William & Mary Business Law Review


Allen C. Page


In 2012, Congress enacted Title III of the Jumpstart Our Business Startups Act (the “JOBS Act”), which it named the Crowdfund Act, to create an exemption from registration under the Securities Act of 1933 that, in the words of President Barack Obama, would allow “ordinary Americans . . . to go online and invest in entrepreneurs that they believe in.” While perhaps well-intentioned in principle, Regulation Crowdfunding imposes material limitations and costs on the issuer, leading most issuers to conclude that the inclusion of unaccredited investors in a crowdfunding campaign is not worth the complexity and expense. Furthermore, the most heavily utilized exemptions from registration, contained in Rule 506, either expressly prohibit the inclusion of unaccredited investors or incentivize the exclusion of unaccredited investors due to burdensome disclosure requirements. Therefore, unaccredited investors are largely structurally excluded (whether explicitly or implicitly) from the vast majority of investment opportunities in private companies. Indeed, many counsels actively advise their clients not to raise capital from unaccredited investors for the reasons discussed above. This result makes little sense when unaccredited investors have the ability, from a securities law perspective, to invest unlimited capital into high-risk publicly traded “penny stocks” in the over-the-counter (OTC) markets without restriction, but are then functionally excluded in practice from investing an appropriate amount of funds alongside experienced accredited investors in most private offerings. Furthermore, companies conducting a Regulation Crowdfunding offering often resort to such an offering due to failure to raise sufficient capital under Rule 506. Thus, unaccredited investors are often resigned to the “bottom of the barrel” in the world of private offerings, with issuers being disincentivized to include them in higher-quality private offerings due to increased cost and inconvenience.

This Article explores how the exemptions in Rule 506 could be reformed to remove regulatory barriers and disincentives for the inclusion of unaccredited investors while also including aspects of Regulation Crowdfunding and other exemptions that afford reasonable investor protections for unaccredited investors. Specifically, Part I of this Article reviews Title III and Regulation Crowdfunding, as well as both Rule 506(b) and Rule 506(c), to provide context for analysis. Part II of this Article then reviews recent legislation, rulemaking, and guidance that sought to bolster Regulation Crowdfunding to encourage greater utilization by issuers and investors. Finally, Part III of this Article explores how the Rule 506 exemptions could be reformed to allow unaccredited investors a meaningful opportunity to participate in such offerings without penalizing the issuer while still maintaining reasonable investor protections for such investors. Ultimately, this Article recommends reforms to the Rule 506 exemptions that would allow unlimited participation by unaccredited investors while maintaining adequate protections for unaccredited investors through reasonable investment limits and meaningful co-investment alongside accredited investors, rather than defaulting to costly and complex disclosure requirements or requiring intermediaries, such as funding portals or brokers.