It’s like a complicated game of Whack-A-Mole. The 2012 Jumpstart Our Business Startups Act (JOBS Act) is introduced, enacted section by section, to address changing investment dynamics related, at least in part, to crowdfunding. As one new section comes into force, older rules pop up that we realize are now out-of-date and require a refresh.
Let’s take Title III of the JOBS Act as an example. If and when enacted it would throw open the door to non-accredited members of the public who want to invest in private securities. It provides an alternative to the intrastate offering exemptions found under Rule 147 and Section 3(a)(11). In the meantime, states are already enacting their state versions of Title III, causing a set of different rules (even if similar) to be enacted in each state.
Intrastate Offering Exemption
Section 3(a)(11) of the Securities Act of 1933 provides that a company may be exempt from federal registration if it is only offering and selling securities within a single state. Rule 147 creates a “safe harbor” for qualifying intrastate securities offerings, as long as certain requirements are met:
* Purchasers of the securities must be residents of the same state
* 80 percent of the company’s gross revenues, operations, assets, and net proceeds of the securities offering must all occur within the same state.
At the time this rule was drafted, the Internet was hardly a twinkle in the eye of technology. The business of capital raising is increasingly crossing lines, not just between states, but between countries. The JOBS Act modernizes the rules, but also exposes flaws in some of the old rules. The SEC Advisory Committee on Small and Emerging Companies has recommended that Rule 147 be modernized, with a particular focus on the 80 percent rule.
Titles II and IV Came First
The SEC has already implemented these two titles of the JOBS Act but implementation of Title III has been delayed. Title IV, or Reg A+, allows retail investors limited participation in so-called “mini-IPOs” (Reg A+ offers an blue sky exemption option). Title II, or Reg D, changed the game by allowing private startups to use “general solicitation” to attract money and attention from investors who are qualified.
All of these new provisions help democratize fundraising, improve access to capital for entrepreneurs, and open up opportunities to invest to un-accredited or retail investors.
Intrastate Crowdfunding Exemptions
At the time of this writing, about two dozen states have amended their blue sky laws or enacted intrastate crowdfunding exemptions from federal registration on activities within state boundaries. While the SEC takes its time to watch, review, and assess the rollout of each element of the JOBS Act, the rest of the investment community waits to see how significant an impact there will be on blue sky laws and the need for intrastate exemptions.
Will Title III eliminate the need for the intrastate offering exemption? No, that’s not likely, at least not immediately. Intrastate offering exemptions will still be useful for some time to come, especially since Title III rules are a bit onerous as they are currently contemplated. Intrastate crowdfunding exemptions that rely on the intrastate offering exemptions might see less value as it’s a bit frustrating to comply with different state rules, but there will be those who may still prefer to raise only in selected states rather than take advantage of the Title III rules.
Many capital raising initiatives still require verification of accredited investors. Let the experts at VerifyInvestor.com take you through a simple, confidential, and complete process.
