The JOBS Act of 2012, the legislation that also legalized online capital formation, included multiple regulatory updates. One, Title 1, has been a notable success as it has helped a growing number of smaller firms to go public. Title III created Regulation Crowdfunding or Reg CF, one of the three exemptions that enable companies to raise money via the internet. Both of these exemptions will receive an adjustment due to an option to take inflation into consideration – at least every five years.
Reg CF allows private companies to raise money online via funding portals or broker-dealers. Investors may be either accredited or non accredited investors.
Under the JOBS Act Inflation Adjustment for Reg CF while the funding cap remains at $5 million (it was increased by the SEC last year from $1.07 million), the amounts individuals can invest have been altered as follows:
Regulation Crowdfunding Rule
Inflation Adjusted Amount
|Threshold for assessing investor’s annual income or net worth to determine investment limits (Rules 100(a)(2)(i) and 100(a)(2)(ii))||$107,000.00||$124,000.00|
|Lower threshold of Regulation Crowdfunding securities permitted to be sold to an investor if annual income or net worth is less than $124,000 (Rule 100(a)(2)(i))||$2200.00||$2500.00|
|Maximum amount that can be sold to an investor under Regulation Crowdfunding in a 12-month period (Rule 100(a)(2)(ii))||$107,000.00||$124,000.00|
Inflation-Adjusted Amounts in Rule 201(t) of Regulation Crowdfunding for when an issuer must provide Financial Statement Requirements.
The SEC noted the increase last year stating:
“As this increase was far in excess of the inflation-based increase that would otherwise have occurred this year, the Commission did not increase Regulation Crowdfunding’s offering limit, which remains at $5,000,000.”
Title I which created the definition of an emerging growth company (EGC), the status now has a threshold of $1,235,000,000 from the previous $1,070,000,000.
Both these changes become effective once they are published in the Federal Register. There will be no comment period for the rule change.
The SEC estimates that the higher threshold for EGCs will have the following impact:
“… increase the overall number of EGCs by 51, from approximately 1,704 (23.7% of the total number of filers (7,199)) to approximately 1,755 (24.4% of the total number of filers (7,199)); among them, the number of domestic issuers that qualify as EGCs would increase by 45, from approximately 1,391 (22.3% of the total number of domestic-form filers (6,232)) to approximately 1,436 (23.0% of the total number of domestic-form filers (6,232)), while the number of foreign private issuers that qualify as EGCs will increase by 6, from approximately 313 (32.4% of the total number of Form 20-F and 40-F filers (967)) to approximately 319 (33.0% of the total number of Form 20-F and 40-F filers (967)).”
Regarding the changes to Reg CF, the SEC believes any impact on the ecosystem will be slight or “marginal.”
Earlier this year, David Burton, a securities law expert at the Heritage Foundation, said Title I of the JOBS Act, created to reduce the cost of initial public offerings and of early continuing compliance costs, has been a significant success.
“The number of IPOs has been trending upwards and roughly four-fifths of issuers conducting IPOs appear to be taking advantage of EGC status. The number of IPOs in the nine years after the JOBS Act has increased by 43 percent relative to the nine years before the JOBS Act and the amount raised has increased by 57 percent.”
Regardless, the number of IPOs continues to be in decline. A provision of the JOBS Act 4.0 aims to improve Title I:
“The EGC provisions of JOBS Act 4.0 would extend the period that a company could retain its Emerging Growth Company status from five to ten years. This would reduce the cost of being a public company until substantial size or maturity is achieved and will, therefore, make IPOs more attractive. It is part of a well-conceived scaled disclosure regime.”
Other aspects of the JOBS Act 4.0 will improve access to capital including improvements to Reg CF.
The current regulatory agenda of the SEC lists multiple items that will impact access to capital as well as online capital formation. Among items on the list include a change to Rule 144 holding periods – which may impact secondary trading of private securities and Reg D which will impact the definition of an accredited investors – most likely a significant increase in the thresholds for the definition. This could harm capital formation for private firms.