WTF is the JOBS Act?

WTF is fintech

When equity-based crowdfunding platforms emerged around 2011, they, unlike their donation or rewards-based cousins, were restricted by law to accredited investors. The crowd, as it were, was quite selective. And while exclusivity has always played a major role in the finance industry, limiting equity-based crowdfunding to accredited investors meant that these platforms were exacerbating a funding gap for entrepreneurs who needed much less funding to get their businesses off the ground.

“Since 2008, it’s been so hard to get a bank loan,” said Tess Hottenroth, chief executive officer of BankRoll Women. “The venture capitalists have moved up in the amount that they are generally giving to companies, and as a result the angel investors have also moved up to a level where VCs used to be.”

Signed into law by President Barack Obama in 2012, the Jumpstart Our Business Startups Act sought to enable a greater number of entrepreneurs and investors to benefit from equity crowdfunding. The bill passed with bipartisan support; after all, Hottenroth noted, “Who’s going to vote against JOBS?”

Tell me what I need to know about the JOBS Act titles.

Title II: Makes it possible for small businesses and entrepreneurs to advertise their businesses or products and solicit investments on equity crowdfunding platforms. As Title II is a private offering, companies that choose to fundraise under this title can only accept investments from accredited investors.

Title III: Is for all of the little guys and gals out there who want to raise up to $1 million. This title is often likened to an equity version of Kickstarter, but with a system in place to make sure the general public doesn’t invest more than they can afford to in startups that might not make it. As David M. Freedman and Matthew R. Nutting wrote in A Brief History of Crowdfunding, Title III was considered particularly risky, because “it opened the riskiest area of alternative investing to tens of millions of investors who, because they were not wealthy, were presumed to be less sophisticated investors.”

Title IV: There are two types of Title IV, Tiers 1 and 2. Tier 2, which allows entrepreneurs to raise up to $50 million, is pretty exciting, because it basically allows companies to form mini IPOs funded by the general public. These offerings are liquid, and can be traded if listed on a stock exchange. Mini IPOs are much, much less expensive and complex to set up than actual IPOs.

Who can benefit most from the JOBS Act?

On the investor side, the average Joe and Joanna Public could potentially win big with the JOBS Act. Unaccredited investors can’t invest in Title II of the act, but they can invest in Titles III and IV. In other words, the crowd went from a complete shutout to be able to invest in nearly every type of equity crowdfunding, much as they can in mutual funds and other types of stock.

On the entrepreneur side, any entrepreneur that fell outside the funding scope of VCs and angel investors are now able to use crowdfunding platforms to raise equity. Crowdfunding equity has joined a growing number of fintech financing solutions for entrepreneurs looking for funding outside the traditional bank channels.

Of course, these are the people who can in theory benefit from the JOBS Act. In reality, very few startups have applied for this type of funding so far.

So you’re saying that from 2012 the JOBS Act has completely changed equity-based crowdfunding?

Not exactly. The SEC has been slow to implement the rules, much to the chagrin of professionals in the equity crowdfunding business. While Title II has been legal since 2013, Title IV wasn’t legal until 2015, and Title III until 2016. Not all of the blame lies with the SEC, though. Many entrepreneurs and investors probably just aren’t aware that the JOBS Act happened.