The Jumpstart Our Business Startups (JOBS) Act, passed into law in April of this year, has the potential to help startups and small businesses raise capital through numerous, small investments from “the crowd.” This widely discussed crowdfunding exemption is found in Title III of the Act. But the Act also created the possibility that the biggest benefit from the legislation will go not to the crowd, but rather to traditional investors that have long had access to the best startup and small business investment opportunities. Here’s how.
Once new SEC rules are finalized, Title II of the JOBS Act allows startups and small businesses for the first time to advertise their investment offerings as long as only “accredited investors” are permitted to invest. Accredited investors are mainly corporate entities and individuals with liquid net worth of more than $1 million or an annual income greater than $200,000; the same exclusive group that the SEC allows to invest in hedge funds. By opening this pipeline, Title II may end up diverting significant crowdfunding opportunities away from the Title III “crowd,” and thus create a two-tiered, less democratic investment system.