Title II JOBS Act and Regulation D – Before and After

Signed into law on April 5, 2012, the Jumpstart Our Business Startups Act (JOBS Act) was designed to stimulate the formation of capital for small businesses by lessening the regulatory demands on these businesses and provide greater access to capital markets. Almost a year and a half later, Congress would enact the Title II JOBS Act that would relinquish the ban on general solicitation and advertising for private securities offerings that depend on Regulation D Rule 506. This is of course contingent on the sales being limited to accredited investors and issuers taking reasonable steps to verify the accredited investor status of all purchasers.

Updated Method of Raising Capital
Title II of the JOBS Act allows small businesses to locate investors and publicly raise funds for their companies. This may be done utilizing the Internet and social media with certain restrictions. The SEC requires issuers to take reasonable steps to verify investors in the securities are accredited investors. There are restrictions on who made by the securities but no restrictions on who a company may solicit. This updated method of raising capital was deemed necessary with the advent of the Internet.

Individual Accredited Investors
An individual may qualify as an accredited investor if they have:

  • A net worth of $1 million minimum, not to include the value of the person’s primary residence
  • And income greater than $200,000 individually or $300,000 jointly with the spouse in each of the two most recent calendar years, with a reasonable expectation of obtaining the same income level during the current year

Before Title II
Prior to the advent of Title II JOBS Act provisions, operating as a public company or going public was limited to large, well-established companies. This was mainly due to the fact that the process of going public was both time-consuming and expensive. There were two options available for these companies to raise capital. One was through private placements, such as provided through SEC Regulation D, with reliance upon an exemption from registration for small issuers, and another was through publicly registering their securities with the SEC. Under the law, before Title II, general solicitation and advertising for small companies raising funds through private placements under Reg. D was not permitted.

Rule 506 Before Title II
Before Title II, Rule 506 forbade general solicitation or advertising, but allowed a limitless number of accredited investors, a maximum of 35 non-accredited (but sophisticated) investors, and only restricted types of securities.

Rule 506 After Title II
The JOBS Act mandated the SEC to institute rules changing the existing exemptions from registration adopted under the Securities Act of 1933 and to develop new exemptions that allow issuers of securities to obtain funding without SEC registration. Per the requirements of the JOBS Act, the SEC adopted amendments to Rule 506 of Regulation D on July 10, 2013, that implemented the requirements of Section 201(a) of the JOBS Act. On September 23, 2013, the amendments went into effect.

After the requirements of the Title II JOBS Act were implemented, Regulation D Rule 506 was converted into two separate Rules – 506(b) and 506(c). With these changes, Rule 506(b) allowed for issuers to manage a Rule 506 offering while adhering to the prohibition against general solicitation. Rule 506(c) represented the old approach.
In addition, when using either exemption – Rule 506(b) or Rule 506(c) – an unlimited amount of capital may be raised in offerings.

For information about verifying the accredited status of prospective investors in private securities offerings, contact an experienced investor verification service today.

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