A Review of the JOBS Act and the Effect of the Election

The election is officially over and we can all breathe a sigh of relief as we now face at least a few months free of political ads and some time for politicians to focus on their jobs–and ours. The JOBS Act seemed pretty secure regardless of who won the presidential election, since both candidates were supportive of crowdfunding and small business, but the outcome does promise some consistency as the Act continues to move through the SEC and FINRA. President Obama has long been a supporter of crowdfunding. He utilized it as a grassroots initiative for fundraising in 2008 and was an early and vocal supporter of the JOBS Act, which is one of the few bipartisan pieces of legislation that has gone through Congress in recent years. As the work continues to move forward, and in light of a new study published by CFIRA that reported that almost 40% of the people they surveyed were unclear on what would change with the JOBS Act, we thought this would be a good time to review what is happening and what we are hoping to see come from it regarding the future of crowdfunding.

The JOBS Act, or the Jumpstart Our Business Startups Act, was signed into law April 5, 2012. It is designed to ease the federal securities regulation burden on small businesses so that they can grow and expand more easily, and thereby encourage job creation. The JOBS Act works in 5 ways (for an in depth description of them click here), but the two we will focus on here are its lessening of restrictions on “emerging growth companies,” and its creation of opportunities for widespread participation in equity crowdfunding.

First, the JOBS Act has created a new class of issuers that it has dubbed “emerging growth companies,” which are defined as companies with less than $1 billion in annual gross revenue. Businesses that fall within this category will have fewer restrictions placed on them and will be less regulated in terms of the kinds of financial information they are required to provide (for example, EGCs will only be required to present 2 years of audited financial statements rather than the 3 years required of non-EGCs). Essentially, the government will give these companies some breathing room as they grow into their own.

Along with this, the JOBS Act will ease restrictions on who can invest in what. Right now, only “accredited investors” can invest in companies that do not yet have a public IPO. Accredited investors are defined as those that have a net worth of over $1 million or who have an annual income of more than $200,000 for at least two consecutive years. If you were wondering, accredited investors make up less than 2% of the American population. The rules have not been finalized for exactly what will happen, but what we know so far is that equity crowdfunding will be available to everyone, with some restrictions, once the Act has passed through the SEC and FINRA. The basic restrictions we’ve seen so far have been put in to place to protect investors, though as Forbes pointed out, Americans spend a shocking $45 billion a year on the lottery, which is unregulated in terms of how much people can spend, despite its 1 in 175 million odds. Hopefully these regulations will block against some of the heartbreak people feel every week when they do not win the lottery, and, more importantly, will keep people from investing their life savings in the next big thing that busts. These are the major restrictions that have been laid out so far:

  • The amount a business may raise in a 12 month period cannot exceed $1 million. Questions remain about whether this $1 million comes from both accredited and non-accredited investors, or if investments from accredited investors will be considered outside the scope of this sum
  • For the investors, if their net worth or annual income is less than $100,000, they can invest $2,000 or 5% of their income, whichever is greater
  • If their annual income exceeds $100,000, the investors are limited to investing 10% of their income up to a maximum amount of $100,000
  • All transactions must go through a funding portal. The regulations on what a funding portal can or cannot do have not been put into place yet, but people are describing the portals as toned-down broker-dealers

The SEC is trying to carefully walk the line, protecting the public from fraud while also making the restrictions lenient enough that they open up the market. The SEC and FINRA have decided to determine their regulations sequentially rather than concurrently, but with the continuity provided by the reelection of President Obama, we are optimistic that the process will continue on its current timeline and with any luck equity crowdfunding will be a reality and an option for all small businesses and all investors by some time late in 2013.

According to estimates, if all Americas were to invest 1% of their savings in crowdfunded ventures, over $300 billion would go into the economy and go directly to small businesses and entreprenuers. If we combine this estimate with the CFIRA study, which showed that most companies that have turned to crowdfunding do so at least in part to gain the capital to hire more employees, we see a very positive turn of events. Crowdfunding has the potential to markedly improve our economy and decrease unemployment rates without any government stimulus.

We will keep you updated as things progress through the SEC. For more information on what has happened so far, look at our equity crowdfunding blog.

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