With the passage of the JOBS Act in 2012, the Securities and Exchange Commission (SEC) had its marching orders: eliminate the ban on advertising and general solicitation in two scenarios. The result is that small business and entrepreneurs have two new securities-based crowdfunding options that reduce compliance and reporting obligations, via exemptions, and that open the doors on raising capital. The JOBS Act also transformed Regulation A into a mechanism which empowers crowdfunding under the new Regulation A+.
JOBS Act Title II, Rule 506, and Accredited Investors
Regulation D provides the mechanism for exemptions, and so-called safe harbors, for issuers looking to engage in relatively small transactions. Rule 506 is the most commonly used of the exemptions available under Regulation D, and has been expanded following the JOBS Act.
- The old Rule 506 exemption is now known as the Rule 506(b) exemption. It is still available for issuers that wish to raise an unlimited amount of capital, via an unlimited number of accredited investors, but not more than 35 unaccredited investors. Under 506(b), it is okay for accredited investors to ‘self-certify’, but not okay for the issuer to promote the offering using advertising or general solicitation.
- Rule 506(c) is the newer exemption brought into life by the JOBS Act, and the first law that people credit with enabling securities-based crowdfunding. There is no limit on the amount of funds that can be raised under this exemption, but unlike 506(b), Rule 506(c) permits advertising and general solicitation. However, other restrictions have been imposed. No self-certification option exists under Rule 506(c). A Rule 506(c) offering cannot be used to sell to investors who are not accredited investors, and issuers have to conduct specific “reasonable steps” diligence to verify that their investors are all indeed accredited. It is under Rule 506(c) that many issuers find relying on services provided by third-party verification services, such as those offered by VerifyInvestor.com, to be convenient, safe, and worth the peace of mind.
Title III of the JOBS Act amended Section 4(a)(6) of the Securities Act to permit limited offerings to unaccredited investors via advertising or general solicitation. It’s now known as “Regulation Crowdfunding” or “Regulation CF”. This is the section that has truly opened the door for any and all investors, regardless of wealth or income level, to have the opportunity to invest in securities through a crowdfunding offering.
The catch here is that, in an attempt to ensure adequate investor protection, Regulation CF limits issuers to raising no more than $1 million in any 12-month period. There are limits on how much an individual can invest, as well, based on his or her income and net worth levels.
- Individuals whose annual income or net worth is below $100,000 may only invest the greater of $2,000 or 5 percent of their net worth or income, whichever is lower.
- Individuals with annual income and net worth greater than $100,000 are limited to 10 percent of their income or net worth, whichever is lower.
- Any investor, regardless of which income and wealth category, may only purchase a maximum of $100,000 in Regulation Crowdfunding securities over the course of any 12-month period.
Regulation Crowdfunding offerings are also required to be handled by either a registered funding portal or a registered broker-dealer.
With its limitations, Regulation Crowdfunding is likely to be less useful for companies that Rule 506(c) capital raises. However, both of the two new exemptions, together with the new Regulation A+ laws work together to provide companies with greater options for raising capital.
If you’re considering an offering under Rule 506(c) or simply would like assistance verifying accredited investor status, VerifyInvestor.com offers safe, confidential and secure verification services for both issuers and investors.