JOBS stands for “Jumpstarting Our Business Startups.” It’s the legislation that, finally, allows American small businesses to raise crowdfunding of up to US$50 million (and still be considered small and private). The full text is online in PDF format. (1)
When did the Jobs Act go in to effect?
A: While President Barack Obama signed the JOBS Act in 2012, some of its provisions have only recently gone into effect.
History of the JOBS Act
A: The JOBS Act was written in an attempt to help the United States recover from its economic slump in the first decade of this century. Small businesses had previously been required to maintain a “quiet period” before making their initial public offering on the market, and “firewall” regulation had banned research analysts from discussing these start-up companies even with their own firms. The JOBS Act was meant to encourage small businesses to grow by speeding up the process that allows them to receive capital investments. (2)
Is there a “Crowdfunding Act”?
Title III of the JOBS Act has the official short title of “‘Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012,” or CROWDFUND Act.
Was it legal for small businesses to raise money through crowdfunding before March 25, 2015?
A: Yes…up to $5 million. Actually, according to the Washington Post, setting that smaller fundraising goal might have simplified matters: “companies looking to raise relatively small amounts of money through a public offering are subject to a much simpler SEC registration process, putting fewer bureaucratic hoops between them and investors.” Companies starting up with a smaller investment can still use this simpler process, known as “Regulation A,” but it’s not been used much. (3)
Why has Regulation A been so seldom used?
A: One reason may be that the process was very elaborate. The JOBS Act has cleared up some of the red tape around using Regulation A. Now that the more complicated process is available to companies that require a much bigger investment, there are new rules that the Obama administration hopes will encourage more companies to use Regulation A.
How do the new rules make it easier to use the old system for crowdfunding?
According to the Post, one of the best parts for an emerging growth company is that the new rules “exempt Regulation A offerers from registering with state financial regulators in every state in which their prospective shareholders reside.”
Yes. Under the older form of Regulation A, which was based on the Securities Act of 1933 and the Securities Exchange Act of 1934, a company offering shares to fifty investors in fifty states would have had to register 51 times: once in each state, and once with the federal Securities and Exchange Commission. Under the JOBS Act, if the initial investment they need is under $5 million, they need only register with the SEC and the company’s home state.
Why was the older form of Regulation A so complicated?
State regulators say that the complication was necessary to prevent interstate scams. However, the present head of SEC, Mary Jo White, thinks the federal government should be able to spot and prevent scams in today’s Internet-enhanced economy.
How many people can be part of the crowd that funds a new company under the JOBS Act?
Either 2,000 people, or 500 people “who are not ‘accredited investors’ as defined under applicable SEC rules.” (4)
Who is classified as an “accredited investors”?
They’re defined as “accredited” based mostly on having an income or net worth sufficient to suggest to the SEC that they’re relatively sophisticated investors. Non-accredited investors are expected to be less familiar with the market.
What defines an “emerging growth company”?
Total annual gross revenues of less than $1,000,000,000, and not having sold “common equity securities” before December 8, 2011. However, “asset-backed securities issuers” do not qualify as emerging growth companies. Neither do ordinary “investment companies” as defined by SEC, but business development companies, a special category of “investment companies,” may qualify. (5)
What if the company has never offered equity securities on the market, but has offered shares of the company to employees as a benefit?
According the SEC web site, offering shares as part of an employee benefit plan counts as selling them.
Must emerging growth companies be based in the United States?
No. With regard specifically to companies based in Canada, SEC says: “While the disclosure requirements for this Canadian issuer would continue to be established under its home country standards in accordance with the MJDS, other provisions of Title I, such as the test-the-waters provision in Section 5(d) of the Securities Act and the deferral of compliance with Section 404(b) of the Sarbanes-Oxley Act, would be available to an MJDS filer that qualifies as an emerging growth company.”
Q: How deeply can an emerging growth company be in debt?
Up to $1,000,000,000.
