The omnibus bill (The JOBS Act 3.0), as described by Representative Jeb Hensarling in an op ed for the Wall Street Journal, contains a whole host of changes from insurance changes and anti-human trafficking efforts to changes to public reporting requirements for low revenue public companies. Several specifically address the alternative investment marketplace in a significant way, however.
Accredited Investor Definition
The most important change for private placements is the changes to the accredited investor status - a requirement for investors of most Regulation D offerings. The accredited investor definition in the Securities Act will be updated and expanded, likely making it easier for Congress to adjust it further in the future. Within these changes, the net worth qualification is tacked to inflation and adjusted every five years to the nearest $10 thousand, which could create complications for some broker-dealers when adjustment occurs, as there will be a push to get investors near the bottom of the requirement in before the adjustment occurs, bumping them out.
Congress also added two more methods for individuals to be accredited:
1. Any person currently licensed or registered as a broker or investment advisor with the proper regulatory authority (the SEC, FINRA, or a State). This change is welcome, as these individuals have the knowledge, experience, and licensing to protect themselves, but were previously ineligible for such investments.
2. Any person who the SEC determines by regulation to have demonstrable education or job experience to qualify as having professional knowledge of a subject related to a particular investment, all of which is verified by FINRA. It is important to note that these qualifications are tied to specific investments, and not private placements in general. Thus far, it is unclear how the SEC and FINRA will enforce the verification of these qualifications, but the process could include subject-matter exams, a licensing process, or other methods. While it makes sense that someone with the requisite knowledge and/or experience should be allowed to the the risk on a private placement, managing that approval is likely to be a complicated process.
Additionally, the house added "Family Offices" as accredited investors if they meet the following qualifications:
- Assets under management is more than $5 million
- They are directed by a person with appropriate investment specific knowledge or experience and with the general financial experience to evaluate the offering
- They were not formed for the particular purpose of acquiring the securities offered
If passed, the JOBS Act 3.0 would require the SEC to create a new category of exchanges, called venture exchanges, where "venture securities" could be traded. "Venture securities" include securities of early-stage growth companies (i.e. a company that has not done an IPO with a public float of less $700 million) that are exempt from registration under section 3(b), emerging growth companies, or securities registered under 12(b) and registered on a venture exchange. The primary securities that would fall into the first category are securities sold under Regulation A. As a result, this change would provide greater liquidity to Regulation A investors.
The Act also fixes one of the early problems with Reg CF Crowdfunding, the requirement that the investors invest directly into the issuer, by allowing the creation of "crowdfunding vehicles". Basically, it allows issuers to use SPVs when conducting a Reg CF offering. This vehicle must be advised by an investment advisor. Additionally, the act allows issuers using Reg CF to remain private until the maximum public float for a company is more than $75 million.
All of these changes are currently dependent on whether the Senate passes the bill and what, if any, changes are made. But for now, this act appears to be a positive move for the alternative investment market.
Need help navigating the regulations surrounding a capital raise?
We've put together a definitive guide to understanding the broker registration requirement.