Crowdfunding and the Job Act III

Crowdfunding business is a term used to refer to raising capital for a specific cause or project through small donations from a large number of people, primarily done through online portals or white label crowdfunding software. In the initial periods of crowdfunding, people donated to a cause or company in exchange for a freebie, such as a t-shirt, early access to a product, or a movie production credit. In an “equity crowdfunding” campaign, people buy “securities,” as defined by the Securities Act of 1933 and the amended Securities Exchange Act of 1934.

Therefore, the registration requirements of the 1933 Act for the offer and sale of securities and the civil liability provisions — as well as both acts’ anti-fraud provisions — apply to equity crowdfunding transactions. Prior to the JOBS Act, private offering exemptions from the 1933 Act’s registration requirement did not apply to equity crowdfunding, classified as a public offering to the general public.

The JOBS Act significantly changed the laws regulating private securities offerings by allowing firms to undertake some types of public offerings to raise money from the “crowd” without registering with the Securities and Exchange Commission. The JOBS Act developed three new exemptions from SEC registration for three different forms of public or “crowdfunding” offerings.

The first exception, established under Title II of the JOBS Act, was only available to “accredited” investors. Since it was based on Rule 506 of Regulation D, there was no monetary limit on these offers and minimal restrictions. Furthermore, the JOBS Act removed a 90-year ban on “general solicitation” for this sort of offering, allowing entrepreneurs to reach out to the general public via websites, ads, and other methods. This exemption came into force on September 23, 2013.

The second exception, which went into effect in September 2013 under Title IV of the JOBS Act, required the SEC to examine, or “qualify,” the offering before it may be made available to the general public, liable to certain individuals’ investment limits. This exception is built on “Regulation A+,” a set of SEC regulations. It had two tiers: a fundraising ceiling of $20 million and a cap of $50 million. It entered into effect on June 15, 2015.

The third exception was Regulation CF, promulgated under Title III of the JOBS Act and subject to this Commentary and Analysis. The final regulations for claiming this exempt status occurred on May 16, 2016.

What is the JOBS Act?

In the past few years, the crowdfunding business has grown in popularity to generate funds for entrepreneurs and new ventures. However, this hasn’t always been the most viable option due to strict rules.

President Obama signed The JOBS Act into law in 2012, making security rules easier to understand and enabling entrepreneurs to use online portals such as white-label crowdfunding software to raise funds from non-accredited investors, which make up around 97 percent of the U.S. population. On May 16, 2016, the Securities and Exchange Commission (SEC) enacted Title III of the JOBS Act, also known as equity crowdfunding.

To sum it up, it made obtaining money easier, cheaper, and faster (for some businesses), and finally enabled crowdsourcing. With the evolution of the JOBS Act, more investors were permitted to contribute equity capital to private companies.

Previously, these investments were only available to affluent, accredited investors, defined by federal securities law as those earning $200,000 or more per year or possessing at least $1 million in assets, excluding their primary residence. Not only has the JOBS Act made it easier to obtain funds from qualified investors, but it has also allowed all investors, accredited or not, to participate in certain private offerings.

As the JOBS Act evolves through periodic updates and exemptions added to the law, individuals and companies on both sides of the capital market (acquirers and contributors) should keep a close eye on these changes and be aware of their options for obtaining and deploying finances.

Who Can Invest?

Crowdfunding offerings are open to everyone, similar to bonds and stocks. However, due to the inherent risks, you can only invest a limited amount of funds in these types of assets spanning 12 months.

The following are the inflation-adjusted investment limitations, which are based on your net worth and yearly income:

• If you have less than $107,000 in yearly income or net worth, you can invest up to the greater of $2,200 or 5% of the lesser of your annual income or net worth during 12 month period.
• If your net worth and your annual income both average $107,000 or more, you can invest up to 10% of your yearly income or net worth, whichever is less, over a year, but not more than $107,000.

Suppose you earn $150,000 per year and have a net worth of $80,000., JOBS Act crowdfunding laws enable you to invest up to $2,200 or 5% of $80,000 ($4,000) in one year. In this scenario, you can invest $4,000 over a year.

The Updated Changes of 2020

The Securities and Exchange Commission (SEC) proposed modifications of the exempt offering structure on November 2, 2020, which aimed to unify, simplify, and strengthen it for investors, new businesses, and more seasoned issuers. These changes resulted from the Commission’s assessment of the first JOBS Act crowdfunding provisions, which took effect in 2015.

The existing “patchwork system” was already proven inefficient and unsustainable, creating a substantial impediment for small, early-stage private companies seeking alternative financing. The 2020 regulation aimed to unify laws and tighten limitations while protecting investors. The following are the amendments to Regulation Crowdfunding (Reg CF) that were implemented after March 15, 2021:

• The offering cap increased from $1.07 million to $ 5 million. Accredited investors (those having an annual income of $200,000 or $300,000 for joint income in the previous two years, or a net worth of $1 million, either separately or together) are no longer restricted from investing.
• It modified the investment limit for non-accredited investors to greater existing limitations based on their yearly income or net worth (rather than the “lesser of” under the present regulation).
• Reg CF businesses were permitted to create crowdfunding business pages and communicate accessible information with potential investors before issuing stock under a new “test waters” provision.
• The period between Reg CF fundraisers was significantly reduced from 180 to 30 days.

Until the latest revisions, there was no clear framework for firms seeking to benefit simultaneously with multiple exemptions or within a short duration. Reg CF businesses can now utilize safe harbors for a wide range of offerings, allowing them to launch multiple fundraising campaigns simultaneously.

This set of adjustments also improved the offering cap for Regulation A+ (the mini-IPO for well-established businesses) and Ruled 504 / Regulation D offerings (for accredited investors only).