The Jumpstart Our Business Startups (JOBS) Act of 2012 opened the door for accredited and non-accredited investors to participate in certain types of private offerings. The Title II JOBS Act and the Title III JOBS Act modified the rules regarding the prohibition on general solicitation and the manner in which businesses may raise capital. The new laws made crowdfunding a possibility for private equity offerings.
Title II JOBS Act Impact Upon Private Equity
The Title II JOBS Act affects private equity in the following ways:
In order to avoid registering a private equity transaction, an exemption must be used. Such transactions that do not comply with an exemption require the payment of the money to be returned, referred to as rescission. In addition, those receiving investment subject to potential liabilities.
Most of those depending on an exemption usually utilize Rule 506(b) of Regulation D. Under this exemption, issuers may raise an unlimited amount of capital, do not have to comply with state filings, and are allowed to receive funds from thirty-five non-accredited investors.
Rule 506(b) of Title II JOBS Act forbids the issuer from using general solicitation, which involves communication from a company with potential investors through the Internet, the press, or various other solicitation channels, without having a previous substantive relationship with the party.
Due to these limitations, more small businesses and entrepreneurs are utilizing the provisions of Rule 506(c) as another way of obtaining capital funding. Rule 506(c) permits general solicitation and advertising of the private equity offering, only if all of the investors participating in the offering are accredited investors.
Online Private Equity
The expansion of securities crowdfunding in the future will largely depend on the popularity of online portals. As individuals become more comfortable with the private equity markets and find success, they will likely choose to become investors who no longer need to meet an issuer in person, but rather invest more often through an online platform.
Small Capital Access
Businesses will likely consider the sale of equity or debt to the private market as a viable alternative to bank debt financing during the next 10 years or so. A broker’s job becomes much easier when these capital raises may be advertised through whatever means required and when the entry barriers for brokers are much lower than in the past. Because of this trend, many brokers may turn to micro-raise services.
Angel Networks
Brokers and investors are now able to advertise and organize open angel networks. These are networks in which all investors are invited through television, newspaper, social media, radio, etc. to receive communication from local entrepreneurs about their investment opportunities. Significant potential for capital flow to businesses is possible through these networks.
Additional small business advantages from Title II JOBS Act provisions include an increase in Regulation D offerings and an increase in the use of social media (Facebook, Twitter, etc) as funding portals.
