The JOBS Act – short for Jumpstart Our Business Start-Ups – became law in early April. The bipartisan effort combines six smaller bills that changed the Securities and Exchange Commission (SEC) rules so that small business can attract investors and go public with lower costs and much less red tape. It allows start-ups to use the Internet and other social media to solicit small-scale individual investors and relaxes earlier rules on advertising. In many ways, it might be described as a logical extension and a redefinition of crowd-funding, which has been around for awhile and offers a much less restrictive climate for entrepreneurs. Although President Obama signed the bill into law in early April, the SEC has several months to pass regulations before the JOBS Act can be fully implemented.
Small businesses with less than $10 million in assets will now be able to advertise to solicit investors, and they may have as many as 2,000 shareholders (up from 500) and not be required to register with the SEC. Similarly, they will be allowed to sell as much as $50 million in shares - up from $5 million - without filing SEC paperwork.
Not everyone on Capitol Hill embraced these changes enthusiastically. In the Senate, some leading Democrats expressed concern about the possibility of companies using “billboards and cold calls to lure unsophisticated investors with the promise of making a quick buck investing in new companies.” The AARP, a lobbying group for seniors, also has opposed removing the advertising ban, fearing that unsuspecting individuals will fall prey to scams.
Crowd-funding websites like Kickstart have helped businesses raise much needed capital, despite the fact contributors were not allowed to buy shares in the companies they helped - or participate in any profits (or losses). The new law lifts these restrictions. A company may use crowd-funding sites to raise as much as $1 million. To protect all parties involved, the Act stipulates that investors with a net worth of less than $100,000 may invest only 5 percent of their yearly income or $2,000 (whichever sum is higher). Investors whose net worth exceeds $100,000 may invest up to 10 percent of their yearly income or $10,000 (whichever sum is greater). The Senate passed an amendment to the bill that requires crowd-funding websites to register with the SEC. Promoters who are paid by a company are required to reveal this, and the company attempting to raise funds must provide information regarding its financial condition, business plan and shareholder risks.
Start-ups are not the only potential beneficiaries. When the JOBS Act takes effect (after the SEC passes regulations to fully implement the law), well-established small businesses with a net worth of at least $1 million will also have a way of attracting investors. They will have the opportunity to advertise directly to the public, go public and grow at a sustainable rate without the burden of brokerage fees or meeting time-consuming regulatory requirements.