Part 9 of a series of posts on the JOBS Act
Prior to the Sept. 23, 2013, approval by the U.S. Securities and Exchange Commission of Title II of the Jumpstart Our Businesses (JOBS) Act of 2012, raising capital for a new or expanding business was not easy.
Companies looking to raise capital were constrained under old SEC rules going back decades. They could not advertise for investment or otherwise solicit funds or even talk about fundraising in public venues.
The object of the rules was to protect small investors from having their life savings wiped out by investment solicitations from unscrupulous or overly risky companies.
But in our age of information, keeping such information on the down-low is not only extremely difficult—if not downright impossible—but is seen as undermining potential business formation, new jobs and economic growth in an extremely competitive world.
Under the JOBS Act’s Title II, general solicitation and advertising of private investment opportunities are now permitted under a new exemption called Rule 506c of Regulation D as long as an issuer verifies that all investors in its offering are accredited investors.
An accredited investor is defined by the SEC as a single person or a person and his/her spouse whose combined net worth is at least $1 million.
“That has resulted in a very significant infusion of capital in the accredited investor space,” Burrasca said, noting that at least $12 billion of additional investment capital has come through accredited investors.
“What we know for a fact is it’s viable and active and individuals are investing brand-new money into the marketplace.”
But Burrasca also notes that simply suggesting that a person with $1 million or more in net worth is a savvy investor may need a more refined definition by the SEC.
“There’s a great misconception that if you’re an accredited investor (by virtue of one’s bank account) that you know what you’re doing,” he said.
“There needs to be a lessening of reliance on wealth as an indication of investment sophistication.”
Despite the uptick in new investment under Title II, companies using the new rules have been somewhat slow in adopting them.
In the first six months after the new Title II rules were passed, the SEC reported only 900 companies had used the new 506c exemption to raise $10 billion in new capital.
Compare that to more than 18,000 Regulation D filings for all of 2012 that raised $900 billion in new capital.
The biggest initial hurdle to more widespread adoption of 506c offerings has been the extra step issuers must take to verify accredited investor status.
But as time goes on and the rules are more fully understood and implemented, that’s expected to change.
In an October 2014 report for TechCrunch by Rob Leclerc called “One Year Into Title II of the JOBS Act,” Leclerc predicts exciting new investment opportunities on the horizon.
“With Title II putting an end to the financial exclusions of yesteryear, investment marketplaces have an opportunity to offer a more collaborative and transparent fundraising process,” the report said.
“And as they evolve and mature, they may become the precursor to new types of investment banks leading the globalization of private capital markets.”