A Definition of Titles I-V
With the crowdfunding industry buzzing about a possible July 2014 signing of Title III of the JOBS Act, entrepreneurs and non-accredited investors across the United States are gearing up for its arrival. Many players on both sides of the crowdfunding field have been educating themselves on the particulars, but not everyone is fully prepared. In fact, it is possible for some to believe the Jumpstart Our Business Startups Act is entirely based on crowdfunding – which it is not. Not by a long shot.
Keeping that in mind, sit back and truly ask yourself: What is the JOBS Act?
In order to be a well-rounded, well-researched crowdfunding participant you need to be familiar with all five titles of the JOBS Act. Knowledge is power, and when it comes to knowledge of investing, you can never have enough power.
To help refresh or update your current familiarity with the JOBS Act, here is a breakdown of Titles I-V:
Title I: Reopening American Capital Markets to Emerging Growth Companies
The first section of the JOBS Act was constructed specifically for companies who are considering going public through an initial public offering (IPO). And to get even more specific – companies who are referred to as an “EGC” or “emerging growth company.” Due to a worsening decline of IPO’s in recent decades, companies with less than $1 billion over the previous fiscal year would be exempt (or partially exempt) from disclosures that had been known to dissuade companies from going public in the past. Title I became law when the JOBS Act was signed on April 5th, 2012 and allows EGC’s the opportunity to at least entertain the possibility of going public when there was no chance before.
Title II: Access to Capital for Job Creators
On September 23rd, 2013, Title II went into effect and marked the first time in over 80 years that private startups and small businesses were able to raise investment funding publicly. It had been illegal for early stage private companies to publicly advertise the fact they were raising funds. Fundraising from the general public was an exclusive right of companies able to afford to be listed on the stock exchange. Now, since the SEC has lifted the ban, companies are free to seek funding publicly – which in the 21st century means Facebook, Twitter and other social media outlets. There are a variety of rules each company must comply with, such as filing Form D with the SEC before solicitation begins and disclosing details about the general solicitation 15 days beforehand, but it is a huge leap in the right direction. Non-accredited investors are not able to invest yet, but their day is soon to come.
Title III: Crowdfunding
All entrepreneurs and non-accredited investors (and readers of our truCrowd blog) interested in equity crowdfunding are certainly aware of Title III. Known for legalizing securities crowd investing, Title III will allow a company to raise up to $1 million in a 12-month period and also places a cap on how much non-accredited investors can invest in a 12-month period. Both of these provisions were established with the best intentions in mind, and in fact, Title III has yet to be passed due to ongoing revisions of the final laws. The SEC is adamant on protecting crowdfunding from fraud and putting uneducated investors at risk of investing (and possibly losing) their life savings. At truCrowd we are happy they are making the rules for Title III watertight but are eagerly anticipating the day when equity crowdfunding becomes legal.
Title IV: Small Company Capital Formation
In another attempt at easing the capital raising process for emerging companies, Title IV, also known as Regulation A+, will allow companies to raise up to $50 million without having to file a registration statement. Regulation A+ is the answer for the burdensome Regulation A which has been a roadblock for a variety of capital-seeking companies. There are two Tiers to Regulation A+: Tier 1 allows up to $5 million in offerings and up to $1.5 million for selling shareholders in any 12-month period. Tier 2 allows for $50 million and up to $15 million for selling shareholders in the same 12-month period. Tier 2 understandably requires additional reporting, such as ongoing electronic reporting, and the remaining details will be ironed out as Title IV gets closer to reality.
Title V: Private Company Flexibility and Growth
Last but certainly not least, the final portion of the JOBS Act allows companies to raise the amount of shareholders they can have before it is subject to annual reporting requirements of the Exchange Act. The currents laws state any private company can stay private until it reaches 500 shareholders. When Title V is passed, this number will quadruple to 2,000 shareholders or 500 non-accredited shareholders. Title II and Title V are aimed at allowing companies to raise money privately and stay private longer than ever before.
After reading this blog I hope you have a more universal understanding of how wide-ranging the JOBS Act is for small businesses. Many of the provisions inside Title I-V have been desired for years and will undoubtedly have an immediate and positive impact on the small business landscape. And with all this knowledge at hand, I hope you have a strong and confident concept of what the JOBS Act is going forward.
Questions or comments? Leave your ideas below!