Law will bring VC investing to masses

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:
&#8226 Bank financing.
&#8226 An initial public offering.
&#8226 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). Needless to say, most Americans and many small businesses do not qualify as “accredited investors” and until now were unable to invest in many of the country’s and the state’s most promising and innovative companies unless and until that company was willing and prepared to make an IPO.
The JOBS Act creates an entire ocean of potential investors, where only a shallow pool had existed previously. Under the act, a company will soon be able to offer publicly and sell up to $1 million in securities within a 12-month period to investors, regardless of “accredited investor” status. Crowd-funding provisions permit any individual to invest the greater of $2,000, or 5 percent of his or her annual income in a crowd-funding offering. That investment cap is extended to 10 percent of an individual’s annual income or net worth (with a cap of $100,000 total investment) for individuals with an annual income or net worth greater than $100,000. The act requires that such crowd-funding investments be made through a broker or through a registered investment portal on the Internet, a new system for offering and receiving investments in securities.
While crowd-funding offerings are not subject to registration with the Securities and Exchange Commission, crowd-funding issuers are required to file certain disclosures with the SEC and make such information available to investors through the investment portal or broker.
States may still require notice filings for such crowd-funding offerings, also known as “blue skies” filings. However, the JOBS Act expressly prohibits states from charging filing fees on crowd-funding securities and from regulating investment portals.
In addition to the new and broader avenues for the offer and sale of securities without engaging in an initial public offering, the JOBS Act makes it easier for certain companies to undertake an IPO. “Emerging growth companies,” which include certain companies with less than $1 billion per year in annual revenue, are now exempt from or subject to relaxed securities registration, disclosure, and annual audit requirements otherwise applicable to issuers of securities. Additionally, the act provides for the creation of a new “small issues” exemption from registration of securities for offerings of up to $50 million within any prior 12-month period.
Despite the strong bipartisan support that the JOBS Act received in Congress, it is not without its critics. Many securities regulators and lawmakers, including U.S. Sen. Jack Reed, D-R.I., have expressed concerns regarding the potential for investor fraud with the sale of securities via the Internet and have questioned whether certain regulatory exemptions under the Act are too broad.
In an effort to quell such concerns, President Obama stressed the role of the SEC in implementing and supervising the administration of the act.
Despite the questions that the JOBS Act leaves open regarding how it will function in practice when it is implemented by the SEC over the coming months, what cannot be denied is that the JOBS Act will significantly change the way small and emerging companies will be able to raise capital. In Rhode Island, where the Small Business Administration figures showed that 96 percent of the state’s private-sector employers are small businesses, granting all Americans the ability to invest in small businesses and emerging startups has the very real potential to bolster entrepreneurism in the state and, in turn, create jobs. &#8226


Alexandra W. Pezzello is an attorney at Partridge Snow & Hahn LLP and Theodore B. Howell is a partner with the firm.

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