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The JOBS Act: Rule 506, Crowdfunding, and the Balance between Efficient Capital Formation and Investor Protection

32 Pages Posted: 25 Mar 2013  

Daniel H. Jeng

Proskauer Rose LLP

Date Written: December 28, 2012

Abstract

With great fanfare, the Jumpstart Our Business Startups Act, popularly known as the "JOBS Act", passed through Congress and, on April 15, 2012, earned President Obama's approval. This paper offers a review of the Act, delving into its historical background, purpose, and important titles. Title II amends Rule 506 of Regulation D to lift the prohibition of general solicitation and general advertising. Title III enables "equity crowdfunding", a novel and controversial fundraising method. These two titles expand capital formation channels to both accredited investors and to the "ordinary American investor". The struggle to strike the optimal balance between efficient capital formation and strong investor protection animates both Title II and Title III provisions as well as rule-making by the Securities and Exchange Commission. This paper offers four qualities that characterize the "ideal JOBS Act startup": 1) a smaller capital requirement; 2) a shorter timeline for success and product development; 3) a simple fundamental idea and business model; and 4) the elusive human element.

Keywords: JOBS Act, Jumpstart Our Business Startups Act, startup, Rule 506, Regulation D, general solicitation, general advertising, equity crowdfunding, crowdfunding, fundraising, capital formation, accredited investor, investor protection, consumer protection, SEC, emerging growth company

JEL Classification: K20, K22, O30

Suggested Citation

Jeng, Daniel H., The JOBS Act: Rule 506, Crowdfunding, and the Balance between Efficient Capital Formation and Investor Protection (December 28, 2012). Available at SSRN: https://ssrn.com/abstract=2238624 or http://dx.doi.org/10.2139/ssrn.2238624

Daniel H. Jeng (Contact Author)

Proskauer Rose LLP ( email )

One International Place
Boston, MA 02115
United States

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