UPDATE: After months of debate and scrutiny, President Obama signed the JOBS Act on April 5, 2012. This important new legislation is intended to spur job creation and economic growth by improving access to capital.
By Gail Perry
On Tuesday, March 27, the House of Representatives approved the Jumpstart Our Business Startups (JOBS) Act with a vote of 380 to 41. The bill, which amends portions of the Sarbanes-Oxley Act, will now go to President Obama who has indicated he will sign the legislation.
The JOBS Act has been touted as the latest attempt to revive and stimulate the economy, with its key element focused on applying a concept called crowdfunding to small businesses. Crowdfunding is a term used to encourage donations of money to help artists and nonprofit ventures. One element of this program has been that, often, those who donate get some token gift in return for their donation.
Taking crowdfunding to the small business arena, investors will be able to put money into small businesses in exchange for a share of equity without the company needing to jump through all the hoops normally required by the Securities and Exchange Commission (SEC) of companies that want to issue shares of stock.
This is excellent news for investors who would like to take part in initial public offerings (IPOs) that would normally only be offered to certain qualified institutional investors and for small companies looking to grow capital without having the restrictions that were previously in place.
Here are the key elements of the JOBS Act:
- Small privately held companies with revenue under $1 billion (or $2 billion if the company provides potential investors with audited financial statements) will be able to sell up to $50 million in shares as part of a public offering without having to register with the SEC.
- New public company startups with revenue up to $1 billion are excused from having an outside audit of internal controls for five years.
- Small companies will be able to have as many as 2,000 shareholders (previous limit was 500) or 500 unaccredited investors without registering with the SEC. According to the SEC, an accredited investor is an individual with a net worth of over $1 million not including primary residence, has earnings of at least $200,000 – or $300,000 for joint earners – for the last two years, or is a general partner, director, or executive officer of the company issuing the security.
- A crowdfunding investor is limited to investing in all private companies that are governed by this Act, the lesser of $10,000 or 10 percent of his or her income if the investor earns less than $100,000 a year.
- Businesses will be able to use advertisements to solicit new investors.
You should be talking to your clients about these points:
- Because SEC registration is no longer required for these small private companies, the standard disclosures to investors will not be required. Companies that want to take advantage of these new rules should consider what types of disclosures they expect to make that will encourage, but not mislead, potential investors.
- Companies considering using crowdfunding techniques need to develop controls to prevent potential fraud and abuse. An accountant is well-suited to help the companies develop these controls.
- Assurances to potential investors should include descriptions of the controls that will guarantee the safety of investments.
- Websites already exist that provide a platform for companies to make themselves available for crowdfunding investments. Sites, such as Launcht, Crowdfunder, 40Billion, MicroVentures, and many more, help businesses reach a wide audience. Accountants can help their clients choose the right site for their business and also monitor progress and performance.
- If clients are interested in investing in small companies using crowdfunding techniques, they should be aware of potential fraud and abuse. Encourage them to learn as much as they can about the companies, their products, their history, and their leaders before investing. If clients invest, they should oversee the investments they make.