On April 5, 2012, President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, which was created to foster economic growth and support small businesses.
The Act modified U.S. securities laws, increasing the number of investors a private firm may have, and eliminated some of the hurdles for companies interested in initial public offerings. It also lifted the “general solicitation” ban, which prohibited small business owners from advertising sales of equity in their private companies to the public.
Business start-ups have always been able to raise money from Accredited Investors. The JOBS Act simply legalized general solicitation, a practice that has been outlawed since the 1930s. The law now allows young, prospective companies to advertise via social media, digital platforms, print ads and even street signage. The only requirement is that the ultimate investors must be “Accredited Investors” as defined by SEC rule.
Another provision, yet to be fully implemented, is the use of retail crowdfunding, which allows small companies to raise funds from average investors rather than only Accredited Investors through an online portal. Before the JOBS Act, only a small number of existing investment crowdfunding sites were permitted to operate using screening pages and pre-existing relationships.
Congress assigned the task of finalizing the rules of the JOBS Act provisions to the U.S. Securities and Exchange Commission (SEC). Currently, access to equity crowdfunding has been limited to Accredited Investors.
Accredited Investors are individuals who have earned $200,000 or more a year ($300,000 if married) for the past two years with a reasonable expectation of making such income in the current year or with a net worth over $1 million, excluding the investor’s primary residence.
The SEC believes that individuals who are not Accredited Investors may lack the skill and experience to safeguard their financial security. Until the SEC finalizes its rules, crowdfunding platforms will not legally be able to exist as equity based models without operating under the license of a broker-dealer.
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