SEC Makes Historic Move
It has been a quiet three years since the April 5, 2012, passing of the JOBS Act, but last week investors and the businesses that need their funding received promising news. At an open meeting held on March 25, 2015, the SEC voted on long awaited final rules for Title IV of the Act, providing clarification on guidelines surrounding Regulation A+ offerings. These rules are paving the way for true democratization of early stage investment funding.
The final rules for Title IV are broken down into two tiers, allowing for strategic exemption from the traditionally high-cost, high-burden regulatory requirements of issuers wishing to raise capital. Tier 1 offerings are those issued for up to $20 million in any 12-month period, while Tier 2 includes issuers of up to $50 million within the same time frame. The previous cap was set to a meek $5 million for all issuers. Tier 1 issuers will be taken under the wing of NASAA and its coordinated review program, and will not have state pre-emption. However, Tier 1 issuers will not be required to take on the costly burdens of annual reporting or formal audits prior to raising funding.
Tier 2 issuers will have state pre-emption, meaning there is no longer the need to register securities in each state those securities will be sold. Instead, Tier 2 offerings will have more stringent auditing and annual reporting requirements in comparison to Tier 1 issuers. Offerings in both tiers will be available to both accredited and, now, non-accredited investors. This permits businesses to raise capital through equity crowdfunding from a greater number of individuals than what previous rules allowed. Issuers can take action on the new rules in about 60 days—after publication in the Federal Register.
Non-Accredited Investor Participation
The most notable aspect of the new rulemaking takes necessary steps to bring non-accredited investors intothe universe of equity crowdfunding, online. Equity crowdfunding issues may not be offered to individuals who do not meet the definition of an accredited investor – individuals with an annual income of $200,000 or more or a net worth above $1 million. Instead, Regulation A+ provides a much broader definition of a qualified investor, removing the tight boundaries of the investor pool available to companies wishing to raise capital online. Under the new rules, non-accredited investors can participate in Tier 1 and Tier 2 offerings up to a maximum of 10% of annual income or total net worth each year.
These new provisions are powerful for companies utilizing equity crowdfunding platforms as it expands the investor crowd much further than the previous total of eight million accredited investors alone. A number of present commissioners spoke directly to this expansion during the open meeting, noting that they were cautious of these improvements since passing of the JOBS Act. Although affordable access to capital is the driving force behind small business establishment and sustainable growth, the SEC reminded attendees that the organization is tasked with keeping investors informed and protected from fraudulent securities activity. Modernizing capital formation through the use of Internet-based crowdfunding presents unique challenges the SEC has tried to tackle over the last three years; the final rule under Title IV relating to non-accredited investor participation is a clear compromise from the SEC, but certainly a step in the right direction for investors and small businesses alike.
A new class of investors is being generated through the new rulemaking from the SEC. Some feel as though the $30 billion venture capital industry or the $20 billion angel investor market will take a hit from this unearthed addition of everyday investors, but start-ups and high growth companies will not likely set aside the valuable business prowess provided by these more traditional financiers for the new retail crowd. Instead, equity crowdfunding can now truly craft a social environment for capital formation, with venture capitalists, angel investors, and non-accredited investors contributing to the growth of small businesses, together