Open for Comment: JOBS Act Title III Proposed Rules

Thursday, November 7, by Timothy McKeever
On October 23, the SEC issued long-awaited proposed rules for Title III of the JOBS Act, taking a big first step towards allowing crowdfunding from non-accredited individual investors for the first time. Crowdfunding allows companies to raise capital by attracting individuals to invest in the company through online “funding portals.” The new Title III rules offer the greatest benefit to smaller private companies, which, for the first time, will be able to seek investment from individual investors without facing the costs and difficulties of taking the company public.

Lifting prior restrictions could spur a wave of new investment and economic growth

The Jumpstart Our Business Startups Act (JOBS Act) was passed on April 5, 2012, and aimed to ease restrictions on the solicitation of funding and investment for small businesses by permitting, among other things, crowdfunding from individual investors. This new crowdfunding policy first took shape on September 23, when the SEC issued rules implementing Title II of the Act, which lifted portions of the prior prohibition on public solicitation of fundraising efforts to allow companies to more freely advertise an offering to attract investment. However, Title II only allows actual investment from “accredited investors”—those with “net worth . . . greater than $1 million (excluding a primary residence) or whose individual income exceeded $200,000 ($300,000 for couples) for the past two years with the expectation for that level of income to continue in the current year.” Today, there are only approximately 8 million accredited investors in the US, and very few of them actually participate in crowdfunding. While still significant progress for businesses seeking investment, the Title II rules still exclude the large class of non-accredited individuals.
The Title III proposed rules offer the chance to open the floodgates of crowdfunding investment by permitting non-accredited individuals to participate. Lifting the prior restrictions essentially creates an entirely new class of investors, which some estimate could generate $300 billion or more in new investment capital. However, the current provisions, totaling more than 500 pages, stop short of permitting unrestricted individual investment. The proposed rules still impose limits on investment by non-accredited individuals in an effort to shield investor risk. Among those proposed restrictions, individual investors making less than $100,000 per year will only be allowed to invest up to $2,000 or 5% of their annual income, and individuals making more than $100,000 per year will only be able to invest a maximum of 10% of their annual income. The rules also require investors to hold any security purchased under Title III for at least one year before being allowed to sell. The proposed rules also cap the amount that companies can raise through Title III crowdfunding at $1,000,000 each year, and require companies to make additional disclosures in order to participate.
Crowdfunding has emerged as one of the more compelling and innovative new ways for business ventures to raise capital outside of traditional funding avenues. Title III, once implemented, has the potential to transform the venture capital industry by greatly expanding the pool of potential investors. Of course, the law is not without its critics. Some criticize the possible risks that investing in young companies could pose to unsophisticated investors, while others see the rules as paternalistically restrictive. However, few debate the potential economic impact of allowing companies to access and harness the value of this population of newly eligible investors.
The new rules are currently open for comment until February 3, 2014. After the comment period closes, the SEC will review the comments and vote on final rules. Final rules could come as early as the Spring of 2014, but, if the past is any indication, eager investors should not hold their breath.