Business Law Advice: How will the JOBS Act affect startups?

By: Kristine Holm

On March 8, the Jumpstart Our Business Startups (JOBS) Act passed in the House of Representatives by an overwhelming majority (390 – 23). This bipartisan piece of legislation is also quite likely to pass in the Senate. The Act aims to make it easier for individuals to invest in startups and for privately-held startups to raise much-needed capital.

The JOBS Act is actually a legislative package comprised of six bills. The most talked about component is the crowdfunding bill titled the Entrepreneur Access to Capital Act. This Act recognizes the tremendous growth of crowdfunding, thanks in part to online platforms such as Kickstarter and Profounder, and loosens securities regulations in order to allow startups to take advantage of this new method of financing. Currently, those who contribute to a Kickstarter project may receive gifts and other tokens of appreciation, but do not receive an equity stake or otherwise receive any type of return on their investment. This is due to SEC regulations that prevent an investor from receiving equity for crowdfunded investments and limit investments from individuals to no more than 35 “accredited investors,” i.e., individuals with assets below $1 million or annual income of less than $200,000. The Entrepreneur Access to Capital Act will change this by creating certain registration exemptions for crowdfunded securities. Under the Act, an individual will be allowed to invest up to $10,000 or 10% of his income (whichever is less) per year. Startups will be allowed to offer securities to these individuals without registering with the SEC, in aggregate amounts up to $1,000,000, or up to $2,000,000 if investors are provided with audited financial statements.

In sum, the Entrepreneur Access to Capital Act will allow more individuals to invest in privately-held companies. This, in turn, will give startups a larger pool of smaller investors, who do not need to be accredited, and more places to turn for funding in order to keep their businesses growing. In deciding whether to use crowdfunding, startups should be mindful that this new type of investor will be a legitimate stockholder and have the same rights under the law as any other traditional type of investor.

The other bills that comprise the JOBS Act remove additional hurdles that startups face when it comes to raising funds:

• The Reopening American Capital Markets to Emerging Growth Companies Act will create a new category of securities issuers called Emerging Growth Companies (EGCs), whereby certain SEC regulations would be phased-in over a period of 5 years for businesses with less than $1,000,000,000 in annual gross revenue during their most recently completed fiscal year. EGCs can retain their status for the full five years unless they first 1) exceed $1 billion in revenue during a fiscal year; 2) issue more than $1 billion in non-convertible debt during a 3-year period; or 3) become a large accelerated filer.
• The Small Company Capital Formation Act will increase the offering threshold for companies exempted from SEC registration from $5 million to $50 million.
• The Private Company Flexibility and Growth Act will raise the shareholder registration requirement threshold from 500 to 2,000 shareholders of record.
• The Access to Capital for Job Creators Act will remove the SEC ban on advertising and solicitation for companies offering securities under Regulation D.
• The Capital Expansion Act will increase the number of shareholders permitted to invest in a community bank from 500 to 2,000.

Generally, the above-mentioned bills will help startups by increasing investment, increasing the length of time before a startup is required to go public, and removing onerous regulations during a company’s early stages. If the JOBS Act is passed by the Senate, which it seems poised to do, startups will soon be faced with a more welcoming environment for growing their businesses.

Sources:

H.R. 3606 – Jumpstart Our Business Startups Act: http://thomas.loc.gov/cgi-bin/query/D?c112:3:./temp/~c112ov1lp6

http://www.cio.com/article/702049/Something_Good_Coming_Out_of_Congress_

http://www.businessweek.com/magazine/crowdfunding-dont-call-it-an-ipo-11172011-gfx.html