The “Jumpstart Our Business Startups” (JOBS) or “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure” (CROWDFUND) Act is a law that created “equity crowdfunding” in which companies generally raise smaller individual amounts of investment capital from a large number of people. This creates a financing method in which companies can use equity crowdfunding to sell securities to the public over the internet and giving the public the opportunity to invest in early-stage startups and private businesses. Id. This allows early-stage companies better access to capital through alternative financing avenues and allows individuals previously excluded from these types of deals access to invest in these early-stage companies. Id.
The JOBS Act was first signed into law on April 5th, 2012, under the Obama administration then the Securities and Exchange Commission (SEC) adopted the rules on October 30th, 2015. The rules went into effect on May 16th, 2016, officially allowing for companies to submit to raise and open a campaign through equity crowdfunding. Id. Once the rules went live, any company can solicit investments through an SEC-registered funding portal or broker-dealer. Id.
Title III of the JOBS Act amended Section 4 of the Securities Act and created a new exemption from registration for Internet-based securities offerings of up to $1 million over a 12-month period. (Vladimir Ivanov, U.S. securities-based crowdfunding under Title III of the JOBS Act (2017)). Similarly, this amendment also provided various investor protection requirements in order to ensure minimal abuse of the system. Id. These protections include a limitation on the amount investors are allowed to invest through equity crowdfunding in a 12-month period based on net worth or income, mandatory disclosure requirements for companies soliciting investments, and companies must raise funds through regulated intermediaries. Id.
Many of these rules, limits, and protections were later amended to increase the amount investors are allowed to invest and increase the amount companies are allowed to raise on March 15th, 2021. The JOBS Act as it relates to equity crowdfunding distinguishes raises into two categories of raising funds. This controls how much the company is allowed to raise on a rolling twelve-month basis, and how much investors can invest in that same twelve months. Id. Regulatory Crowdfunding (Reg CF) and Regulation A (Reg A) are these two types of raises, with Reg CF raises typically used for smaller companies raising less money, and Reg A raises used for later-stage companies raising larger amounts of funds. Id.
Reg CF vs Reg A
Reg CF raises allow companies to raise up to $5 million in a rolling twelve-month period so long as they meet certain regulatory requirements. Companies have varying levels of disclosures that are needed depending on how much money they plan on raising through a Reg CF offering. A company can raise $107,000 or less by submitting financial statements and specific line items from tax returns that are certified by the principal executive officer of the company. Id. A company can raise up to $1.07 million if they submit financial statements “reviewed” by an independent public accountant and submit the accountant’s review report. Lastly, a company can raise up to $5 million if they submit financial statements that are audited by an independent public accountant and disclose the accountant’s audit report. Id.
Reg A allows companies to raise up to $75 million in a rolling twelve-month period subject to similar, but more stringent disclosures and regulatory requirements. Id. Similar to Reg CF offerings, Reg A offerings are broken up into two tiers subject to the amount being raised by the company looking to open a Reg A offering. The first tier is for companies looking to raise up to $20 million in a rolling twelve-month period. Id. Tier one offerings are subject to the review and qualification of the SEC and regulators of the state in which the offering is being conducted, and companies looking to raise through a Reg A must submit financial statements and balance sheets for the two previous fiscal years’ end, but the financials need not be audited. Id. Tier 2 offerings allow companies to raise up to $75m in a rolling 12-month period, and they must submit financial statements and balance sheets, but the statements must be audited. Id.
These also effects how much the investors are allowed to invest in a rolling 12-month period. For Reg CF campaigns, if you are an accredited investor, then there are no limits on how much you are allowed to invest. Id. For non-accredited investors, the limit depends on your net worth and annual income. Id. If your net worth or annual income is under $107,000 then you can invest up to $2,200 or 5% of your income, whichever is greater. Id. If your annual income and your net worth are over $107,000 then you can invest up to 10% of your annual income, or net worth, whichever is greater. Id. However, for Reg A offerings, this is quite a bit more generous. Id. There is no limit to the amount investors can invest in tier one Reg A offerings. Id. For tier two Reg A offerings, investors may invest a maximum of 10% of their net worth or their yearly income, whichever is greater. Id.
Funding Portals & Broker-Dealers
The SEC has taken an interesting approach to the enforcement of equity crowdfunding. The SEC does qualify every offering made through the JOBS Act, and generally, the more money being raised, the higher level of scrutiny required for the offering to be qualified. However, the SEC has clarified they expect the intermediaries to act as “gatekeepers” to “deter fraud”. The most popular type of intermediaries in equity crowdfunding are