Overview of the JOBS Act
The recent passage of the JOBS (Jumpstart Our Business Startups) Act has political, business and legal experts discussing potential ramifications of the new law. The bill passed with bipartisan support on April 5th and contains some provisions that will give startups and investors new opportunities to work together.
The JOBS Act and Crowdfunding
You may be familiar with existing crowdfunding efforts like Kickstarter and similar websites that allow individual investors to make small capital contributions to various creative projects in an effort to get those businesses off the ground. The JOBS Act supports the crowdfunding method of raising capital and modifies existing securities laws to grease the wheels of such transactions.
This is done by allowing startups to raise money while making minimal disclosure of basic financial information to potential investors. The law curbs potential abuse of the new model by:
- requiring startups and any crowdfunding websites used to market the startup’s shares to disclose the risky nature of the investment,
- capping the amount of funds that can be raised by a single company through the crowdfunding platform, and
- limiting an individual’s investment via crowdfunding to either 5% or 10% of that person’s annual income – depending upon his or her income level.
IPO On-Ramp Enhancements Under The JOBS Act
Under the JOBS Act, startups have more flexibility in determining when they decide to go public. In the past, companies with over 500 investors had to file with the SEC, which forced companies like Google and Facebook to go public earlier than they would have liked. That number has been raised to 2,000, excluding employee-shareholders. The adjustment has been lauded as giving startups a greater opportunity to mature before going public.
Firms with gross annual revenue of less than $1 billion will now be given the new classification of “emerging growth companies”. Emerging growth companies will have more time to comply with disclosures required by the 2002 Sarbanes-Oxley Act, mandatory Say-on-Pay, and the forthcoming Dodd-Frank CEO pay ratio rules. Purportedly, the main purpose of this new issuer class is to help companies divert resources away from paperwork and towards job creation.
A side benefit of the emerging growth company moniker is that it gives qualifying companies the ability to keep their cards closer to their chest for a longer period of time. Now, businesses can withhold their financial results and other IPO-related filings until 21 days before soliciting investors. This cuts the amount of time investors have to investigate potential companies from three months to just under one month.
JOBS Act Reception
It has been a little over a week since the passage of the JOBS Act, and the bill has received mixed reviews. Two companies have already taken advantage of the law, according to Reuters. Unfortunately, many aspects of the law – the crowdfunding portion in particular – will take a while to kick in, as the SEC has been given ample time for implementation.
As expected, there are concerns being tossed around liberal outlets and forums charging that relaxed regulations for startups will lead to a crowdfunding bubble, prevalent fraud, or both. The concept of opening the doors to extensive crowdfunding use by startups is, by itself, a bit controversial (WSJ). While debates surround the law will surely continue, the JOBS Act has been signed into existence and startups would be wise to consider changes to their strategies in light of the new regulations.
For companies interested in crowdfunding, Forbes has a few ideas about where to start. As the SEC has been given a grace period of 9 months to implement changes made by the JOBS Act, the crowdfunding avenue is not open quite yet. Regardless, now is the time to consider how the new law and resulting crowdfunding options will affect your business by discussing new funding strategies and ideas.
As implementation of the Act continues, we will begin to see not only the long-term results of any new regulations and resulting investment strategies, but also whether any new jobs are actually produced. Check back with this blog to learn more about developments surrounding this Act, as well as other issues affecting your ability to incorporate in Texas, attract investment, and more.