The SEC defines accredited investors as individuals who meet one or more of the following criteria:
The JOBS Act (Jumpstart Our Small Businesses) is a piece of legislation that covers many aspects of private company investment, from small startup raises to public IPOs. It was designed to jumpstart small business funding and job creation by allowing all Americans to invest in private small businesses.
President Obama signed the JOBS Act into law on April 5, 2012.
Over the subsequent years, the Securities and Exchange Committee (SEC) have put rules and regulations governing the JOBS act into place, and most portions of the JOBS Act are now in effect.
Title III of the JOBS Act, which went into effect in May 2016, is most relevant to online startup investing. Title III permits unaccredited investors to invest in startups via online crowdfunding platforms, subject to certain rules and regulations.
Many observers have noted that due to the high regulatory burden and additional cost, time, and filing disclosures required to raise funding via Title III, it may be an attractive option only to startups that are unable to secure funding from incubators/accelerators, angel investors, traditional VCs, and online VCs.
This is because the relative cost of venture capital is lower when compared to the cost of Title III funding, making venture capital a more attractive option to high-promise startups.
This creates what is called an “adverse selection filter” for startups – a circumstance that leads to a selection preference for underperforming startups, rather than the over-performing startups that generate the highest returns.
The adverse selection filter on online equity crowdfunding and Title III platforms is no doubt an unintended consequence of the original proponents of the JOBS Act and Title III.
It will likely take subsequent rules and regulations to correct these deficiencies, or potentially a complete overhaul of Title III. The US is likely many years away from truly democratized access to the best startups for all investors, regardless of financial wealth.