Home » Why is September 24th a Huge Day for Entrepreneurs? Title II of the JOBS Act and Crowdfunding for Accredited Investors Begins

Why is September 24th a Huge Day for Entrepreneurs? Title II of the JOBS Act and Crowdfunding for Accredited Investors Begins

More Investment Money Means Potentially More JOBS!

On September 24th, there will be a sea change in how entrepreneurs can seek money from early stage investors – one of the largest changes to securities laws in 80 years.  On September 24th, Title II of the JOBS Act (a seven-part Act signed into law by President Obama on April 5, 2012) goes into effect.  Here are the key questions to be asking. 

Screen Shot 2013-09-20 at 7.52.19 AMQuestion: What is the change is that is going into effect?

 Effective as of September 24, 2013, Issuers of shares (under New Rule 506c) may use general solicitations and general advertising to effect a private placement. Prior to this any public means of communication like magazines and television were excluded from avenues for raising money for companies unless they were public. You really needed to know someone who was raising money in order to invest. There must have been a pre-existing relationship. Now that pre-existing relationship doesn’t have to be there. So businesses can reach more potential investors, faster, via the Internet and social media.

Now private companies can use those mediums as well as the Internet and the social network to reach millions of potential investors.  This reverses an eight-decade-old law.

Question: Can anyone invest?  Is this crowdfunding for unaccredited investors that we’ve been hearing about?

No, not anyone can invest. While anyone can see the solicitation for funds, the completed sales, must only be to “accredited investors” and the Issuer (the company, broker/dealer or 3rd party Web platform) has the burden to verify that the investor is “accredited.” An accredited investor is someone who makes over $200,000 for the last 2 years or has a liquid net worth of $1M.  Crowdfunding for unaccredited investors is still waiting on the SEC to come out with the proposed rules. Unaccredited investors that might see these solicitations cannot invest in these offerings. Companies accepting funds must be careful to verify accreditation.

Question: What is the maximum amount that can be raised?

Unbeknownst to many people there is no cap on the amount that can be raised.  While this has always been there, the ability to use the Internet to reach more investors has the potential to lead to a lot more investment money. This influx into the economy could be a boon for businesses and jobs. This can be beneficial for startups, small businesses and even Venture funds.

Question: What are the risks?

There are many.

    1. First, as with any investment there are no guarantees that you will see a return, that you will get your money back or a timeline attached to if and when you see a return.
    2. Second, there is no review of the offering by the Securities and Exchange Commission. Solicitations can be online or offline and made to any potential investor. While forms need to be submitted to the SEC, there is no requirement for review of the offering by any State Securities Commission. Since State Securities police the markets there is an opportunity for fraud.
    3. Third, this is really buyer beware.  Investors need to be cautious before they invest.  Investors should only invest in people they know and trust and opportunities they believe in. They should take time to educate themselves about investing in the private markets and understand that in many cases the securities they buy will not be liquid, meaning they are not converted into cash easily.  As a matter of fact in many cases you might have to hold on to them until the business sells, merges or goes public.

             Question: What are the benefits?

The majority of wealth in corporations happens at their early stage.  While there is a tremendous amount of failure after 5 years, companies that succeed not only create a vast number of jobs but a return on investment that exceeds many other investment opportunities.  That being said, investments into high-risk companies like startups and small businesses should never equate to more than 10% of an individual investor’s portfolio.

DRILLING DOWN

  1. What does this change mean?
    1. Issuers can reach moreWhy is this important?
      1. According to the IRS there are around 6M accredited investors in the USA.
      2. According to the Angel Capital Association:
        1. Only 10% of them invested in private companies
        2. However, those investors pumped $23B into those companies
        3. With the lift on the ban the potential to reach every 1% more of accredited investors represent another $2.3B into the economy and jobs
  1. Is this Crowdfunding?
    1. Crowdfunding is using the social network to solicit funds for an idea via an online platform likeIf a website like this is used under the new law and the solicitation is targeted to accredited investors, you could consider this the first wave of equity or debt-based crowdfunding.
    2. However the change in the law does not require the use of websites to facilitate theWe think this might be problematic because crowdfunding websites bring transparency to the process by forcing all the documents related to the offering online.  This means there is a digital footprint of everything that happens.  Digital footprints have been shown to increase transparency since people are afraid of repercussions.  Not having a footprint of what people are offering or saying can lead to problems.
    3. When Title III of the JOBS Act goes into effect, businesses will be able to solicit both accredited and unaccreditedHowever there is a $1M cap on how much issuers can raise as well as caps on how much investors can risk.  In what just went into effect, there are no caps on issuers or investors.  This means investors can lose a great deal if they aren’t careful.
    4. By not forcing this to happen on SEC registered websites, it might be difficult to police theTitle III of the JOBS Act requires that these transactions take place on websites that are registered with the SEC.

EDITORIAL

Net-Net This could be a huge influx of capital upwards of $2.3B for every 1% more of accredited investors that begin to invest in private companies.

  1. All issuers and participants in the offer and sale of securities who may elect to utilize the new freedoms afforded by Rule 506(c) should proceed carefully and to generally solicit and market the offering of unregistered securities in a manner that doesn’t draw unwanted attention.
  2. Issuers should consider hiring a law firm like Ellenoff, Grossman and Schole to review their documents and assist with filing their forms with the SEC.
  3. Issuers should consider listing their offerings through an “accredited investor crowdfunding platform” like SeedInvest that can help them follow the steps to be compliant.
  4. If you are an entrepreneur and you have never raised money before, you need to EDUCATE yourself before you getThere are resources:
    1. Success With Crowdfunding– Provides online step-by-step training and education including:
      1. Introduction to Crowdfunding
      2. Title II for Issuers
      3. Title II for Investors
    2. Crowdfund Investing for Dummies – Lays the groundwork for raising money using the Internet and is a resource for issuers looking to raise money from both accredited and unaccredited investors.

The Law

This isn’t easy.  Companies trying to raise money will have to work for it.  Here’s a breakdown of what issuers need to confirm.  (Some of this is repetitious to above).

  1. All solicitations must be accurate
  2. Companies need to make sure each potential investor receives a full private placement memorandum (these require lawyers and can cost at minimum $25,000) so this will likely mean that people using this means of raising money will be raising more than $500,000
  3. Companies, as mentioned above, must verify each investor is indeed “accredited”
  4. Form D will be expanded and require addition information including:
    1. Issuer information
    2. Issuer website
    3. Type of securities
    4. Details about purchasers (individuals or entities)
    5. Use of proceeds
    6. Description of general solicitation
    7. Description of verification methods
    8. File Form D within 15 days before general solicitation begins
    9. File an amendment to Form D within 30 days after completion of the offering
    10. Include a legend in offering materials for generally solicited deals
    11. For a period of two years, submit offering materials to the SEC for review and analysis (these materials will not be available to the public via the SEC website)
  5. For the first time in history the ban on general solicitation is lifted.
    1. No need to engage a middleman, no need for a broker
    2. However, they can only take funds from accredited investors.
  6. Prior to this change accredited investors self-certified their status
  7. Now the burden of certification falls on the shoulders of the issuers
    1. Con – Investors might not want to release their privateIssuers might not have the manpower to read through all the documents to confirm accreditation.  If issuers do not follow reasonable verification procedures, they may be in violation of the 1933 Act resulting in significant penalties, including rescission rights on behalf of investors.
    2. Pro –  Accountants or lawyers can act as the proxy forThere is talks about US Treasury creating a plug-in to the IRS tax tables for investors to print off a government issued accreditation certificate which would solve this problem
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