As you likely know if you have found your way to the KingsCrowd website, you have the freedom to invest in your favorite startups online. You might be wondering why this is. It wasn’t too long ago that there were more restrictions on investing in alternative assets in the US.
What is the JOBS Act of 2012?
The Jumpstart Our Business Startups Act, commonly known as the JOBS Act, was passed by Congress and signed into law in 2012 by President Obama. The primary goal of the JOBS Act is to reduce barriers to capital formation, particularly for smaller companies. This legislation comprises several sections, or Titles, each addressing different aspects of investing, including regulated investment crowdfunding (debt and equity crowdfunding).
Titles of the JOBS Act
Title II (Reg D 506(c)): This new exemption allows startups to raise an unlimited amount of capital from accredited investors. Unlike its predecessor Reg D 506(b), Reg D 506(c) permits companies to advertise their fundraising efforts publicly and conduct these raises online.
Title III (Reg CF): Better known as Reg CF, this exemption enables companies to raise up to $5 million annually from both accredited and non-accredited investors, within certain limits.
Title IV (Reg A+): Known as Reg A+ (to differentiate it from Reg A, which existed prior to the JOBS Act), this exemption is divided into two tiers. Tier I allows issuers to raise up to $20 million, while Tier II allows up to $75 million. Both accredited and non-accredited investors can participate.
Prior to the JOBS Act: Reg D 506(b), Rule 504 and SCOR
Before the enactment of the JOBS Act, the landscape for investing in startups and alternative assets was significantly more restrictive. Accredited investors, comprising about 10% of American households according to the SEC (though some estimates suggest this number may be lower), had exclusive privileges under certain regulations such as Reg D 506(b) and Rule 504.
Rule 504 of Regulation D allowed companies to raise up to $1 million (later increased to $5 million and now $10 million) within a 12-month period from any investors, whether accredited or non-accredited. This rule was particularly appealing to smaller companies looking for a straightforward way to access capital without the extensive disclosure requirements mandated for larger public offerings. However, public solicitation was generally not allowed under Rule 504, limiting the reach of these fundraising efforts.
SCOR (Small Corporate Offering Registration), on the other hand, was another mechanism available before the JOBS Act and continues to be utilized today. SCOR facilitated smaller companies in raising up to $1 million from the general public using a streamlined registration process. This method was designed to reduce the costs and complexities associated with traditional public offerings, making it more accessible for small businesses. SCOR was particularly popular in certain states that adopted specific guidelines to support these offerings.
Both Rule 504 and SCOR provided pathways for small enterprises to secure funding, but they were limited in scope and reach compared to the more comprehensive opportunities introduced by the JOBS Act. The introduction of Reg CF, Reg A+, and the public solicitation allowance under Reg D 506(c) significantly broadened the investment landscape, democratizing access to capital for startups and expanding investment opportunities for the general public.
The JOBS Act opens up investing in private companies to those that don’t meet the above criteria, or are unaccredited investors. At KingsCrowd, we cover deal flow for both accredited and non-accredited investors, so no matter who you are, you can make the most of your money. If interested, you can subscribe to KingsCrowd here.
