The pros and cons of the JOBS Act
- June 19, 2012
As of April, by way of the Jumpstart Our Business Startups (JOBS) Act, almost anyone in this country will have the opportunity to invest in a startup company. The JOBS Act is Congress’ latest effort to create more jobs and drive entrepreneurship. This legislation makes funding much more accessible for startup companies by allowing non-accredited investors — those who make less than $200,000 annually and have a net worth less than $1 million excluding their primary home — the ability to participate in the early funding rounds of startups. The idea behind this legislation is simple: by removing or modifying rules and regulations that limit capital flow to early-stage startup companies, Congress is betting that there will be an explosion of new startup companies that obtain a source of funding that did not previously exist, and that this explosion will also lead to employment opportunities that may have not have otherwise materialized. While the legislation’s goals are admirable, what does it mean for business professionals, investors and financial experts?
I suspect as marketers, solicitors, brokers, crowd funders and other sellers of these types of securities begin marketing these investments over the next few years, financial experts and leaders in the business community will be bombarded with questions from clients about these new rules and could be tasked with having to educate an entire new group of client investors who previously had little or no knowledge of this investment class and the rules surrounding it. They will also need to educate their clients on the risks associated with these types of investments.
This is not your typical Federal Deposit Insurance Corporation (FDIC)-insured bank certificate of deposit (CD), investment-grade bond or even blue-chip stock. These are, quite frankly, the riskiest of all securities, and to view them any differently from an investment standpoint is foolish. While there’s a chance an investment turns out well and your client hits a home run with their startup investment, the fact is that most startups will not have that kind of success. Investors need to know this.
Furthermore, financial experts are also concerned about provisions in the JOBS Act due to exemptions included in the bill for certain companies. Those exemptions could have a negative effect on public company financial reporting by causing problems for investors and other users of financial statements in distinguishing between different accounting treatments. Similar issues could come up for companies as a result of potential changes to auditing standards.
The bill’s passage could also have an impact on the independence of the Financial Accounting Standards Board (FASB), which is critical to protecting investors’ interests and ensuring that there is clarity, objectivity and transparency in public company financial reporting. Creating a policy that would allow for different accounting standards for different classes of public companies — for example, different standards for emerging growth companies and other public companies — would create marketplace and investor confusion by allowing different accounting standards to be applied at different points in a publicly-traded company’s lifecycle. Financial experts believe strongly that consistency in applying accounting standards for all public companies is vital to investors, along with clear, objective and transparent financial information.
Yet I am not against the JOBS Act. I believe it has good merits and just might help create permanent jobs, and it also contains some good protective measures regarding the amount non-accredited investors will be allowed to invest in these securities. There are also many different tax considerations with these investments that clients may not know exist, and although financial experts, on average, have not had to advise the masses on this special area of taxation, they now have an opportunity to do so and garner more influence and favor for their knowledge. Members of the business community should get ahead of the curve and educate themselves on this legislation. If you are considering investing in a startup or have questions about the JOBS Act you should consult a certified public accountant (CPA).
Ryan Losi is Executive vice president & director of business development for Piascik & Associates, personalized tax and financial planning CPA firm in Losi is a member of the American Institute of Certified Public Accountants, Virginia Society of Certified Public Accountants, Richmond Import/Export Club, Greater Richmond and Henrico Chambers of Commerce, Richmond Apartment Owners Association, and Virginia International Trade Alliance.