By Robert R. Boeche, Partner and Shahrzad Borna, Law Clerk of Shustak Reynolds & Partners, P.C. posted on Monday, August 22, 2022.

Robert R. Boeche II

Partner

Location: San Diego, California
Phone: (619) 696-9500 (Ext. 122)
Direct: (619) 546-5502
Email: [email protected]

On the tenth anniversary of the 2012 “JOBS Act,” the Senate Banking Committee has proposed a new legislation, referred to as the “JOBS Act 4.0.” The new JOBS Act could potentially adjust SEC regulations to increase access to high-growth investment opportunities for everyday investors and reduce the costs of raising capital for small businesses. It also could have repercussions for licensed professionals operating pooled investment vehicles or otherwise conducting private investments.

THE 2012 JOBS ACT

The 2012 “Jumpstart Our Business Startups Act,” or “JOBS Act,” encouraged capital formation for startup companies by relaxing certain securities regulations. The JOBS Act exempted crowdfunding, and mandated certain changes to Rule 506 of Regulation D, which gave non-sophisticated investors some access to private investment opportunities and expanded startup companies’ access to retail investors when raising capital.

The regulatory modifications below are among the more noteworthy proposals under the JOBS Act 4.0, which are designed to further expand those concepts kicked off by the 2012 JOBS Act.

JOBS ACT 4.0, TITLE II: IMPROVING THE MARKET FOR PRIVATE CAPITAL[1]

Enhancing Access to Capital for Small Businesses by:

1. Small Entrepreneurs’ Empowerment and Development (SEED) Act of 2022 (Sec. 204 of JOBS Act 4.0)

The SEED Act of 2022 creates a micro-offering safe harbor that would exempt specific offerings of up to $500,000 from state and federal securities registration requirements. This is an expansion of the registration exemption created by the SEED Act of 2021 for sale of securities if the total amount of securities sold by the issuer during the preceding 12-month period does not exceed $250,000.[2] The increased $500,000 sale limit proposed by the SEED Act of 2022 will help small companies by further reducing the burdens and costs of regulatory red tape, paperwork and threat of potential SEC enforcement actions for noncompliance normally associated with raising capital.

2. Unlocking Capital for Small Businesses Act (Sec. 205 of JOBS Act 4.0)

Improving upon the Unlocking Capital for Small Businesses Act of 2019,[3] which established regulatory provisions related to private-placement brokers, Unlocking Capital for Small Businesses Act of 2022 will exempt “finders,” meaning individuals who help private companies – like a local dry cleaner, café, or bookstore – identify investors but do not manage funds or securities, from SEC broker registration. This change is intended to make it easier and less costly for small companies to find investors.

3. Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act Of 2021 (Sec. 206 Of JOBS Act 4.0)

The Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2021 exempts persons who help buy and sell small companies (less than $25 million in gross revenue) as a whole (i.e., M&A brokers) and don’t handle any funds or securities, from SEC registration. This should help small companies use professional services to sell their company or expand their operations by purchasing another one at a reduced cost.

JOBS ACT 4.0, TITLE III: ENHANCING RETAIL INVESTOR ACCESS TO INVESTMENT OPPORTUNITIES[4]

Expanding Investment Options and Investment Safety for Retail Investors by:

1. Improving Crowdfunding Opportunities Act (Sec. 305 of JOBS Act 4.0)

The 2012 JOBS Act enabled startup companies to raise a limited amount of capital from the general public through the crowdfunding exemption.[5] Before the 2012 JOBS Act, those private investments could be offered to accredited investors, or investors who met certain income and net worth thresholds. The JOBS Act 4.0 as proposed will improve upon the crowdfunding statute in favor of small businesses by preempting certain limiting state securities laws and reducing the current costly regulations of crowdfunding portals.[6]

2. Equal Opportunity for all Investors Act (Sec. 306 of JOBS Act 4.0)

Rule 506 of SEC’s Regulation D is a “safe harbor” that under certain conditions allows companies to raise unlimited amount of capital without filing a registration statement. The 2012 JOBS Act made it easier for companies to satisfy those conditions and benefit from this exemption.

The 2012 JOBS Act instituted Rule 506(c) under Regulation D that directed the SEC to lift the ban on general solicitation for Rule 506 offerings when all purchasers are accredited investors, and the issuer takes reasonable steps to verify that the purchasers are accredited investors. The JOBS Act 4.0 will help issuers by permitting self-certification of accredited investor status (through a SEC-administered examination) to replace the current, costlier, issuer-certification model.[7] As proposed, it will also create a larger, more inclusive, pool of qualified investors for Rule 506 offerings by allowing individuals to obtain accredited investor status by passing the SEC’s accreditation examination - regardless of income level and allow any individual to invest in Regulation D securities up to 10% of their income.[8]

3. Retirement Savings Modernization Act (Sec. 308 of JOBS Act 4.0)

Amending the Employee Retirement Income Security Act of 1974 (“ERISA”),[9] the proposed Retirement Savings Modernization Act clarifies that diversified plans with alternative assets, including private equity, can be offered by retirement plan sponsors.

JOBS ACT 4.0, TITLE IV: IMPROVING REGULATORY OVERSIGHT[10]

Protecting and Empowering Everyday Investors by:

1. Increasing Opportunities for Retail Investors Act (Sec. 402 of JOBS Act 4.0)

The JOBS Act 4.0 will make it easier for the SEC to reduce the regulatory burden on small businesses as it sees fit by authorizing the SEC to increase any statutory exemption ceiling, such as those governing offering sizes. For example, the SEC could increase the small issues exemption (Section 3(b)(1) of the Securities Act) beyond the $5 million statutory limit.

2. Tracking Bad Actors Act of 2022 (Sec. 403 of JOBS Act 4.0)

To protect average investors from financial crime, the Tracking Bad Actors Act of 2022 requires the SEC to create a public database of persons (bad actors) subject to criminal, civil, and administrative actions relating to financial services.[11]

3. Administrative Enforcement Fairness Act of 2022 (Sec. 405 of JOBS Act 4.0)

The Administrative Enforcement Fairness Act of 2022 revises SEC administrative law proceedings to permit defendants (except for registered entities like broker-dealers, investment advisers, and transfer agents) to elect to remove administrative proceedings to Federal court.[12]

THE BOTTOM LINE

If signed into law, JOBS Act 4.0 has the potential to offer small companies access to more sources of capital at a lower cost, bring a larger variety of investment opportunities within the reach of everyday investors, and boost investor protection and privacy. This will have an impact on registered professionals, how they work with their clients, and what is required to be reported to applicable regulators. 

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law, corporate law, and complex business disputes.
We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney Robert Boeche can be reached in the firm’s San Diego office at (619) 696-9500.

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