KMK Law Corporate & Securities Blog

On July 17, 2018, the U.S. House of Representatives passed the “JOBS and Investor Confidence Act of 2018.” This bill is the third piece of the “Jumpstart Our Business Startups (JOBS) Act” legislation, and its aim is to reform capital markets to assist small businesses and entrepreneurs in accessing capital. The bill is set to be voted on by the Senate during the fall and will become effective 90 days after it is signed by the President.

Definition of “Accredited Investors”

One portion of the legislation expands the definition of “accredited investors,” which will allow more people to invest money in private placements of securities. To be classified as an “accredited investor” and to therefore have the opportunity to invest in a Regulation D offering under the original JOBS Act of 2012, investors are currently required to have an annual income of at least $200,000 (or $300,000 jointly with a spouse) or a net worth in excess of $1 million (individually or jointly with a spouse). However, the legislation will allow investors with sufficient “experience and expertise” to participate in such offerings.

This expansion of the definition of “accredited investors” will ultimately serve to put investors at ease, as they will likely not be exposed to as extensive of an investor verification process, which typically entails a thorough review of tax returns and bank and brokerage statements.

Reduction of Regulatory Burden on Angel Investors

The legislation also allows angel investors and entrepreneurs to have greater access to each other. Through exemptions granted under the JOBS Act of 2012, entrepreneurs are permitted to raise capital in private placements through general solicitations aimed at investors via social media and other avenues, despite Regulation D’s broad prohibition on general solicitation. However, these exemptions were limited in scope and the contours of what constitutes a “general solicitation” in practice are still somewhat unclear, leaving startup companies and entrepreneurs concerned about whether certain solicitation activities will allow them to utilize Regulation D of the Securities Act of 1933 to exempt their offering. The current bill expands the number of exemptions and will insert more certainty into the interactions of investors and entrepreneurs. For example, the legislation exempts from the prohibition “a presentation or other communication made by or on behalf of an issuer” at a demo day that does not, among other requirements, include any references to a specific offering in the event’s advertising materials or involve the sponsor making investment advice or entering into negotiations regarding the offering. Furthermore, the only information on the offering permitted to be communicated to attendees is that the issuer is in the process of making such an offering, the type and amount of securities being offered, the amount of securities that have already been subscribed for and the intended use of the proceeds.

Crowdfunding Amendments Act

While Title III of the JOBS Act of 2012 exempted certain crowdfunding transactions from registration, the Crowdfunding Amendments Act, which is part of the current legislation, will now allow investors to pool their money into funds being guided by registered investment advisers. Such special-purpose vehicles will be authorized investors in crowdfunding offerings and will make it more efficient for startups to access capital and potential investors. These vehicles will also make it more attractive for investors to utilize Title III, as they will be able to rely on the expertise of investment advisers.

Emerging Growth Companies and Small Issuers

The bill also lengthens the amount of time that emerging growth companies have to comply with Sarbanes-Oxley Section 404(b) beyond the current five-year period. Furthermore, small issuers that go public can utilize registered “venture exchanges” that are proposed under the legislation. Qualifying companies that issue only a limited number of shares will be able to have their securities traded on such exchanges, which will be tailored to meet the needs of these smaller companies by aggregating liquidity on a single exchange and attracting post-issuance support by market makers.

The version of the bill passed by the House can be found here. For more information regarding this bill and its potential implications, please contact Mark Reuter, Jim Kennedy, Allie Westfall, Chris Brinkman or Brett Niehauser.