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Blog

The Role of Investor Accreditation in the Jumpstart Our Business Startups Act

Mihir Gandhi

The Jumpstart Our Business Startups Act, or JOBS Act, is a law that makes it easier for startups and small businesses to obtain capital by lessening the restrictions on investment funding and securities. If you're an issuer or purchaser who's interested in participating in private offerings that have generally solicited for investors, the JOBS Act requires that investors must be accredited investors. Relying on the services of a reliable third-party reviewer can help you obtain investor verification whether you're a business owner or an investor.

Before the JOBS Act

The Securities Act of 1933 was signed into law in the U.S. with a ban on general solicitation, which prevented small businesses from publically advertising their need for investment capital. In many ways, these laws protected investors and issuers alike from fraud. However, the ban on general solicitation made it extremely difficult for small startups and business owners to obtain the funds they needed to expand their companies. Recognizing that information is easier to obtain in today's modern world, the ban against general solicitation was lifted under Title II of the JOBS Act, allowing organizations to use public advertisement as a means to fundraise. Final rules formally enacting the general solicitation provisions of the JOBS Act went into effect on September 23, 2013.

Public Advertising

Before the implementation of Title II of the JOBS Act, companies had to rely on close, personal connections with investors as they couldn't advertise their capital raise. Now, under the JOBS Act, small businesses have the right to utilize a variety of public advertising methods to obtain investment capital. Business owners can advertise through social media sites, crowdfunding sites, printed publications, etc., while still considered by the SEC as conducting "private" offerings. Through the provisions outlined in Title II of the JOBS Act and Rule 506(c), business entrepreneurs are given the freedom to raise the capital they require, improving their companies' chances of succeeding.

Mandated Purchaser Certification

The primary requirement for these new capital raises that may be generally solicited is that all eventual purchasers of the securities must be "accredited investors." The stakes are high. If an entrepreneur or business takes even one non-accredited investor, the entire offering can be illegal. Before an issuer offers securities, they should first obtain proof that an investor meets the SEC's definition of accredited. Whether or not an investor is accredited is largely based on their income and net worth. The type of investor they are also determines the minimum-asset requirement they must meet to be considered accredited.