Over recent years, crowdfunding has become a very powerful tool that small businesses can use to raise capital. It also enables entrepreneurs to solicit and obtain the funding they need from a wide range of investors in the marketplace. Provisions provided under Title II of the JOBS Act have had a significant role in facilitating the ability of companies to use general solicitation in order to market their securities offerings.
The JOBS Act, which stands for “Jumpstart Our Business Startups Act” passed Congress in 2012. In September 2013, Title II of the Act was officially enacted. The purpose of Title II was to make the process easier for small businesses and startups to raise capital. However, this legislation also placed certain limitations on who is permitted to purchase the securities offered by these companies.
Title II of the JOBS Act and Regulation D
Businesses seeking to raise money through the sale of securities are required to rely on a particular exemption from registration or register the securities offerings with the Securities and Exchange Commission (SEC). Most of the exemptions from registration do not allow general solicitation – for instance, advertising through the Internet, newspapers, etc. However, in accordance with Rule 506 of Regulation D, Title II does allow a business to utilize general solicitation to market their securities offerings.
This exemption allows companies to take advantage of the Internet or other avenues of advertising to market their offerings. While the type of investor who can purchase the securities is limited by restrictions, it does give a company the opportunity to attract a larger number of new investors.
Investor Criteria
Under the requirements set forth by this Title II JOBS Act exemption, a company is only permitted to make a securities offering to accredited investors. Under the provision, an accredited investor is an individual having a net worth of $1 million (excluding their principal residence), or someone who has earned more than $200,000 each year for the previous three years leading up to the purchase of the securities. An additional requirement is that the company must conduct reasonable steps to verify the accredited status of an investor. However, the amount of money that can be raised and the number of investors who can participate in such an offering under the exemption of Title II JOBS Act with Regulation D has no restrictions.
Although the above-mentioned restriction related to accredited investor status does reduce the pool of possible investors, the increased potential number of investors available through the ability to utilize general solicitation outweighs the disadvantages.
