By John Dedon
At a time when many businesses have had a hard time emerging from the recession, a new federal law is a welcome boon to existing businesses looking to grow and to entrepreneurs starting businesses. The Jumpstart Our Business Startups Act (“JOBS”), signed into law by President Obama in April, reduces government regulation, thereby making it easier for businesses to raise money and for the public to invest in startups.
Daniel Ingersoll, a securities and corporate attorney with Odin, Feldman & Pittleman, who has reviewed the legislation, says that “This legislation is a great opportunity for small and medium sized businesses. The JOBS Act will allow more new businesses to raise capital to begin operations, and it will allow more existing businesses to raise capital to grow and expand capabilities. More cash in businesses means more successful businesses, which means more jobs and more opportunities.”
JOBS’ provisions that have a real and tangible effect on businesses include the following:
Lifting of solicitation and advertising restriction
Currently, Rule 506 of Regulation D prohibits an issuer of securities from soliciting investments through advertising, articles, or notices published in newspapers or magazines, on TV, or over the radio. Rule 506 is one of the most common exemptions used for private offerings. It allows an offering company to raise an unlimited amount of money, from an unlimited number of accredited investors and up to 35 unaccredited, sophisticated investors. However, until JOBS, most private offerings were done through family and friends, as well as angel and venture capital investors.
Thanks to JOBS, offering companies can go directly to investors by utilizing the internet, paid advertising and publicity to raise awareness of their offering. Management will be permitted to do public appearances, seminars and media interviews. Generally speaking, there will no longer be a restriction on solicitation and advertising in a Rule 506 private offering. This means that businesses can significantly expand the pool of eligible investors. The only contingency is that all of the ultimate purchasers of the securities in the offering must be accredited investors. The issuer of the security must verify that the purchasers all are accredited investors.
Ingersoll says: “This is perhaps the most exciting aspect of this legislation for businesses. For years, entrepreneurs and businesses have struggled with how to get the word out regarding the need for a cash infusion to the right audience for their businesses. Lifting the solicitation and advertising restriction opens up a plethora of options for the offerer to get creative to find target investors.”
“Crowdfunding” becomes possible
“Crowdfunding” (also called “crowd financing” or “crowd source capital raising”) means raising small amounts of capital from a large network of investors. This helps particularly in a down economy, when startups struggle to find deep-pocketed investors. Currently, under existing law, there is no practical way to sell securities using crowdfunding because of the administrative burden and expense involved.
Fortunately, JOBS enables businesses to sell securities in crowdfunding transactions, without expensive and time consuming SEC or state registration, if certain conditions are met, including the following:
1) the aggregate amount of securities sold does not exceed $1 million during any 12-month period;
2) the aggregate amount sold to any investor during a 12-month period does not exceed either: (a) the greater of $2,000 or 5 percent of the annual income or net worth of the investor, if either is less than $100,000; or (b) 10 percent of the annual income or net worth of the investor, up to a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000; and
3) the offering transaction must be conducted through a registered broker-dealer or through a “funding portal,” which also must be registered with the SEC.
In addition to these significant benefits, JOBS has many more features that are designed to make it easier for smaller companies to hold IPOs, including less stringent accounting reporting and fewer disclosure requirements, such as executive compensation.
Ingersoll concludes: “For businesses that are just getting out of the gates, the regulatory hurdles to profitability just became that much less cumbersome. If they follow the proper guidelines, JOBS should make it easier for businesses to raise cash and less costly for them to do so.”
It is important to note that the provisions of JOBS are not currently in effect. The provisions will have a practical effect when the SEC adopts rules implementing them. The clock has been ticking on the SEC making these rules since JOBS was signed in April, and we can expect to see rules implemented as soon as this summer.
Once JOBS is implemented by the SEC, current business owners and potential business owners have a much better chance to raise capital and expand their business in an otherwise slow economy.
John P. Dedon is a principal in the firm with the Trust, Estate & Tax Planning practice group of Odin, Feldman & Pittleman. Dedon blogs about estate planning issues for Virginians and U.S. citizens at http://www.dedononestateplanning.typepad.com.Tweet
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