In April, the president signed the Jumpstart Our Business Startups (JOBS) Act in an effort to enable private capital formation and reduce regulatory and reporting obligations for “emerging growth companies.” The legislation includes the “IPO On-Ramp,” which relaxes emerging growth companies’ reporting obligations under Sarbanes-Oxley, as well as provisions that increase the offering amount under which certain small company financings are exempt from registration.
Additional provisions within the JOBS Act present investment advisors with a number of new challenges and opportunities for high-net-worth clients, as the legislation increases investor visibility and access to several alternative private investment structures.
Simply put, non-accredited investors will be able to invest alongside higher net worth angels under the new “crowdfunding” provisions in which groups of people pool small individual investments in startups and other early-stage ventures. (For more on crowdfunding regulations, see “SEC, NASAA Tell Small Businesses: Wait to Join the ‘Crowd’.”) The Act allows non-reporting issuers to raise up to $1 million within any 12-month period through a broker or “funding portal” that meets certain conditions.
Venture populists and those who advocate that net worth is a poor measure of sophistication, and that all investors should have a level playing field with respect to access to private investment offerings, hail the crowdfunding provision as a step forward in investor rights. Advisors can expect to have more conversations in the near future with their non-accredited investor clients about the merits of specific startup small business investment offerings and venture investment in general.
The Act does cap the maximum crowdfunding investment per investor at the greater of $2,000 or 5% of the investor’s annual income or net worth (if the investor’s annual income or net worth is less than $100,000), and 10% of the investor’s annual income or net worth, capped at $100,000 (if the investor’s annual income or net worth is $100,000 or greater). These caps, viewed as being excessive by some, do provide some comfort to those who advocate in favor of investor protection clauses that non-accredited investors not overexpose themselves to riskier venture opportunities.