SEC Steps Forward with Equity Crowdfunding, but Non-Accredited Investors Remain on Hold
On July 10, 2013, the Securities and Exchange Commission (“SEC”) adopted a rule to effectuate the Jumpstart Our Business Startups Act (“JOBS Act”) requirement to remove the ban on general solicitation for various private securities offerings. The new SEC rule repealed the ban on general solicitation in Rule 144A offerings and specific Rule 506 private offerings. However, the rule changes came with an important limitation – the lift on general solicitation only applies to “accredited” investors. The SEC has yet to pass a rule under the JOBS Act governing the participation by non-Accredited Investors in equity crowdfunding. As a result, the new SEC rule does not provide access to crowdfunding to the majority of the American population.
As noted above, the main limitation to the SEC changes is that these changes only apply to the offering of securities solely to Accredited Investors. The SEC defines individual Accredited Investors as those with individual net worth or joint worth with a spouse over One Million Dollars ($1,000,000), excluding the primary residence, or an individual with annual income over Two Hundred Thousand Dollars ($200,000) or joint income with a spouse exceeding Three Hundred Thousand Dollars ($300,000) in each of the previous two years. There are several other categories of Accredited Investors that include certain entities, financial institutions, and non-profit organizations. The category of individuals that can meet the definition of Accredited Investor is relatively small. Some critics of the new SEC rule note that Accredited Investors comprise less than 1% of Americans. Consequently, the restriction on general solicitation would still apply to most securities offerings.
This is not to say that unaccredited investors will be neglected by the SEC and the JOBS Act – the SEC has reiterated its intention to establish more rules under the JOBS Act. Moreover, the JOBS Act requires the SEC to adopt further rules allowing non-Accredited Investors to participate in equity crowdfunding. Until the SEC promulgates such a rule, however, the full benefits of the JOBS Act have yet to be realized. As the SEC continues to create rules to effectuate the JOBS Act requirements, the attorneys at Meyers, Roman, Friedberg, & Lewis will continue to follow the SEC’s progress. If you would like to discuss how the new SEC rules could affect you or your business, please contact Peter D. Brosse, Chair of the Business & Corporate Law Group, at pbrosse@meyersroman.com (216-831-0042, ext. 144).