JOBS Act: Title II & How It Applies to Issuers & Investors
Zach Kelly
Are you looking to verify yourself or a potential purchaser as an accredited investor? Under the Jumpstart Our Business Startups Act (JOBS Act), which was signed into law on April 5, 2012 by President Obama, businesses can advertise and sell securities, so long as the eventual sales are made only to accredited investors that are verified using “reasonable steps.” Third-party reviewers conduct verification for issuers and purchasers, ensuring that companies and investors take reasonable steps to obtain validation.
ABOUT THE JOBS ACT
The JOBS Act was created with small businesses in mind, giving them greater opportunities to raise capital under new regulations that allow general solicitation and advertising. The U.S. Securities and Exchange Commission (SEC) implemented final rules regarding general solicitation and advertising as required by Title II of the JOBS Act. Those rules went into effect on September 23, 2013 and allowed private startups and businesses to publicly solicit for investments –while still qualifying them as private placements. While the ban on general solicitation and advertising was lifted, investors still need to be verified as accredited in order to purchase securities.
WHAT IS AN ACCREDITED INVESTOR?
Under Title II of the JOBS Act, companies can publicly solicit when capital raising without having to register any securities with the SEC so long as the sales of securities is made only to accredited investors. Accredited investors fall into one or more of several categories, which are outlined by the SEC in Rule 501 of Regulation D. Certain types of individuals, banks, charitable organizations, corporations, trusts, insurance companies, and employee benefit plans are all examples of accredited investors. As individuals or organizations that are compliant with the SEC's definition of accredited investors, these investors can invest in private placements of securities that are supposed to be marketed or sold only to accredited investors.
INVESTOR VERIFICATION
When it comes to accreditation of investors for Title II of the JOBS Act and general solicitation, investor questionnaires and self-certifications are no longer SEC-compliant forms of validation. Under the new laws allowing general solicitation, before companies can issue any securities to investors, they are responsible for taking "reasonable steps" to ensure an investor is accredited. Even if they're fully confident in the fact that an investor is accredited, a company selling securities should acquire some form of verification to evidence that they took “reasonable steps.” One of the SEC-approved methods that issuers and purchases can utilize to prove accreditation is through third-party verification reviewers who are licensed professionals in good standing, such as attorneys.
Updated 12/1/2021
Wow! It is amazing how far the JOBS Act has come in almost 10 years. To put it in perspective the SEC has added many new accredited investor qualifications outlined below -
Many new categories were added to the individual category as well as some previous categories being amended as listed below:
The SEC deems “natural persons” with certain certifications, licenses, and other credentials to be “financially sophisticated” enough to qualify as accredited investors. Accepted certifications from accredited educational institutions will initially include the Financial Industry. Regulatory Authority, Inc. (FINRA) Licensed General Securities Representative (Series 7), Licensed Investment Adviser Representative (Series 65), and Licensed Private Securities Offerings Representative (Series 82).
Additionally, "knowledgeable employees" of venture capital or private equity funds would be permitted to invest in those particular funds without meeting the income or net worth tests typically required of accredited investors.
Lastly, the spouse definition has been amended to include “spousal equivalent” when combining income to meet the $300,000 USD income requirement or the $1,000,000 net worth requirement.
The newly adopted amendments to the “accredited investor” and “qualified institutional buyer” definitions will open the private placement market to any entity that meets certain requirements, as long as the entity was not formed for the purpose of investing in the private placement offering in question.
These newly allowed entities include governmental bodies, funds, and Indian tribes owning over $5 million USD in “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act and not formed for the specific purpose of investing in the securities offered.
Limited liability companies with $5 million USD in assets may be accredited investors, as may SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) as long as it is not formed for the specific purpose of investing in the securities offered.
Family offices with $5 million USD or more in assets, along with their “family clients” of those offices, may invest in the private markets.
Lastly, an accredited investor that the issuer previously took reasonable steps to verify with the last 5 years remains an accredited investor during the time of a subsequent sale if the investor provides a written representation to qualify and the issuer is not aware of information to the contrary.
With so many accredited investor verification methods available, we created a handy infographic to help break it all down: note that the bottom 5-year rule is now effective.
For quick, affordable, and confidential verification services for issuers and investors, choose VerifyInvestor.com. Visit https://VerifyInvestor.com for more information.