Title IV Of The JOBS Act Has Been Passed
By Kevin Vela
Well, it only took 3 years, but the SEC has finally published a fact sheet on the final rules of Title IV of the JOBS Act, known as Regulation A+. In laymen’s terms, this means that everyone will be able to invest into startups who utilize Regulation A+ very soon.
Traditionally, startup investing has been limited to a very small percentage of the population due to 1930’s era SEC regulations. No more.
I first wrote about crowdfunding in April of 2012, shortly after the JOBS Act was signed. In September of 2013 the SEC implemented Title II of the JOBS Act, which basically made it easier for accredited investors to invest. This was not the hopes of the masses, as the crowdfunding portion of the JOBS Act was intended to allow for non-accredited investors to take part in startup investing.
Title IV is now here and in a few months, the floodgates will open. (There is a very handy infographic on Crowdfunder which walks us through this legislative history.) The Title IV rule amendments to the JOBS Act were adopted on March 25, 2015 and become effective 60 days after publication in the Federal Register. That means soon. Here are the highlights of Regulation A+.
Regulation A+ provides for two tiers of offerings: Tier 1 is up to $20M, and Tier 2 is up to $50M; issuers with offerings up to $20M can elect either Tier 1 or Tier 2.
Tier 1 and Tier 2
- Offerings available to accredited and non-accredited investors
- Neither tier has general solicitation restrictions. But it is expected that the offerings will need to be done through a crowdfunding portal.
- Issuer is subject to eligibility, disclosure, and other requirements, drawn from the current provisions of Regulation A.
- Issuer must provide an “offering circular” to the SEC – the issuer will have to file a disclosure document and financials with the SEC and must obtain approval prior to any sales.
- The securities issued in Regulation A+ will be unrestricted and freely transferable.
- Offerings of securities up to $20M in a 12-month period, with not more than $6M in offers by affiliates of the issuer.
- Issuer must provide reviewed financial statements (not audited).
- Offerings still remain subject to federal and state registration and qualification requirements, falling under the NASAA “coordinated review” process with the states.
- Offerings of securities up to $50M in a 12-month period, with not more than $15M in offers by affiliates of the issuer.
- Non-accredited investors are limited to 10% of the greater of the investor’s annual income or net worth. Note that this limitation is only for Tier 2 offerings.
- Issuer must provide audited financial statements.
- Issuer must file annual, semiannual, and current event reports.
Blue Sky Laws
State “Blue Sky” laws are preempted for securities offered to “qualified purchasers.” A qualified purchaser is any person to whom securities are offered or sold in a Tier 2 offering (i.e. investors investing not more than 10% of the greater of the investor’s annual income or net worth or accredited investors).
Issuer (Company) Eligibility
Regulation A+ is not available to companies that:
- Are not organized in and have their principal place of business in the U.S. or Canada
- Are already SEC reporting companies and certain investment companies
- Have no specific business plan or purpose or have indicated their business plan is to engage in a merger or acquisition with an unidentified company
- Are seeking to offer and sell asset-backed securities or fractional undivided interests in oil, gas, or other mineral rights
- Have been subject to any order of the Commission under Exchange Act Section 12(j) entered within the past five years
- Have not filed ongoing reports required by the rules during the preceding two years
- Are disqualified under the “bad actor” disqualification rules
If you really want to get in depth on this stuff, check out this fact sheet from the SEC and the final rules here. There are still quite a few legal hurdles regarding compliance and qualification, and if an issuer wants to take advantage of Regulation A+ it will have to issue an “offering circular” which is a lot more work than filing a Reg D form (how most private offerings are done these days). So a lot remains to be seen, but I do believe that Title IV is a substantial step in bringing equity investing to the masses.
Because Tier 2 is pre-emptive (meaning it trumps state laws), and both Tier 1 and Tier 2 allow for investment by non-accredited investors, this will have a direct effect on the states, like Texas, who have passed their own crowdfunding rules. More to come on that.
This Tech Crunch article has a great synopsis of each of the key Title sections from the JOBS Act. I encourage you to check it out.