What’s special about business development companies?
According to SEC, they “invest in startup and emerging growth companies for which they make available significant managerial experience, and are subject to many of the disclosure and other requirements from which Title I provides exemptions, including executive compensation disclosure, say-on-pay votes, MD&A and Section 404(b) of the Sarbanes-Oxley Act.”
If a company does not qualify as an emerging growth company, and it decides to form a new subsidiary business, may that subsidiary business qualify as an emerging growth company?
It may. However, “the emerging growth company status of an issuer may be questioned if it appears that the issuer or its parent is engaging in a transaction for the purpose of converting a non-emerging growth company into an emerging growth company, or for the purpose of obtaining the benefits of emerging growth company status indirectly when it is not entitled to do so directly.” Also, “the emerging growth company status of an issuer may be questioned if it appears that the issuer ceased to be a reporting company for the purpose of conducting a registered offering as an emerging growth company.”
What’s a funding portal for crowdfunding, and how can a company qualify as one?
The Financial Industry Regulatory Authority has been working on setting up regulations for funding portals that don’t profit from anyone’s decision to invest in any particular company, but simply publish information about emerging growth companies that qualify for crowdfunding. They’ve set up a form online for use by people who want to register prospective funding portals for crowdfunding good-sized small businesses under the JOBS Act. (6)
According to JOBS Act crowdfunding rules, how much of the $5 to $50 million dollars can a company raise online through the familiar kind of small-scale crowdfunding where individuals contribute money to friends, readers contribute money to writers, etc.?
Not more than one million dollars can be collected from those “non-accredited investors” the company might find online. (When funding portals are registered and authorized to operate, they’ll be required to disclose to “non-accredited investors,” among other things, that there’s a possibility that the investors might lose their entire investment.)
Is it legal to make offers or sell securities based on the crowdfunding provisions in the JOBS Act?
Not yet. Regulations are still being written, and SEC reminds people “that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.” (7)
When funding portals are authorized to publish information about crowdfunding investment, how reliable will they be?
SEC intends to make legitimate funding portals as reliable as possible. They will be required to conduct background checks on the owners of the companies seeking crowdfunding. The JOBS Act also contains specifications about providing information to prospective investors–and testing them on that information.
Is there any way to back out of an investment in an emerging growth company if an investor decides the risk is too great?
The JOBS Act authorizes SEC to provide rules under which an investor will have time to reconsider an investment before the sale becomes final.
Will brokers or funding portals be affiliated with the emerging growth companies, or benefit in any way from an investor’s decision to fund one start-up rather than another?
Generally, no. If there is any connection between a funding portal and any company whose offering it helps to publicize, the JOBS Act requires that connection to be disclosed.
What are the penalties for fraudulent fundraising or misuse of funds under the JOBS Act?
In addition to whatever criminal penalties may apply to the specific abuse of funds, the JOBS Act specifies that a person who has violated a pertinent law or regulation will thereafter be disqualified from any regulatory exemptions in the JOBS Act.
Are funding portals part of a national securities association?
The JOBS Act provides that funding portals can be registered with a national securities association.
Under the JOBS Act, do state securities and exchange offices have any authority over the crowdfunding process?
Although the JOBS Act federalizes the crowdfunding process, it does not abolish state securities and exchange authority. It requires SEC to keep state regulatory officials informed about transactions covered by the JOBS Act.
Are people involved in fraudulent business as “emerging growth companies” still subject to state laws, regulations, fees, and penalties?
Yes, but only in their own state. Just as the JOBS Act allows a legitimate emerging growth company in Connecticut to offer securities to investors in California without having to register in California, it also allows a fraudulent emerging growth company in Connecticut to be prosecuted under Connecticut laws but not California laws.
What about the places that belong to the United States but aren’t exactly states?
For the purposes of the JOBS Act, the District of Columbia and the U.S. territories are considered the equivalents of states.
