Jobs Act - Title Title III & Non-Accredited Investors

6 Replies

Since the Jobs Act was passed in 2012 there has been a lot of debate about Title III of the Jobs Act; which would allow non-accredited investors to invest smaller amount of money into private companies. 

My question concerning crowd funding is how are some platforms accepting monies from non-accredited investors? Are there some SEC regulations or loopholes that allow this? 

Most of the exceptions involve, as you said, smaller amounts of money.  There is also some leeway, since the crowd funding sites are not marketing to the people.  That's one of the issues around offering to non-accredited investors.  Another is Circle of Influence...I can offer an investment deal to my friend from college, and he can choose to invest $250k with me, even though he's not an accredited investor.  Why?  Because he's in my circle of influence.  I can make offers of investment opportunities directly to non-accredited investors as long as they are in my circle of influence, and I'm not guaranteeing a return.  The definition of circle of influence has been a little fuzzy, but it's generally been opined to be a minimum of 3 personal interactions (think having coffee).  That can cast a pretty wide net.  As far as I know, there hasn't been any definitive opinion written on the aspect of social media interactions & acquaintances.  (i.e. Facebook friends)  Anyway...there's a lot of operating space in the accredited investor rules, particularly if you're not marketing directly.

thanks @Hattie Dizmond , So in your opinion these crowd funding websites that allow non-accredited investors to put up funds is because they are not marketing?

There are a lot of things about crowd funding, which have not yet been challenged in court an/or haven't gone through appeals.  Therefore, there is a dearth of legal opinions on a lot of this stuff.  With the web, we're having to make laws as things develop.

With that said, I suspect that it is a combination of the fact that they are not marketing directly to the investors and the dollar amounts are smaller, in relation to other types of investments.  It's the same reason you can put an investor lead capture API on your website and send information to someone who requests it.  They have approached you.  You didn't seek them out.

There are many great posts and forums about crowdfunding here on Bigger Pockets, I highly recommend you search the keyword and read through them. While there is still a lot of regulatory uncertainty around JOBS Act legislation, there are certainties around existing regulations, some of which allow unaccredited investors, like Regulation A, or intrastate crowdfunding, which bypasses the federal regulations. To date, 13 States have passed their own crowdfunding regulations that allow non-accredited investors access to crowdfunding investments. In my own experience, and through the regulations that we market our offerings, Reg D, 506c, we can generally solicit, however we can only accept funding from verified, accredited investors.

The sites that are currently accepting non-accredited money are few and far between.  Georgia has one of the most favorable intrastate exemption regimes and Groundfloor is apparently doing these.  

Many other states like Texas are about to pass similar laws for intrastate exemptions in an attempt to head the SEC off at the pass.  I just got back from speaking at Kickercon in Houston and the word from those very close to what is going on with Title III implementation is that they're expecting it to happen around February or March of 2015.  I am very bearish on Title III from a promoter's standpoint, but Title IV should be a much better regime to operate in.  Hopefully Title III and all the fuss about intrastate exemptions will make the concept more of a household name.

California has some special Rule 147 type exemptions and many other states have various other instrastate exemptions.  I expect that a lot of new portals will spring up in the coming years that specialize in these types of exemptions; especially in the more populous states like Texas and Georgia where there would be enough investors to satisfy promoter demand.  Northeastern states with a small population (think Rhode Island) probably won't be able to get similar interest unless they band together in some fashion.  I'm not sure what advantage there would be to a promoter to use that exemption though once Title IV comes out.  

What many portals are currently doing is positioning themselves for Title III by allowing non-accredited investors access to the site without the capacity to invest.  This helps them build their list and react to the laws when they stabilize.  There is some gray area about some of the no action letters from a decade or so ago and many companies are more aggressive with what they show in their OFFER (not sale) of securities to non-accredited investors.  

I'll point out that it's not truly your circle of influence, anyone giving you money you can call a friend, it's showing that you have had past business relationships yourself or with one who introduces the investor.

The purpose of the Jobs Act is to facilitate employment, not self-employment. There is a difference between funding a factory to employ 40 people on an ongoing basis and raising funds to employ 5 guys for 3 weeks to flip a house.  The question of real estate financing was brought up almost immediately after the Act and it didn't meet the test. I'd suggest you hang as close as possible to SEC regs and/or utilize entities and partnerships until these aspects have a final determination.

I suggest small operators as here on BP not be the testing field for questionable tactics unless you can afford the battle and the consequences. The internet is not where folks should be getting their legal advice. :) 

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