The JOBS Act, originally passed in 2012, is regularly cited as one of the most significant regulation changes in the history of private investing. Now, almost a decade later, Congress is assessing an update to this legislation — referred to as JOBS Act 4.0 — which has huge implications for both emerging and aspiring venture investors.

The 2012 Act notably increased access to private markets, specifically through Regulation Crowdfunding, which allowed private companies to raise money from non-accredited investors, and the addition of Rule 506(c), which allowed general solicitation of fund offerings. While the 2012 Act (Reg CF specifically) gave retail investors the opportunity to invest in startups for the first time, it did little to meaningfully advance opportunities for venture capitalists.

Today, VCs have to navigate a regulatory minefield to ensure compliance with the Investment Company Act, Investment Adviser Act and Broker-Dealer regulation. The current regulatory regime limits VCs in the following ways:

• Only “accredited investors,” representing ~2% of the US population, are permitted to invest in startup companies.

• The majority of VCs abstain from secondary, “fund-of-fund” (FoF), and crypto investments altogether due to the risk of having to register as an investment adviser (RIA). Investors participating in these types of deals must either keep AUM under $150M or become an RIA (which comes with an abundance of restrictions and requirements).

• VC funds are capped at a maximum of 99 or 249 (accredited) investors (depending on how much they raise), or must create a second “parallel” fund structure which is costly and can only accept qualified purchasers.

• If leveraging Rule 506(c) “general solicitation” (noted above), VCs must actively verify the accreditation status of all participating investors.

  
  

  

Overview of JOBS Act 4.0 updates

So, why is this new JOBS Act update so exciting? Well, it addresses all of those material limitations described above — and more. Here’s a summary of the regulatory changes proposed by the JOBS Act 4.0:

• An expanded definition of a qualifying “VC” investment to include secondaries and fund-of-fund investments, meaning that VCs employing these strategies can avoid registering as an RIA.

• A shift in the burden of verifying accreditation under Rule 506(c) “general solicitation” from the fund manager to the individual LPs. This would allow LPs participating in 506(c) deals to self-attest their accredited status (similar to the current 506(b) process), rather than the GP needing to verify for each investor.

• Any American would be able to invest up to 10% of their income in private assets (as opposed to the current requirement of being an accredited investor).

• The investor cap would be increased to 500 LPs for funds under $50M (as opposed to the current cap of 250 investors for a fund <$10M).

Implications for emerging VCs

The updates proposed in the Jobs Act 4.0 are timely given recent shifts in the venture capital landscape. VC is no longer preserved for institutional GPs and LPs. Today, some of the most promising investment opportunities are sourced by new entrants, from solo-capitalists to emerging funds to individual angel investors. At Sydecar, we believe the future of VC — and in many ways, the future of innovation — will be defined by this new generation of capital allocators. Regulation changes, along with proper tooling, is a necessary first step to empower private investors from a wider variety of backgrounds.

Raising via 506(c) is a huge unlock for new entrants to VC, particularly those that do not come from generational wealth or high socio-economic status. It allows anyone who has built an engaged following online, for example, to market their fund publicly rather than having to rely on the closed-door networks that have historically dominated the industry. However, the current requirement to verify accreditation status in a 506(c) fund can be expensive and time-consuming, as it requires manual document verification. If this responsibility is shifted to the investor, 506(c) becomes more viable for emerging fund managers who don’t come from wealth.

The JOBS Act 4.0 also proposes expanding the definition of qualifying VC investments to include secondaries and fund-of-funds. Historically, only direct investments in private companies were considered “qualifying,” while acquiring private equities from founders, startup employees, or other funds was considered “non-qualifying.” Loosening this definition would allow VCs to participate in secondary and FoF investments without limiting the type of investors they can raise from or worrying about becoming an RIA. In addition to allowing more flexibility for VCs, this would also benefit founders and early startup employees by creating opportunities for liquidity.

Permitting all Americans to invest in private companies, regardless of their income or wealth, would help to level the playing field for wealth creation. Over the past several years, venture as an asset class has outperformed public markets — and, as public market stocks look increasingly uncertain, exposure to private assets held over a longer period looks more enticing. At the same time, this would create a greater pool of possible LPs for new fund managers to raise from, which aligns with the current trend of micro-VC funds. Gone are the days where a fund needs to be in the tens of millions to make fundraising cost-effective. Platforms like Sydecar make it possible to pool and deploy funds within hours, and at a fraction of the cost. All of this means that a VC can cost-effectively do smaller deals, comprised of smaller checks, from a wider pool of investors.

Source: Pitchbook

What’s missing?

So what about web3.0? The proposal avoids any explicit reference to crypto/token issuances in the JOBS Act 4.0. That said, in their current form, the proposed changes would allow VCs to invest in tokenized offerings with far more flexibility.

What’s next?

The JOBS Act 4.0 was proposed on April 4, 2022 and still needs to make its way through Congress before being signed into law. The act is widely expected to undergo major changes, so it’s too early to celebrate some of the proposals summarized above. We will be keeping a close eye on this bill and other advancements to the current state of VC regulation, so stay tuned!

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