Does SEC really plan to regulate all of these emerging growth companies over the years?
The JOBS Act requires emerging growth companies that take advantage of the JOBS Act to file audited financial statements with SEC every year.
Can emerging growth companies file these statements online?
Yes. In fact, the JOBS Act specifically provides that SEC may require companies to file online.
Will the amount of money emerging growth companies can raise under the JOBS Act remain the same forever, or will it be adjusted in relation to future economic change?
The JOBS Act provides that, every two years beginning in 2013, SEC must review the JOBS Act and report to Congress whether an increase in the amounts set as “caps” is indicated, or not. And, if not, SEC must explain why not. The administration expects that the amounts specified in the JOBS Act will increase.
How do business owners even know that they can take advantage of the JOBS Act?
The final paragraph of the JOBS Act provides that “The Securities and Exchange Commission shall provide online information and conduct outreach to inform small and medium sized businesses, women owned businesses, veteran owned businesses, and minority owned businesses of the changes made
by this Act.” (1)
Is or was SEC’s regulatory process open to input from the public?
According to their web site, SEC officials still “look forward to hearing the public’s views as we write” regulations that will “facilitate capital formation and promote investor protection.” Of course, that statement was posted in 2012, but it’s not been changed as of 2015. (8)
Will SEC take responsibility for informing prospective investors about the costs and benefits of participating in crowdfunding for emerging growth companies?
In a general way, yes. They will provide “an Investor Bulletin that will highlight aspects of crowdfunding investing that you should keep in mind when deciding whether to invest or not.” (2)
Does the JOBS Act mean that people will be seeing advertisements to buy stocks and shares in emerging growth companies?
Yes, but those advertisements will have to mention that they’re not for everybody, which might deter emerging growth companies from advertising via TV commercials. According to SEC’s Lori Schock, “you may see a TV or newspaper advertisement to buy the common or preferred stock of a private company. You may also see a proliferation of websites that, similar to crowdfunding, offer a platform for companies to raise money with a Rule 506 offering online. However, only accredited investors may participate in these offerings that take advantage of general solicitation.”
Given that more emerging growth companies fail than succeed, is investing in an emerging growth company a wise decision?
If the investor can afford the investment, the JOBS Act is designed to benefit the U.S. in general. The benefits of investment in the United States offer varying degrees of measurable returns for individual investors. The intention of the JOBS Act is to ensure that all emerging growth companies offering investment opportunities will be legitimate. Some emerging growth companies will grow and prosper; early investment can offer financial advantages.
- JOBS Act (PDF). http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf
- Schock, L. “Outline of Dodd-Frank Act and JOBS Act.” https://www.sec.gov/News/Speech/Detail/Speech/1365171490596#.VRQdyPnF9ic
- Washington Post. “SEC Finalizes Key JOBS Act Rules for Small Businesses,” http://www.washingtonpost.com/news/on-small-business/wp/2015/03/25/sec-finalizes-key-jobs-act-rules-for-small-businesses/
- Fields, C., and Burt, J. “JOBS Act Eases Requirements for Triggering SEC’s Exchange Act Registration.” http://www.cfjblaw.com/jobs-act-eases-requirements-for-triggering-secs-exchange-act-registration/
- U.S. Securities and Exchange Commission. “Jumpstart Our Business Startups Act: Frequently Asked Questions.” https://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm
- U.S. Financial Industry Regulatory Authority. http://www.finra.org/industry/issues/funding-portals and http://www.finra.org/industry/interim-form-crowdfunding-portals
- U.S. Securities and Exchange Commission. “Information Regarding the Use of the Crowdfunding Exemption in the JOBS Act.” https://www.sec.gov/spotlight/jobsact/crowdfundingexemption.htm
- U.S. Securities and Exchange Commission. “Jumpstart Our Business Startups (JOBS) Act.” https://www.sec.gov/spotlight/jobs-act.shtml