JOBS Act Increases Opportunities for Startups

Posted on April 09, 2012

On April 5, President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act). The overall goal of the Act is to allow young companies to flourish and create new employment opportunities in the United States. According to the Jobs Council, the number of new businesses launching annually has fallen by 23% in the last three years. The Council estimates that “if we had maintained the same level of start-up activity as in 2007, we would have nearly two million more jobs than we have today.” In response to these statistics and similar findings, the JOBS Act increases financing opportunities for smaller, newer companies and relaxes certain regulatory burdens.

Equity Financing via Crowdfunding

The JOBS Act increases financing opportunities for startups by legalizing crowdfunding or raising small sums of money from a large number of people. Crowdfunding utilizes Internet platforms to connect investors to startups seeking access to capital. Before the Act, entrepreneurs were limited by federal and state regulatory schemes that restricted their ability to offer and sell investments to non-accredited investors. Thus, startups could not legally sell shares in privately held companies to the general public—a major barrier to those companies that do not have access to venture capital networks.

With the Act’s legalization of peer-to-peer investments, startups will now be able to raise up to $1 million in equity capital from anyone. Citing investor protection concerns, however, the Securities and Exchange Commission (SEC) will limit unaccredited investors to certain investment amount ceilings based on the investor’s income. The SEC will publish implementing rules for the crowdfunding provisions of the JOBS Act within the next six months. TheJOBS Act is likely to create a new wave of crowdfunding platforms, but CNN Money reports that traditional crowdfunding marketplaces (such as Microventures) are still unsure of whether they wish to take on additional risk by opening up deals to unaccredited investors.

Creation of an IPO “On Ramp”

A second immediately effective provision of the JOBS Act eliminates common regulatory barriers that keep smaller companies from going public. The Act creates an IPO “on ramp” for “emerging growth companies” by providing an exemption from certain costly Sarbanes-Oxley requirements for either five years or until the company exceeds $1 billion in revenue or $700 million in market value. As Steve Case, co-founder of AOL, reports on his blog, today’s investors are more likely to force an exit of a sale and less likely to wait for an IPO. The result has been a dramatic shift toward companies either going public later in their lifecycle or failing to reach the IPO stage.

Additional Rule Changes

Finally, the JOBS Act updates certain securities rules making them more startup-friendly. Before the Act, small companies could only qualify for Rule 506 exemption from costly securities registration if they refrained from advertising that they were seeking capital. The JOBS Act amends certain advertisement restrictions for such Rule 506 offerings allowing companies to advertise offerings to the public, press, and on their websites. Similarly, companies will be able to publicly discuss offerings at industry seminars and meetings without fear of jeopardizing their Rule 506 exemption.

The JOBS Act also raises the private shareholder limit. Before the Act, regulations forced companies to go public once they had more than 500 shareholders and $10 million in assets. The Act now allows companies to remain private until they exceed 2,000 accredited investors or 500 unaccredited investors.

Going Forward

Despite the current environment of a divided Washington, the JOBS Act passed with overwhelming bipartisan support (73-26 vote in the Senate; 380-41 majority in the House). Critics warn that the Act’s deregulation will allow unscrupulous companies to take advantage of gullible investors and encourage the proliferation of thousands of junk companies. Proponents, on the other hand, view the Act as a boon to the nation’s entrepreneurial economy and solution to stagnant employment numbers. The long-term effects of the Act may not be measurable for some time, but today’s startups would be smart to take advantage of the new opportunities presented by the Act.

For additional information on the JOBS Act, contact us at (814) 459-2800.

Joy E. Sadaly is an Associate at Knox McLaughlin Gornall & Sennett, P.C.’s Erie office.

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