JOBS Act, Accredited Investors, and Flaming Hoops

I’ve heard it multiple times now, from angel investors and entrepreneurs alike, that the JOBS Act changed the definition of accredited investorin order to make it easier to be one.  (Remember, Dodd-Frank made it harder.) It’s as if President Obama and the Congress had with the JOBS Act done away with the many flaming hoops that investors and companies have had to jump through for decades in order to raise capital in compliance with the securities laws.

In fact, I’ve heard it stated that the JOBS Act reduced the income or net worth requirement to $100,000.

I’ve always responded to these assertions with: ”No. It didn’t.”

But the last time this type of encounter occurred I was upbraided. “Yes, it did!” my conversant declared.

He proceeded to whip out the statute to show me. As I watched him thumb through the pages, I wondered what he would find. He finally found what he was looking for, it said:

“B)   the aggregate amount sold to any investor by an issuer, including any amount sold in reliance on the exemption provided under this paragraph during the 12-month period preceding the date of such transaction, does not exceed—

  1. the greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000, and;
  2. 10 percent of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000.”

“There!” my inquisitor said.

I had to explain to him that the above definition has nothing to do with the definition of “accredited investor.”

“Accredited investor” offerings under Rule 506 are completely different from what will be “crowdfunding” offerings under the JOBS Act, when the rules for crowdfunding offerings are finally done and crowdfunding is actually legal (it is not legal yet).

The best way to think of it is this way: Rule 506 “all accredited investor” offerings are on a completely different planet from crowdfunded offerings. Definitions helpful in one world don’t necessarily have any meaning in the other. The below table shows some of the differences between the two offerings. As you can see, they are dramatically different. Two different worlds.

Below is a table comparing the current most commonly used federal exemption from the registration requirements for early stage equity financing of emerging businesses and the new equity crowdfunding exemption, which I hope you will find helpful.

Rule 506 Crowdfunding
Limitation on Offering Size None $1M during any 12 month period (including amounts raised in any other private securities offering in the same period).
Limitation on number of investors Not if all investors are accredited. Not technically, but there is a some outside limit by virtue of the the offering size limit.
Advertising allowed Yes – once the rules are final. No, companies cannot advertise; they can only refer people to portals.
Specific Disclosure Requirements None required by the rules; but subject to anti-fraud requirements. Yes, very specific, detailed disclosure requirements, the complete details of which have yet to be finally determined. Also subject to anti-fraud requirements.
Third party intermediary required No Yes; companies have to go through a broker-dealer or registered funding portal.
Ongoing SEC reporting No Yes, but exactly what is required here is not yet defined.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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