The Jumpstart Our Business Startups Act, or JOBS Act, was passed on April 5, 2012. Its purpose is to encourage funding of emerging growth companies by easing securities regulations, which in turn, will increase American job creation and economic growth. The legislation has several provisions to increase small businesses’ abilities to raise capital:
- Increases the number of shareholders a company can have before being required to register with the SEC as a publicly traded company
- Provides a new exemption from registering public offerings with the SEC for certain types of small offerings, allowing internet funding portals registered with the government
- Relieves emerging growth companies from certain regulatory and disclosure requirements in the registration statement they file when they go public and for five years thereafter
- Lifts the ban on “general solicitation” and advertising in certain kinds of private placements of securities
- Raises the limit for securities offerings exempted under Rule 505 of Regulation D, allowing for larger fundraising efforts
- Raises the number of shareholders permitted in community banks
The JOBS Act has been supported by many in technology and startup communities, investors and entrepreneurs, and both parties of Congress. The National Venture Capital Association supports the changes made by the bill, like facilitating the use of online services to invest in small companies.
Many of the provisions of the JOBS Act are intended to boost IPOs. There may be a rush of IPOs in the coming year as the JOBS Act allows relaxed financial reporting provisions and even permit small, quickly growing companies to work with the SEC confidentially prior to filing their registration statements. Brian Hamilton, of Forbes Magazine discussed the influence that the recent decline in IPOs had on some of the provisions of the JOBS Act in a May 2012 article as follows:
“A KEY PART OF THE JOBS ACT RECENTLY SIGNED BY PRESIDENT OBAMA HAS BEEN DESCRIBED AS CREATING AN ‘IPO ON-RAMP’ THAT MAKES THE PROCESS OF AN INITIAL PUBLIC OFFERING EASIER AND MORE ATTRACTIVE. IN FACT, MANY OF THE ACT’S PROVISIONS GREW FROM A TASK FORCE APPOINTED BY THE TREASURY DEPARTMENT TO ADDRESS A DECLINE IN THE NUMBER OF IPOS IN RECENT YEARS.”
Even though some parts of the new law are supportive of small and mid-sized companies going public, there are millions of privately held companies in the US today that want to stay that way. For these companies, the new law provides more alternatives for staying private and raising capital. In 1997, there were over 8,800 publicly held companies listed on US exchanges. Since the wane of the popularity of the dot-coms in the 1990s, the number of public companies has dropped steadily to less than 6,000 by the end of 2005 and then to 4,990 as of March 31, 2012, according to the World Federation of Exchanges.
The JOBS Act will now make it easier to fund your startup with many small donations from hundreds of individuals through a website, called crowdfunding. Those emerging growth companies that may not be able to develop a relationship with venture capitalists now have another option for raising much-needed capital. Small and mid-sized businesses can raise up to $1 million over a 12-month period through the use of a ‘funding portal.’ The crowd of investors, besides giving money, can also spread the word about your emerging growth company through their connections. However, the SEC has until the end of 2012 to come up with some regulations for crowdfunding.
Venture Capitalists will more than likely still be a major source of funding for tech startups and high growth businesses. These types of companies will benefit from forming relationships with Venture Capitalists that can offer expertise as well as funding to guide their emerging growth companies.