After a lengthy delay, the Securities and Exchange Commission finalized Title IV of the Jumpstart Our Business Startups (JOBS) Act. The new rules make it easier for small and mid-sized companies to raise capital, and for the first time allow the general public to become investors.
On Wednesday, the commission approved changes to the existing Regulation A provisions, raising the limits on the amount businesses can raise through small public offerings from $5 million to $50 million.
More than just increasing the amount businesses can raise through a public offering, the updated rules, known as Regulation A+, broaden the definition of a “qualified investor” and opens equity funding to average citizens. Title IV permits non-accredited investors. Prior to the Regulation A+, all individual business investors had to be accredited—a set of limitations, which ruled out the majority of the public. Per the SEC, an accredited individual investor must have income exceeding $200,000 in each of the two most recent years, or joint income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year. Net worth criteria include individual or joint net worth with a spouse, exceeding $1 million at the time of the purchase, excluding the value of the primary residence of such person. Regulation A+ democratizes investing, but the SEC still placed limits on how much non-accredited investors can invest. This group of investors is limited to no more than 10 percent of their income or net worth, a provision in place to prevent less-experienced investors from losing it all on a single investment.
Title IV divides businesses into two tiers, depending on the total amount of equity sought. Tier 1 allows businesses to raise up to $20 million from both accredited and non-accredited investors over a yearlong period. Tier 2 covers fundraising of up to $50 million over 12 months. Both offerings are subject to basic requirements as to issuer eligibility and disclosure. The main difference between the two tiers, other than the dollar amount raised, is the reporting requirements. Companies proceeding under Tier 1 are subject to state-level review, but are not required to perform formal audits or annual reviews. Tier 2 offerings are exempt from Blue Sky Laws, a series of state security law registrations and qualifications, a change that may encourage more businesses to go this route. Under the original Regulation A, companies wanting to offer shares to qualified investors in multiple states would be required to file separate reviews in each of those states along with paperwork for a federal review.
Some experts believe the cumbersome reporting process may have contributed to the underutilization of the original Regulation A. “I have never felt that the $5 million cap was that significant,” DJ Paul, who serves on the SEC’s advisory board on small and emerging companies, told The Washington Post in an interview. “The real friction point has been this state approval requirement.” While the larger Tier 2 offers will not be subject to state oversight, they are still required to submit audited financial statements, annual, semi-annual and current event reports.
The move to finalize Title IV comes three years after President Barack Obama signed the JOBS Act — which was designed to increase the access of small businesses to non-bank capital — into law. Half of the legislations proposed under the law are still outstanding including Title III of the act, which would further democratize business fundraising by allowing companies to raise smaller amounts of money through online crowdfunding marketplaces. SEC chairwoman Mary Jo White has said there is no limit to the period of time under which the SEC will implement all of the parts of the JOBS Act, although some experts believe that after 700 days of delay, Title III will not share the same happy outcome as Title IV.
The revised Title IV will go into effect 60 days after their publication in the Federal Register.