The JOBS Act, or Jumpstart Our Business Startups Act, was signed into law in 2012 to encourage funding of small businesses in the U.S. by making various securities regulations easy. The main objectives of the JOBS Act were to spur job creation and economic growth by making it easier for startups and small businesses to raise capital from a wide range of investors.
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Raising Capital Through Crowdfunding
One of the most significant provisions of the JOBS Act was the legalization of equity crowdfunding. Equity crowdfunding allows private companies to raise capital from a large number of individual investors, including non-accredited investors. Before the JOBS Act, it was very difficult for private companies and startups to raise money from non-accredited investors due to security laws. The JOBS Act created certain exemptions from registration requirements of the Securities Act of 1933 to make it possible.
Startups and small businesses can now raise up to $5 million in a 12-month period from accredited and non-accredited investors through registered crowdfunding portals. This has significantly expanded the pool of potential investors that can fund new and emerging companies. Equity crowdfunding provides an opportunity for ordinary individuals to invest in growth-oriented private companies that were previously only accessible to angel investors and venture capital firms.
How The Jobs Act Changed Real Estate Investing
The JOBS Act not only enabled equity crowdfunding for startups but also made it possible for real estate companies and developers to raise money from a large pool of investors. Real estate crowdfunding platforms have emerged to help real estate developers and operators raise capital from both accredited and non-accredited investors to finance new property acquisitions and developments.
Investors can browse investment offerings on real estate crowdfunding sites and invest in individual properties with a small minimum investment as a result of how the JOBS act changed real estate investing. This allows more individuals to add real estate to their investment portfolios. Real estate crowdfunding has effectively disrupted the real estate industry by providing greater capital-raising options for developers as well as more accessible investment opportunities for both small and big investors.
Raising The Cap On Private Placements
Another provision of the JOBS Act increased the maximum number of unaccredited investors for private placements under Rule 506(c) from 35 to 99 individuals. Rule 506(c) allows companies to raise an unlimited amount of money from accredited investors and up to 99 unaccredited but “sophisticated” investors. An individual is considered sophisticated if they can understand the investment strategies and risks. Prior to the JOBS Act, no more than 35 non-accredited investors were allowed in private placements. By increasing this limit to 99, the bill made it feasible for more startups to raise substantial capital through blended private placements from accredited and sophisticated investors.
Expanding The Pool Of Potential Investors
By easing various securities regulations, the JOBS Act effectively expanded the pool of potential investors for private companies and startups. Equity crowdfunding and changes to Rule 506 have allowed more non-accredited individual investors to participate in early-stage private companies. While previously limited to wealthy accredited investors, private capital markets are now more accessible to ordinary people. This could be a game changer for crowdsourcing by creating new opportunities for a wider range of investors to fund emerging companies and new business concepts.