg CF continues a noticeable trend of easing restrictions and barriers for emerging companies to sell stock and raise money. Between access to nonaccredited investors through crowdfunding, the ability to raise up to $5 million, and the noticeably fewer restrictions, it’s no wonder Reg CF crowdfunding is seen as an attractive alternative to raising funds through venture capital or an IPO.
Regulation A
Reg A gives crowdfunding companies the ability to bypass registration for public offerings. One way to understand Reg A is a streamlined version of an IPO. A company can sell shares without going through the rigorous and time-consuming SEC registration process.
Regulation A gives small- to medium-sized companies and startups the chance to sell shares to both accredited and nonaccredited investors. Startups can perhaps even determine from this process if an IPO is in the company’s future.
As described by the SEC, Reg A is an exemption from registration for public offerings. Regulation A has two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $75 million in a 12-month period. For offerings of up to $20 million, companies can elect to proceed under the requirements for either Tier 1 or Tier 2.
Why is Crowdfunding a Good Investment?
The challenge to update and diversify your investment portfolio is an ongoing one. Adding a startup or small business to your portfolio will help diversify your assets. That being said, crowdfunding is also a fantastic opportunity to get in on the ground floor of an emerging company.
Crowdfunding also allows retail investors to support new technology. Whether you’re hoping to see a company go public and invest before the IPO or simply hoping to invest in a promising local business, crowdfunding enables investors to put their money where they otherwise couldn’t.
Ultimately the ability to invest in a company on the rise is an incredibly valuable opportunity. Retail investors can support a promising startup, cash out when a startup goes public, or decide to keep their stock and watch its value skyrocket.
Benzinga Favorite Equity Crowdfunding Platforms
If you’re interested in crowdfunding investments, diversifying your portfolio and getting in on the ground floor of exciting opportunities, take a minute to check out our favorite equity crowdfunding platforms.
For Accredited Investors Only
Lasting Impact of the JOBS Act
Ultimately, the JOBS Act and creation of equity crowdfunding has significantly changed how small- to medium-sized companies raise capital and offer securities. On the other side of the coin, unaccredited investors now have opportunities to invest in startups they previously wouldn’t have been able to through Regulation A and Regulation Crowdfunding raises. Make sure to return to Benzinga for future JOBS Act updates and essential information about crowdfunding investment opportunities.
Frequently Asked Questions
What does the JOBS Act do for companies?
The JOBS Act gives companies the ability to raise money in ways that weren’t previously possible due to SEC regulations. The act lessens restrictions, oversight, reporting requirements and opens the door to new and innovative ways of raising capital. Ultimately, the JOBS Act gives small businesses and startups a noticeably greater ability to grow their business
What is a Reg CF offering?
As described in Title III of the JOBS act, a Reg CF offering enables private companies to raise up to $5 million from American citizens. Before the JOBS Act was passed, private companies could only raise money from accredited investors, typically the wealthiest 2% of Americans.
