The JOBS (Jumpstart Our Business Startups) Act was passed in 2012 with the intention of making it easier for investors to fund small businesses. This legislation was largely seen as a victory for the small business community as well as for investors alike. The JOBS Act removed many SEC regulations regarding who could and could not invest in startups, in addition to when a business was required to go public. Before the passage of the JOBS Act, “accredited” individuals with a minimum of a million dollars in assets and annual earnings of $200,000 for example, were favored when investing in small businesses. Federal laws mandated that startups were allowed to take on as many “accredited” investors as was necessary, yet could only utilize 35 “unaccredited” individuals for investment unless they went through an onerous, burdensome, and expensive disclosure process.
In essence, this Act was intended to pave the way for economic recovery: as more people would be sharing in profits, the healthier the American economy could become. Now, with the March 25, 2015 passage of Title IV of the JOBS Act, otherwise known as “Regulation A+,” budding entrepreneurs will enjoy even fewer restrictions on how they raise money for their emerging enterprises. However, like any investment opportunity, the laws of Regulation A+ can be complicated, and its critics find strengths as well as weaknesses in the legislation.
Regulation A+ divides investors into two tiers – one is for investments up to $20 million in a 12-month period, and the second for investments of up to $50 million in a 12-month period. However, Tier 1 investments require the businesses receiving the funds to file paperwork in each of the states where capital is going to be raised. Tier 2 investments are not required to file such paperwork, yet companies must file financial audits with the SEC, and then file two more financial reports per year. Critics of this plan suggest that the extra costs of filing these reports, estimated at $25,000 to $100,000 an instance, will prevent smaller startups from taking advantage of Regulation A+ as it is intended.
However, Regulation A+ also features a new and groundbreaking “test the waters” provision. This allows startups to survey potential investors about the feasibility of investing with their company. Such a provision gives emerging enterprises the opportunity to plan for future offerings, but also alerts possible investors of the prospects of owning a piece of a new company before it goes public. Nothing like this has ever been authorized before, and it allows investment access to average citizens as well as emerging growth companies. Essentially, Regulation A+ is designed so more people are encouraged to participate in entrepreneurial growth and in return strengthen our economy.