Part 1 of a series of posts on the JOBS Act
One of the biggest changes in the JOBS Act of 2012 was the subsequent inclusion of a new Title II, adopted on Sept. 23, 2013, by the U.S. Securities and Exchange Commission (SEC), which permits the general solicitation and advertising of private investment opportunities.
Under a new exemption called Rule 506c of Regulation D, an entrepreneur no longer had to have a “substantial and pre-existing relationship” with a prospective investor to receive funding for a startup business as long as the investor was an accredited investor.
An “accredited investor” is someone whose net worth — either or alone or combined with a spouse — exceeds $1 million or someone who has earned more than $200K (or $300K with their spouse) for the past two years and can reasonably expect to earn the same amount in the current year.
The new rule marked a dramatic change from how things had to be done prior to the SEC’s adoption. Under previous SEC rules, entrepreneurs could not broadcast an investment offering to anyone with whom they didn’t have that prior special relationship.
The old rules were meant to protect small investors from being accosted by questionable offerings and possibly losing their life savings.
But the pre-Title II rules made it hard to get the word out by startups looking to get some funding traction. In effect, those pre-Title II rules tended to keep investment in the domain of rich, connected folks.
Title II was meant to democratize the investment landscape, and it has. Rob Leclerc, CEO of AgFunder, described in his Oct. 17, 2014, TechCrunch blog post that his investment marketplace had raised more than $10 million since February using the new 506c exemption.
According to Leclerc, one client met her target of $355,000 in just 60 days using the new rules, with its fundraising campaign being promoted in a number of blogs and publications and on the company’s website.
“The company was able to leverage this public campaign to broadcast its story to thousands of potential investors, including celebrity venture capitalist Brad Feld…” Leclerc said.
But adoption of the new Title II rules has been slow. Leclerc noted that in the six months after the adoption of Title II, only 900 companies across the nation had used the exemption to raise $10 billion in capital.
Sounds like a lot, but compare that to 18,000 Regulation D filings in 2012, which raised $900 billion in new funds, Leclerc wrote.
“The biggest hurdle to widespread adoption of 506c offerings centers around the extra step that issuers must take to verify their accredited status, as well as some minor hesitation amongst startup lawyers who haven’t yet dealt with a 506c offering.”