Finally, after three years the Securities and Exchange Commission (SEC) has ruled that investments in businesses with less than $50 million no longer require that an investor be an “accredited investor.” This means that everyday citizens can now invest in Startups and small businesses as an investor on Crowdfunding platforms. The long-awaited decision to democratize small business and Startup funding comes from Title IV of the Jumpstart Our Business Startups (JOBS) Act, and will done initially through what are called Regulation A+ investment offerings.
Previously, an accredited investor was considered to be an individual who earns more than $200,000 per year or has a net worth of over $1,000,000; or entities with over $5 million in assets. The new Title IV rulings/Regulation A+ offerings will become actionable after roughly 60 days, following publication in the Federal Register.
Now, the new rules for Regulation A+ offerings, which include non-accredited investors, are divided into two tiers that allow companies to raise an amount up to $20,000,000 or $50,000,000. Effectively, Regulation A+ broadens the definition of “qualified investors” to include non-accredited investors, although there are caps on how much these new types of investors can invest. For example, non-accredited investors can invest a maximum 10% of their income or net worth per year. This rule has the effect of protecting less-experienced investors by restricting the amount they invest so that they do not incur major losses of their net worth.
The final rules, often referred to as Regulation A+, would implement Title IV of the JOBS Act and provide for two tiers of offerings:
Tier 1, which would consist of securities offerings of up to $20 million in a 12 month period, with not more than $6 million in offers by selling security holders that are affiliates of the issuer.
Tier 2, which would consist of securities offerings of up to $50 million in a 12 month period, with not more than $15 million in offers by selling security holders that are affiliates of the issuer.
Under Tier II of Regulation A+ offerings, Startups can raise up to $50,000,000 from both accredited and non-accredited investors. Other than the amount of money that may be raised, the biggest difference between Tier I and Tier II is pre-emption on Blue Sky Laws, which removes the requirements to register the offering in each state in which securities are sold. More significantly, Tier II offerings will be required to have audited financials and annual reporting requirements.
On the one hand, this new law opens up ordinary citizens to the risk of investment in a company that may never materialize or deliver on its promises. After all, about three-quarters of venture-backed firms in the U.S. fail to return investors’ capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School.
There is also Mark Cuban’s argument that the rise of equity crowdfunding is one of the causes of the current economic bubble. In a blog post earlier this month, he argued that inexperienced investors have pumped money into the Startup market, but have no way to get it out and that there is no liquidity in these investments.
On the other hand, equity crowdfunding makes capital accessible to entrepreneurs who would have no other way to raise the funds to achieve their dreams and provide products or services that bring positivity and change to the market. According to AOL co-founder Steve Case, “even when these ‘investments’ don’t ‘pay off’ for the person making them, they make the community a better place, and create winners in unexpected ways.”
In the end, it’s always best to do some serious due diligence before making any investments.
What do you think about the changes to SEC regulations? Respond in the comments section below.
Read more about this topic in Forbes.
Disclaimer: This article is for informational purposes only, and does not constitute tax or legal advice.
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