How the Jumpstart Our Business Startups Act Impacts Private Equity

by | Jan 6, 2020 | Money and Finance

In what ways does the Jumpstart Our Business Startups Act Title II affect private equity? To answer that question, it is important to understand that every private equity transaction must qualify under an exemption for purposes of registration with the SEC. Private equity transactions that are not compliant with an exemption are subject to potential personal liability for those receiving the investment, and potentially the repayment of funds to investors.

Rule 506(b)
A lot of issuers use an exemption have relied on Regulation D, Rule 506(b). This exemption helps issuers bypass state filings, lets issuers raise unlimited funds, and allows as many as 35 non-accredited investors.

The Jumpstart Our Business Startups Act Title II, Rule 506(b), prevents the issuer from utilizing general solicitation, which basically means communicating with potential investors through the Internet, press, and other means, absent a substantive prior relationship. Issuers are not permitted to post on social media or any website to announce they are searching for capital investment, and they can’t advertise in any traditional ways either. Also, any comments made to the press by the issuer can destroy the issuer’s ability to depend on 506(b).

Rule 506(c)
Increasingly more small businesses and entrepreneurs are benefiting from the provisions of 506(c), another way of obtaining funding without registration. Advertising, or in other words “general solicitation” for private equity offerings is permitted under Rule 506(c).

Open Angel Networks
Brokers who are investors can now organize and solicit “open angel networks” in which they can invite accredited investors through TV, newspaper, social media, radio, etc. to learn about the businesses of local entrepreneurs. Capital starts to flow the quicker businesses trust and accept this process.

Jumpstart Our Business Startups Act Title II Expands the Online Private Equity Market
These online portals are popular and can boost the prospects of securities crowdfunding significantly, enabling a greater online presence. As individual accredited investors begin to trust the private equity market and see success, they will begin to have greater trust in the asset class. Investors who once needed to see, feel, and touch an issuer may find that they have the confidence and trust to invest through a platform without even meeting the issuer in person.

Small Businesses Gain Access to Small Capital
In the coming decade, businesses will look at the sale of equity or debt to the private market as another option to be considered instead of bank debt financing. A broker’s job becomes easier with the ability to solicit these raises through whatever means required. Brokers also have lower barriers to entry.

More Reg D Offerings
Permitting issuers to access new investors will expand the money supply in the market considerably, leading to more capital raises. With more capital raises there are more entrepreneurs raising capital which increases the number of private equity offerings, leading to an increase in the number of jobs.

As is obvious, the JOBS Act has affected private equity transactions in a number of positive ways.

Latest Articles