The JOBS Act: Growth Company Bonanza or Regulatory Morass?
Assessing a law that's only four years old is difficult: by legislative life spans, four years is a blip. But the Jumpstart Our Business Startups Act of 2012 was designed to be a fast-acting measure — an economic defibrillator that would revive access to capital for small to midsize businesses. So it's not too early to ask if the JOBS Act, a major achievement of the Obama administration, is a success so far. In addition, with some congressman introducing legislation that would alter the law s ..
David P. Hooper
Wayne R. Pinnell
As an early advocate for the JOBS Act, I firmly believe it has largely been a success. The purpose of the JOBS Act, signed into law April 5, 2012, is to promote capital formation for small businesses, IPO-ready companies, and everything in-between.
There are seven titles in the Act. Though rarely attended to, Title II which allows general offer and solicitation for private placements, and Title IV, which increases the size and flexibility of Regulation A offerings, are, in fact, the most impactful provisions of the JOBS Act.
Title II brought significant change to private placements, or what is known as Rule 506 offerings. Prior to enactment of the JOBS Act, private placements were just that: private. Subscribing to a deal was difficult, because, with few exceptions, all of the investors had to qualify as “accredited investors.”
If you were selling the deal, you would have to access a deep sales channel, such as an investment bank, and pay a premium for doing so. Rule 506(c) offerings allow you to advertise a deal. All investors must be accredited, and you must have some proof of this, such as a tax return or a letter from the investor’s lawyer or accountant. You can also rely on third-party verification services, and if you are raising money through an online platform, you may rely on that platform’s diligence.
This has improved access to a wide variety of deals, particularly venture capital deals, as evidenced by the explosive popularity of leading venture platforms like Funders Club and Angel List. Investors in traditional venture funds previously had to make significant commitments to qualify as a limited partner Now, investors on these online platforms can participate in venture deals with as little as $5,000, and credible startups can receive funding on competitive terms.
Title IV of the JOBS Act amended what had previously been a little-used offering framework known as Regulation A. Under the old rules, companies could raise up to $5 million from all investors, regardless of accreditation. Deals had to be qualified by the both the Securities and Exchange Commission and the states in which the issuer sought to sell the deal. The qualification process required a filing similar to a mini-IPO, and the costs of putting this together were difficult to justify, given the limited offering amount.
The JOBS Act improved Regulation A by allowing companies to offer up to $50 million of securities in a 12-month period. There are two different tiers of so-called “Regulation A+” offerings. Tier 1 allows companies to sell up to $20 million of securities. The issuer still must qualify with the SEC and the individual states in which the issuer seeks to offer securities; however, the ongoing disclosure obligations have been reduced, and the states have introduced a highly effective coordinated review process to ensure timely qualification.
Should issuers need more capital, they can use Tier 2, which requires heightened disclosures and ongoing reporting obligations but allows the sale of $50 million of securities and preempts state qualification.
Regulation A+ has already brought some important deals to the public, and credible underwriters such as WR Hambrecht & Co. are active in the space. The real beauty of Regulation A+ is its flexibility. My own company, GROUNDFLOOR, is using Regulation A+ to provide retail investors with the opportunity to fund short-term, single-family real estate construction and renovation loans for as little as $10. Though many of the early Regulation A+ deals have been growth-stage companies, I think there is a real opportunity for more mature private companies to use Regulation A as a bridge-financing tool. Think of GE Finance’s commercial paper program but at a fraction of the size.
Title II, in creating a general offer and solicitation framework for private placements, and Title IV, in amending Regulation A, are the most impactful provisions of the JOBS Act and the major factors in its overall success and efficacy. Both provisions are flexible, and we are seeing many creative approaches to finance that provide great investment opportunities for accredited and non-accredited investors alike.
Nick Bhargava is a co-founder and executive vice president of regulatory affairs at GROUNDFLOOR, the first real estate lending marketplace open to non-accredited investors.