Starting today, September 23, 2013, the Securities and Exchange Commission (SEC) will launch its effort to support the JOBS (Jumpstart Our Business Startups) Act, and in so doing will provide new sources of capital to small businesses and the whole emerging entrepreneur scene. All of this is great New Orleans for small under served markets like New Orleans that has a rich pool of technologist with new ideas but needing more capital to help bring it to market. As with any governmental regulations or legislation, trying to read the government jargon makes impossible to understand much less see how to take advantage of it.
Here are five of the most important things you need to know about the changes Title II of the JOBS Act will bring:
- Reduced restrictions on soliciting investments – Seeking and securing investors has been a highly regulated game, with both civil and criminal penalties. For more than a decade, technology has provide investors the opportunity to see and learn about new products but there was no direct connection via e-mail, websites, or even blogs to follow up. The JOBS Act makes it simpler for small businesses and investors to get in contact with each other and determine if there might be interest in a financial transaction
- Investor Profile and Number Have Changed – The SEC has kept the regulation that any investors of private companies must be accredited, meaning an investor who is “a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person or a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.” Basically, the investor needs to be sophisticated enough to understand the risk and has the ability to lose the money they invested.
Secondly, the private company shareholders cap has been raised from 500 to 2,000 shareholders before they get to the crossroads of thinking about going public and the added cost that will bring. The process and cost of going public was never very attract to even the best of the entrepreneurial class. It required lots of management structuring and horse trading without the guarantee of success. Entrepreneurs skill sets in this phase was no match to those in the seed and venture professions.
- Crowdfunding opportunities will skyrocket! – The lifting of restrictions that limit open investment solicitations will mean that now entrepreneurs and small businesses can crowd-source equity to a greater extent then ever before. We know crowdfunding is not new and that some entrepreneurs and companies have raised money, but it was on a donation basis or negotiated return of first run products, i.e., the investor sat through the movie making process or get the 1st edition of the book or music video. There was no transfer or control of their businesses, products and services that had to be delivered as a result of the activities of the company. However, under the new Regs, businesses using sites like Kickstarter, Angelist or Indiegogo will be able to offer equity in their company in exchange for return for investment (ROI). It should be noted that these would have to be accredited investors, at least until Title III of the JOBS Act, which deals with non-accredited crowdfunding, goes into effect.
- More Online Investing will occur – I saw this in the Tenant in Common real estate structuring business in the earlier part of the decade when the IRS ruled in Rev Prop 2002 that 1031 exchanges into fractional owned properties was eligible for 1031 tax free exchanges. Deals were openly being made online through new investment platforms. Investors were supplied with all of the due diligence on investment opportunities all across the globe. A few leading companies jumped into the industry and feed leads to the entrepreneurs looking for new capital. all of this is already starting to happen as several of these portals, currently limited to accredited investors, like CircleUp, CrowdFunder.com and AngelList come on line. My guess is that there will be many more to follow.
- Exposure to an all new world of Emerging Growth Companies – According to the SEC, an “emerging growth company” is defined in the Securities Act and the Exchange Act as an issuer with “total annual gross revenues” of less than $1 billion during its most recently completed fiscal year. Companies that are defined this way will not have the SEC burdens when going public. Fundamentally, it will change three things: 1) they will only need to two years of audited financial statements when filing for an IPO, instead of three; 2) they are exempt from having to give shareholders a non-binding vote on executive compensation under the Dodd-Frank rules; and 3) they aren’t required to hire an outside auditing firm to check internal financial controls.
These changes will provide for much needed capital to assist in the development of young, emerging growth companies. I am excited about the opportunities it will present for the talented entrepreneurs struggling to make it. I am equally excited for the prospects it holds for New Orleans which has an abundance of talent just waiting for the right spark — this could be it!
Until next time, be positive and work for the greater good.
Whenever you are thinking about investing money, you should seek the counsel of an attorney, CPA and other professionals.
- Crowdfunding – not just for early stage (thehartford.com)
- Today, Startups Can Start Raising Money Publicly Thanks to the JOBS Act (tech.co)
- First JOBS Act General Solicitation Offering Launched at 12:00 am EDT this morning (prnewswire.com)