As featured on Orchardplatform.com
There’s a lot to know about the Jumpstart Our Business Startups (JOBS) Act (the “JOBS Act”), especially when it comes to crowdfunding. This post highlights the facts we believe investors and borrowers should know in order to gain a better understanding of the JOBS Act and its implications.
What is the JOBS Act?
In recent years, crowdfunding has become a useful tool for businesses and entrepreneurs to raise capital. But it wasn’t always an available option due to strict securities regulations.
In 2012, the JOBS Act was created to ease securities regulations and to encourage the private funding of U.S. small businesses. In short, it made the process of raising capital simpler, cheaper, and faster (for some companies), and eventually made crowdfunding possible. As the JOBS Act continued to evolve, it allowed more investors to participate in equity capital contribution to private companies. Historically these investments were only accessible to wealthy, accredited investors, a term defined by federal securities law which includes individuals earning $200,000 or more annually or holding at least $1 million in assets, minus their private homes. The JOBS Act has made it not only easier to raise capital from accredited investors, but has also opened the door to all investors, accredited or not, to invest in certain private offerings.
As the JOBS Act develops through periodic updates and exemptions added to legislation, it is important for individuals and business on both sides of the capital market (acquirers and contributors) to keep their finger on the pulse of these changes and understand the options they have in terms of raising and deploying capital.
A History of Investment Advertising and Solicitation
Prior to the JOBS Act, the Securities Act of 1933 was the first major piece of federal legislation regarding the sale of securities. It was enacted as a result of the stock market crash in 1929 with the following goals: 1) provide more transparency in financial statements to help investors make informed decisions and 2) establish laws about misrepresentation and fraudulent activities in the securities markets. The federal government relied upon this legislation to help renew stability and investor confidence in the markets.
The Securities Act of 1933 addressed the need for improved disclosure by requiring issuers of securities to register with the Securities and Exchange Commission, ensuring they provide both the SEC and potential investors with all relevant information through a prospectus and registration statement. The Act also provided companies with a number of exemptions which permitted the sale of securities in limited circumstances under certain “exempt offerings.” Before 2012, it was nearly impossible for anyone of average wealth to gain access to private investments. Not only did this limit investors, it also constrained those seeking to raise capital.
When President Obama first signed the JOBS Act into law on April 5, 2012, two sections—Title II and Title III—changed the rules surrounding general solicitation and the way companies could raise capital under certain exempt offerings, making crowdfunding possible. Title II went into effect on September 23, 2013. Prior to Title II, general solicitation (e.g., public advertising) for participation in a securities offering was illegal for early stage private companies.
To encourage economic growth after the Great Recession, the JOBS Act was implemented to allow private startups and small businesses to use crowdfunding platforms and publicly raise investment capital. According to the U.S. Securities and Exchange Commission (SEC), “The final rules makes changes to Rule 506 to permit issuers to use general solicitation and general advertising to offer their securities provided that: the issuer takes reasonable steps to verify that the investors are accredited investors; and all purchasers of the securities fall within one of the categories of persons who are accredited investors under an existing rule.”
On November 16, 2015, the SEC adopted Title III of the JOBS Act, which opened crowdfunding to non-accredited investors. However, companies could only raise a maximum of $1 million in a 12-month period from non-accredited investors. The $1 million-dollar limitation has been a source of great criticism surrounding Title III. This threshold made it easier for smaller transactions to get financed but limited the potential to raise significant capital from non-accredited investors for larger transactions. On January 29, 2016 funding portals were able to start registering with the SEC on the new Form Funding Portal and the new crowdfunding rules took effect on May 16, 2016.
According to RealtyMogul.com CEO, Jilliene Helman, Title III of the JOBS Act, while a step in the right direction, featured too low a cap to make a real difference for real estate investing, where most transactions exceed $1 million. However, Regulation A+ presents the industry with potential, since those caps are now $20 million at Tier 1 and $50 million at Tier 2.
Title IV Regulation A+ rules offered yet another avenue for issuers to raise financing, by expanding the amount of money companies may raise from accredited and non-accredited investors through short-form public Regulation A+ offerings. Startups and later stage pre-IPO companies may use Regulation A+ to raise up to $20 million in a 12-month period (Tier 1) or $50 million in a 12-month period (Tier 2).
How Does the JOBS Act Affect Investors and Crowdfunded Real Estate?
When Congress first passed the JOBS Act in 2012, it transformed investing. First, the JOBS Act allowed entrepreneurs and small businesses to use crowdfunding platforms for fundraising. Next, it mandated that the SEC write rules to allow non-accredited investors to invest in private transactions for the first time. As a result of Title III, crowdfunding platforms in the real estate industry are able to create connected networks of investors and give them insider access to pre-vetted investment properties all in one place.
Title IV rules allow individual investors who are non-accredited to invest through crowdfunding in equity offerings, provided they follow Regulation A+ investment guidelines. Crowdfunding platforms have already started using Regulation A+ to expand their investment offerings to non-accredited investors through the launch and sales of Real Estate Investment Trusts (REITs). The best platforms will help investors track and measure their returns across the entire real estate portfolio with real-time data and analytics. As with all investments, real estate investing still does carry its own risks and does not guarantee a return of any sort.
The JOBS Act has expedited the growth of crowdfunded real estate. It’s predicted that commercial real estate crowdfunding in the U.S. will grow to more than $1 billion by the end of 2016 and potentially to $10 billion in five years. For more information about the author or RealtyMogul.com, please visit this link.