Pending JOBS Act Proposals – Securities Lawyer 101
The Jumpstart Our Business Startups Act (or JOBS Act) (the “JOBS Act”), enacted in 2012, is intended, among other things, to reduce barriers to capital formation, particularly for smaller companies.
Among other things, the JOBS Act requires the Securities and Exchange Commission (the “SEC”) adopt rules amending existing exemptions and creating new exemptions that permit companies to raise capital without SEC registration.
Additional information about the JOBS Act is available here With all new rules with some final and others pending, many issuers are confused about which exemptions are presently available for their securities offerings.
Eliminating the ban on general solicitation under Rule 506
The JOBS Act required the SEC to eliminate the prohibition on the use of general solicitation and general advertising in Rule 506 of Regulation D, so long as all purchasers in the offering are accredited investors and the issuer takes reasonable steps to verify their accredited investor status. Rule 506(c) implements this statutory mandate. Rule 506 is commonly used in going public transactions and issuers can use Rule 506(c) to raise capital so long as sales are only made to accredited investors.
The JOBS Act requires the SEC to develop new rules permitting capital raising by “crowdfunding.” Crowdfunding is a means to raise money by attracting relatively small individual contributions from a large number of people. In recent years, crowdfunding websites have proliferated to raise funds for charities, artistic endeavors and businesses. These sites did not offer securities, such as an ownership interest or share of profits in a business; rather, money was contributed in the form of donations, or in return for the product being made. The JOBS Act creates an exemption from the registration requirements of the Securities Act that provides for a form of securities crowdfunding.
Under JOBS Act crowdfunding, companies will be limited to raising $1 million in any 12-month period. Companies cannot crowdfund on their own, but will have to engage an intermediary that is registered with the SEC. These intermediaries will be subject to a number of requirements.
Individual investors will be limited in the amount they can invest by way of crowdfunding in any 12-month period to:
- if the issuer’s annual income or net worth is less than $100,000—the greater of $2,000 or 5 percent of annual income or net worth, or
- if the issuer’s annual income or net worth is more than $100,000—10 percent of annual income or net worth up to a maximum of $100,000.
(When calculating net worth, primary residence should not be included.)
The SEC must first write rules that govern how companies can use JOBS Act crowdfunding to raise money from investors and set out the responsibilities of intermediaries. These rules will include what must be disclosed to prospective investors before they decide to participate, as well as requirements for how intermediaries will operate.
Until the SEC adopts these rules, Companies cannot use equity crowdfunding to raise funds. Issuers seeking to raise capital after the JOBS Act should be certain that they understand the securities exemptions available to them and the limitations of each exemption.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855