Over the recent past, crowdfunding has emerged as a powerful tool for entrepreneurs and businesses for the raising of capital. However, due to stringent securities regulations this effective tool is not always been available.
Prior to the JOBS Act
Before the enactment of the JOBS Act in 2012, the Securities Act, which was established in 1933, constituted the major piece of federal legislation that served to govern issues related to the stability of markets and investors’ confidence in those markets. The Act was instituted in the aftermath of the stock market crash of 1929.
Specifically, the Securities Act provided two important functions regarding the sale of securities:
1. Requiring greater transparency in disclosures to aid investors in their decision-making process
2. Establishing new laws regarding fraudulent activities and misrepresentations in the securities markets.
The 1933 Securities Act required issuers of securities to obtain registration with the SEC. Under the Act, these issuers were required to provide potential investors and the SEC with a registration statement and a prospectus. Certain sale of securities, however, would be exempted from these requirements if they met certain restricted conditions. These offerings became known as “exempt offerings”. Prior to the 2012 JOBS ACT, access to private investments was restricted overwhelmingly to those with significant wealth. Under that environment,the number of possible investors was limited and those looking for investors from which to raise capital found their options constrained.
After the JOBS Act
The introduction of the Jobs Act in 2012 brought with it certain rule changes that concerned issues involving general solicitation and the methods companies were permitted to use in order to raise capital. Title II of this Act addressed the 80 year old ban on general solicitation in the offering of private securities. Title II opened up public advertising, or otherwise called, general solicitation when it comes to securities offerings for early stage private companies.
In the aftermath of the Great Recession, the JOBS Act was passed and signed into law in order to pave the way for small businesses and private startup firms to utilize crowdfunding platforms to solicit publicly for investment capital. Rule 506(c) of Regulation D, which was implemented as a result of the Act, allows issuers to use general solicitation and advertising to offer securities with the caveat that the issuer takes ‘reasonable steps to verify the accredited status of investors.
The post-JOBS Act era where companies can generally solicit to find their accredited investors equalizes the playing field so that all companies have a chance to seek funding from these investors. Title II, Rule 506(c) capital raises, which allow for this general solicitation and advertising have been increasingly used to help businesses, small and large, find the funding they need to grow their business.
