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The Opportunity of the JOBS Act

Relevant Facts:

Jobs act signed into law April 5th 2012

Title II takes effect – September 2013

 

Title II - Current Legislation Main Points:

- Lifts the ban on “general solicitation” and advertising in specific kinds of private placements of securities.[23] This allows broader marketing of placements, as long as companies only sell to accredited investors (based on income, net worth or written confirmation from a specified third party. There is no limit on the size of the offering allowed under 506(c).

- Inexpensive, simple exemption from public deal registration that can be openly advertised.

- This is handled through a Regulation D 506(c) private placement offering.

- Securities sold through 506(c) are restricted and cannot freely be resold within 12 months

 

The significance of this regulation is that capital formation and investment opportunities for certain private placements can now be advertised publicly without highly expensive and time consuming SEC registration. This allows entrepreneurs to access a much larger broader base of investors, including where there is no prior relationship at all. Opportunities that, in the past, were limited only to networks of brokers and their clients, are now available to a much larger audience. This will allow for a great deal of additional cross-sector investment between existing investors, and the inclusion of a large amount of accredited individuals who have not been active investors previously.

General solicitation of private placements in this manner now have the added condition that investors cannot self verify their accredited status. Issuers are required to take reasonable measures to verify the accredited status of their investors by using an intermediary or third-party authority.

 

Title III “Crowdfunding” – Comment period closed as of Feb 2013 and is expected to be enacted in Third Quarter 2014 or later

- Lifts the requirement of limiting to accredited investors only. Both accredited and unaccredited investors will be able to purchase securities in private placements, within strict limits, without issuer being required to register as a public company. This registration exemption will allow issuers to raise up to $1 Million per 12 month period and limits investors to contributing $2,000 or 5% (whichever is greater) for people earning (or worth) up to $100,000, and $100,000 or 10% (whichever is less) for people earning (or worth) $100,000 or more.

- There will be a maximum offering size allowed under this exemption of $1,000,000. Additionally, the Bill mandates reviews of financial statements for offerings between $100,000 and $500,000, and audits of financial statements for offerings greater than $500,000 

 

The appeal of this upcoming regulation is that it allows the participation of a massive investor class that has been primarily prohibited for private placements under current law except under extremely burdensome restrictions. This brings private placement, and capital formation in general into the purview of the general public. Unfortunately many of the safety and reporting mechanisms proposed are still somewhat prohibitive. It remains to be seen whether the investing appetite and purchasing power of the general public will be enough to offset the additional limitations inherent in opening the opportunity to their participation. 

 

 



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