What is Equity Crowdfunding?
An Overview of the JOBS Act of 2012
Updated on February 10, 2017
The JOBS Act, passed in 2012, has permanently changed the investment market by allowing solicitation to the general public for the sale of securities. Only now can U.S. companies ask the world for equity investment via the internet. Lifting the SEC’s ban on general solicitation is creating a new capital formation market, allowing a drastic shift of capital investment from the public market to the private market. The World Bank has estimated the amount of annual dollars to pass through crowdfunding platforms worldwide will increase from $10 billion in 2014 to $96 billion by 2025. This estimation assumes only 1% of investment capital is investment through crowdfunding platforms. After several years of delays, Titles I through VI have been implemented. Titles II, III, and IV create exemptions from registering the sale of securities with the SEC, and Titles I, V, and VI redifine the regulatory requirements of certain types of businesses.
Title I: Reopening American Capital Markets to Emerging Growth Companies
The SEC created a new classification of privately held companies. “Emerging Growth Companies” are generally defined as privately held companies with less than $1 billion “total annual gross revenue.” New scaled disclosure provisions require only 2 years of audited financial statements to release their initial public offering (IPO). Brokers, dealers and members of a national securities association are now allowed to publish research reports on emerging growth companies prior to their IPO.
Title II: Access to Capital for Job Creators
The SEC lifted the ban on general solicitation of privately-held stock, defined as Private Issuers Publicly Raising (PIPR) by the SEC. Sale of securities via public offers must only be purchased by Accredited Investors or Qualified Institutional Buyers (QIBs). Resale of these securities may be generally solicited, and they are restricted to Accredited Investors and QIBs.
Title III: Capital Raising Online While Deterring Fraudulent Use of NonDisclosure ("CROWDFUNDING")
Under Title II, the SEC provides an exemption from registering crowdfunded securities transfers to the general public. In order to qualify for this exemption, the transaction must fall within specific parameters. The amount raised by the Issuer must not exceed $1 million within a 12-month period; the amount invested by any individual must not exceed $2,000 or 5% of annual income or net worth, if the annual income or net worth of the investor is less than $100,000; or the amount invested by any individual must not exceed 10% of annual income or net worth (not to exceed $100,000) if the annual income or net worth of the investor is greater than $100,000; and transactions must be conducted through an intermediary that is either registered as a broker or is registered as a new type of entity called a “funding portal.”
Title IV: Small Company Capital Formation
This rule exempts PIPR offers of up to $50 million from the registration requirements of the Securities Act. There are two tiers of investment amounts under this exemption, each with different regulatory requirements. Tier 1 is for offerings up to $20 million, and Tier 2 is for offerings of up to $50 million. Issuers utilizing this exemption must go through financial audits, and satisfy several other regulatory stipulations. Investors, under this proposed rule, are still limited to 10% of the greater of annual income or net worth, but issuers have been provided a much higher ceiling in exchange for increased compliance measures. Securities purchased under this exemption may be resold without restriction, unlike Title III.
Title V: Private Company Flexibility and Growth
Prior to the JOBS Act, under the Securities Exchange Act, issuers with assets exceeding $10 million and a class of equity securities with 500 or more shareholders were required to register its securities with the SEC. Title V increased this ceiling from 500 to 2,000 shareholders, as long as the number of non-accredited investors does not surpass 500. This ceiling does not include employees who acquired their securities through an employee compensation plan that is exempt from federal registration requirements or holders who purchased their securities under the exemptions of Title III of the JOBS Act. Although Title V has passed, the SEC still has yet to adopt safe harbor provisions that issuers can follow when determining whether shareholders received their securities pursuant to an exempt employee compensation plan.
Title VI: Capital Expansion
Title VI of the JOBS Act raises the mandatory Securities Exchange Act registration threshold for banks and bank holding companies. This ceiling has been increased from 500 shareholders to 2,000 shareholders, and there are no limits to the number of non-accredited investors. Under the provisions of this Title, a bank or bank holding company is required to register its securities when its total assets exceed $10 million and any class of its equity securities is held by 2,000 or more persons. This number does not include employees who acquired their securities through an exempt employee compensation plan or holders who acquired their securities through crowdfunding offerings. Issuers may now also terminate the registration of certain securities by filing a certification with the SEC that the number of shareholders of the class of securities in questions has fallen to less than 300 persons. Title VI sets the threshold at 1,200 persons for banks and bank holding companies, while maintaining a threshold of 300 for other types of issuers.