On April 5, at a signing ceremony attended by a bipartisan group of lawmakers and entrepreneurs from around the country, President Barack Obama signed into law the Jumpstart Our Business Startups – or Jobs – Act. In his remarks prior to the ceremony, President Obama described the act as “a potential game-changer” for startups and small businesses.
He noted that the act represents an “important step” in removing “barriers that were preventing aspiring entrepreneurs from getting funding.” The act makes a number of major changes to the ways in which companies can raise funds from investors through the sale of securities.
Many feel that the act will make a significant difference in the ability of local startups, entrepreneurs and small businesses to gain access to funding that otherwise may have been out of reach.
Prior to the enactment of the JOBS Act, if a company wanted to obtain funding it had essentially three options:
• Bank financing.
• An initial public offering.
• The sale of debt or equity in the company pursuant to a private placement exemption.
With credit tight, it has been difficult for many small businesses to obtain bank financing and such financing is typically not even available for pre-revenue startups.
Initial public offerings are generally not an option except for the largest of companies – they are expensive and onerous due, in part, to the extensive disclosure requirements and are not feasible without significant public demand. Many companies, therefore, turn to investments pursuant to a private-placement-exemption offering, which cannot be made in a public manner. Furthermore, such offerings have additional hurdles depending on the size of the offering, including arduous disclosure requirements and/or use of only “accredited investors.”
Accredited investors are defined as those individuals who meet certain income or net-worth levels ($1 million net worth or an annual income of $200,000 individually or $300,000 jointly with a spouse).