Post by Sandy Swartzberg
My grandfather, Sam, made the comment once that you are lucky if government is only twenty years behind where we are technologically. The JOBS Act is an example of this theory. The JOBS Act recognizes the influence of the internet and other means of disseminating information. It is a substantial step forward for businesses attempting to raise capital, either start up or continue growing. The rest of this post will explain some of the provisions of the JOBS Act.
Every business owner and CFO should know about the provisions of the JOBS Act because of the effect on business, either on their company or that of their competitors. The rest of this post, which explains some of the provisions, may be a little dry but it is important.
The JOBS Act has two substantial provisions. The one getting most of the attention is what is called “crowd funding,” but the one which may have a much larger impact are the substantial changes in the securities law.*
The “crowd funding” will allow start-up companies to request funding for a total of $1 million. A start-up will do this by placing its financial request, including supporting documentation, on what is known as a portal. The portal will have to comply with SEC rules. The rules have not yet been promulgated, but the hope is that both the portals and the rules will be effective soon after January 1, 2013.
The intent of the act is that small investors invest small amounts of money hoping that one of these start-ups will hit it big. It is also a way for start-ups to raise enough capital to get to the next stage of funding, including angel funding, venture capital funding and even bank funding. No one knows how effective the law is going to be and whether businesses are actually going to raise enough capital to make a difference. The hope is that thousands of small investors will invest small amounts of money, allowing some start-ups to succeed and create new jobs.
Of more immediate significance are the changes to the securities law. The securities law in the United States has been out of date for a substantial period of time. There are two basic types of securities offerings: registered and unregistered. A registered securities offering, which is often an IPO (initial public offering) has to go through a registration process with the SCC, which can cost hundreds of thousands of dollars. It only makes sense when trying to raise hundreds of millions of dollars.
Most of the time, the business trying to raise equity (anything that is not debt) tries to qualify under one or more of the exemptions created by both the state and federal government.
One of the problems has been that the law has required, depending on which exemption you use, that you only show the offering, which is usually in a private placement memorandum sometimes known as a PPM to a limited number of accredited investors. There was a ban on general solicitation. These rules were first promulgated in the 1880s when there were a lot of scams going on, where people were selling what were known as blue sky, meaning really nothing. In fact, many states, including Wisconsin, had what was called merit review where the state would say whether or not this looked like a good investment.
The new law removes much of this silliness letting you show the PPM or some other offering document to as many accredited investors as you want. Under certain rules, you can even make a general solicitation. There are still restrictions. These investments can only be made by what is known as an accredited investor, who under state or federal law meets certain criteria as to either income or wealth. The theory is that these people are sophisticated and are able to take the risk. One still needs to comply with all of the anti-fraud provisions of the various Federal and State Statutes and common law.
The JOBS Act also changed reporting requirements for companies that are widely held. Up until the change in the law, any company with more than five hundred shareholders had to comply with Sarbanes Oxley. The law now says that you can have up to two thousand shareholders before you have to comply with Sarbanes Oxley under most circumstances.
Again, I caution that this is a complicated area of the law and you should always seek competent advice before proceeding. The law also raises the amount that can be raised in a nonregistered offering up to $50 million. There is also a simplified process for nonregistered securities under Regulation A.
The intent of the law is to encourage investments and start-ups for companies with product lines, etc. which will create jobs in the United States. Some hope that money in low risk or low yield securities, such as government bonds, put into potentially higher risk or higher yield investments, will help with job creation. Only time will tell whether this hope is realized.
*None of this should be considered securities advice. Before offering any security registered or unregistered; you need to check with the appropriate professionals.