Title II, Titan of JOBS Act

The Jumpstart Our Business Startup Act (JOBS Act) was signed into law by then-President Barack Obama in the spring of 2012. The JOBS Act, in practice, is the twenty-first century response to the Securities Act of 1933, passed shortly after the Great Depression. The Securities Act banned the ability for companies to generally solicit the public for investment capital unless the securities were registered.  With the advent of the information age, the internet boom, and the digital era, it became clear how antiquated the Securities Act laws had become.

The JOBS Act, and its respective sections, were meant to dramatically ease investment restrictions for small-scale operations looking to build a financial springboard. Keep in mind, historically companies needed to go public to amass large quantities of capital. The rollout of the JOBS Act was staggered, with Titles II, III, and IV taking effect in the following sequence:

• Title II (accredited): September 2013

• Title III (non-accredited): May 2016

• Title IV (non-accredited): June 2015

What makes Title II unique in its comparison to other sections of the law is its applicability exclusive to accredited investors. Accredited investors are a group of investors that are considered to be so wealthy or so sophisticated that they could make better investment decisions or sustain investment losses.  Many entities are accredited investors, but being able to crowdfund to individual investors was seen as the ultimate goal.  To be considered an accredited investor as an individual by the SEC you must:

• Have, either individually or with a spouse, a net worth of $1 million (excluding primary residence)  OR

• Earn $200,000 individually, or $300,000 with a spouse, or more annually

The initial rollout of Title II allowed for an opening of cash flow, but still put strict limits on it, thus retaining a level of comfort by the SEC’s standards. Businesses that don’t vet and confirm the accreditation of their investors under Title II aren’t allowed to rely on it for crowdfunding.  To use Title II, you must verify that your investors are accredited investors.

Crowdfunding surpassed angel investment in 2015 and has already exceeded the cash provided by venture capital firms.  It’s early in the game, especially given the limited time Title III and IV have been applicable, but it appears that accredited investment remains the dominant channel for crowdfunding. Chance Barnett, CEO of Crowdfunder.com, took note of this in a late-2016 piece for Forbes. The successful use of crowdfunding applicable under the JOBS Act has leaned heavily on Title II with both individual investors and total capital commitment. This suggests that even with the liberalization of funding, start-ups are still rely on the historically sound route of accredited investment.

Due to the esoteric nature of the JOBS Act, information in the mainstream press on the legislation is relatively sparse. Yet there is a growing consensus that Title III and IV are not showing the vigor initially expected. As of December 2017, less than $85 million worth of investor commitments were reported for Title III, Regulation CF capital raises.  Title IV, Regulation A+ capital raises have been similarly lackluster.  Both are dwarfed by Title II, Rule 506(c) capital raises which continue to dominate the crowdfunding ecosystem and will for years to come.  When it comes to capital raising, companies need a reliable and cost-effective way to raise capital.  Accredited investors combine to raise over a trillion dollars each year in the US, and maybe that’s why Title II is the Titan of the JOBS Act and Crowdfunding even though Title III & Title IV get all the press.

Updated 2/21/2023

We cannot underestimate the effectiveness of general solicitation and its role in the crowdfunding process. Consistently funds using Rule 506(c) exemption have had immense success gaining investors and raising money for their funds. Using safe harbors to ensure you are not breaking any laws in verifying your investors as accredited investors is necessary to avoid losing all the cash you have raised.

Using a third party to verify your investors constitutes “reasonable steps” and using the most reliable service in the industry makes your compliance life much easier. Do not rely on inexperienced third parties. VerifyInvestor.com is fully compliant with SEC federal laws and knows the “ins and outs” of accredited investor status.

for 506(b) they use questionnaires.