On September 23, 2013, the Jumpstart Our Business Startups Act or JOBS Act, is a law intended to encourage funding of United States small businesses by easing various securities regulations went into effect. It passed with bipartisan support, and was signed into law by President Barack Obama on April 5, 2012. The sound of “the Jobs Act” going into effect was reminiscent of a 21 gun salute, as the sounds of continued email arrivals entering my inbox began promptly at 12:01 am yesterday morning.
The new rule lifts a longstanding ban on broadly advertising a private stock placement, a restriction that had been in place since the Securities Act of 1933, also known as the Blue Sky law. Companies use private placements to issue stock without registering the offering with the Securities and Exchange Commission. By avoiding registration, a company also avoids having to make the disclosures necessary if it were offering the stock to the general public. However, with a few exceptions, this stock may be sold only to an institutional buyer or accredited investors — as defined by the SEC is someone with annual income of at least $200,000 or net worth exceeding $1 million who is presumed to be a sophisticated investor. The company must file for a Regulation D, SEC exemption. A Regulation D offering is intended to make access to the capital markets possible for small companies that could not otherwise bear the costs of a normal SEC registration. Reg D may also refer to an investment strategy, mostly associated with hedge funds, based upon the same regulation (Title 17 of the Code of Federal Regulations, part 230, Sections 501 through 508).
What does this mean for startups and other entities looking to legally raise capital?
Companies:
- Still must file a Regulation D exemption;
- Must still file in the states whereas they are looking to raise the capitalization;
- May solicit or generally advertise the investment opportunity;
- Can only take investment dollars from accredited investors, whereas investor introduction came through general solicitation.
Crowdsourcing Portals:
- Has limitations on the amount of capital raised on a per investor basis which are $2,000 or 5% (whichever is greater) for people earning (or worth) up to $100,000, and $100,000 or 10% (whichever is less) for people earning (or worth) $100,000 or more.
- The Jobs Act Bill mandates reviews of financial statements for offerings between $100,000 and $500,000, and audits of financial statements for offerings greater than $500,000 (noting maximum offering of $1,000,000).
- Can’t be used to raise capital for an investment fund.
To my amazement, I have only heard of a few companies preparing to take advantage of this new ruling. Ironically, I found most investment banking firms unaware that that this ruling existed or what impact if any it may have on their bottom line as more companies take their private capital offering into their own hands. It is my belief that in the next 5 years we will see billions in private funding’s under the Jobs Act. Moreover, I can see this ruling being combined with other government backed investment initiatives that could usher in a new economic bubble is several sectors.
Please feel free to comment and share.
John Cataldi
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It’s not that we are not aware of the Job’s Act, but we don’t believe it will greatly impact out bottom line given the size of most offerings seems to be well under $10M. Our sweet spot is well in excess of that number. Good article.
P2p lending 2.0 baby!