Yesterday, President Obama signed the JOBS ACT (Jumpstart Our Business Startups Act) into law. According to President Obama at the signing, “New businesses account for almost every new job created in America. That’s why I pushed for this bill.”
Ever since this bill was introduced, there have been opinions flying every which way. Since most small businesses won’t have time in their busy schedules to read the 500 plus pages that make up the JOBS Act, here are a few things that you should know.
The primary goal of the JOBS Act is to reduce the regulatory burdens (which are also often costly to businesses) on capital raising by small businesses so that in turn, these businesses will create jobs. If you were to do a quick read of the press coverage, most of the focus has been on this bill giving technology startups a boost, but according to Reuters’ reporter Sarah McBride, high-tech businesses are not the most prevalent entrepreneurs. In actuality, the sectors with the most new activity are professional, construction and other service and retail.
The one definition that you need to understand that is key to the JOBS Act is:
- Emerging Growth Company. An Emerging Growth Company according to this act is a company that had less than $1 billion in revenue before going public. Per this definition, a company remains an emerging growth company until it has $1 billion in revenues or 5 years after going public.
If you are a small business, this definition may take you by surprise. According to a recent Brookings report, “the JOBS Act’s definition of a small company covers the vast majority of U.S. Companies that go public.”
Per this new act, benefits to Emerging Growth Companies include the following:
- They are exempt from “say on pay” rules
- They only have to provide 2 years of audited financial statements for IPO instead of 3 years required now
- They are exempt from Sarbanes-Oxley Section 404(b), which mandates outside auditing firm opinion as to the adequacy of internal financial controls
- They can conduct an IPO with research reports coming out immediately before and after the previously named “quiet periods.”
There is concern that although the JOBS Act was intended to help start-ups and small businesses raise capital, ultimately going public, but that it could actually lead to a larger number of money-losing Initial Public Offerings (IPOs).
According to an article by Charles Jaffe, Marketwatch, the JOBS Act essentially allows startups to go directly to investors via the Internet and with little disclosure or regulation. One positive that he cites is that companies must use third-party crowd-funding platforms approved by the U.S. Securities 7 Exchange Commission, but the drawback is that they will likely be regulated more loosely than investment bankers. He also cites SEC Chairman Mary Shapiro’s criticism of the bill as a reason this is of concern.
The Crowdfunding part of the act is really getting the most attention in the media since this is a fairly new way of raising money – initially used to raise money for non-profits, projects in the arts, independent films and the like. There is fear that this act and it’s crowdfunding language will make it easier for fraudulent schemes. Others are concerned that the last-minute senate amendment, which was added to enhance fraud protection, may have made the provisions of crowdfunding hard to use.
The Crowdfund Act creates Section 4(6) of the Securities Act, which exempts crowdfunded offerings from SEC and state registration. The facts:
- The Issuer can only raise up to 1 million dollars per 12-month period
- Each Investor can only invest in all crowdfunded investments in a year for all companies the greater of (a) $2,000 or 5% of annual income or net worth if either is less than $100,000 or (b) 10% of annual income or net worth with a cap of $100,000 if income or net worth are more than $100,000.
- The deal must be done through a broker or “funding portal” registered with the SEC and FINRA
- Information including risks, must go to investors at least 21 days before closing
- Information to be given includes management certified financial statements for offerings under 100,000, reviewed financial statements for offerings between $100,000 and $500,000, and audited financials for offerings over $500,000.
- Issuers must file updated results of operations and financials annually with the SEC
- Investors cannot transfer stock for one year with limited exceptions
- The company must be organized in the US and must be non-SEC reporting
- The SEC has 270 days to make rules to implement this act.
- Bad actors will be disqualified
- Offerings are exempt from state regulation but certain filings and fees may be required
There are several crowdfunding sites that are set to benefit from all of this attention in addition to this new act. These include Crowdfunder, Crowdtilt, Wefunder, The Launch Pad, Rock The Post, Indiegogo, AngelList, SecondMarket and Kickstarter. Not all of these are built to offer equity in their models, but going forward, they may.
For those who are critical of the act based on the potential for fraud, Henry Blodget wrote on the Business Insider that “it’s not up to the SEC to save investors from their own bad decisions – just to police fraud after they’ve been burned.”
It is important to note that there are two SEC regulations that are being removed by this new act. The JOBS Act lifts Reg D, which required that any offer to sell securities must be registered with the SEC or meet certain exceptions, and it banned public solicitation in private offerings. It also lifts Reg A, which currently allows issuers to raise small amounts of money from the public under a streamlined, less-regulated process; the JOBS Act raises the ceiling to $50 million from the current #5 million.
It will be interesting to see how the passing of this act changes how businesses raise capital moving forward. Will it be small businesses that are really the benefactors? Or will as one journalist suggested, will it be lawyers, investment bankers, hedge funds and financial journalists who end up with all of the jobs? Time will tell.
Regardless of the new JOBS Act, small businesses will have to continue to use their best judgment when it comes to the way that they access capital. They need to continue making sure that they have their financials in line so that when it does come time for them to access capital, they will be able to work with the right investors and bankers that meet their needs for their future success.