The JOBS Act of 2012
AIMkts covers The JOBS Act of 2012 as events occur with news and commentary:
Passed by Congress on March 27, 2012, and signed into law by President Obama on April 5, the JOBS Act makes it easier for startups and small businesses to raise capital from investors in both private offerings and IPOs. The federal government hopes this will result in faster economic growth and job creation. From accredited investors’ point of view, the JOBS Act will (a) boost the supply of private-company investment opportunities and alternative investment funds, like venture capital and hedge funds; (b) spur the availability of news, research, and data (and advice) about those investment opportunities; and (c) inevitably result in new scams and frauds, at least until the SEC and perhaps state regulators step in to promulgate new protections based on the JOBS Act’s rule-making provisions.
Deregulation The most important provision of the JOBS Act for accredited investors is that it lifts the ban on “general solicitation.” The Securities Act of 1933 required that when a private company (or a person or entity acting on behalf of the company) offered or sold equity in its business to investors, it could solicit only those people with whom they had preexisting, established relationships, and whom they knew to be accredited investors. Now, thanks to the JOBS Act, such companies will soon have the option to solicit the public generally, although they still must restrict the sale of equity to accredited investors.* That means investors in general, even those who have no relationship with anyone in the private capital markets, may be flooded with PE and VC offers — including offers from funds as well as offers directly from companies selling equity.
* This is oversimplified a bit. Actually, the Securities Act requires that private companies either register their shares with the SEC or qualify for an exemption before offering shares to investors. Under the exemptions available prior to the enactment of the JOBS Act, general solicitation was prohibited.
The SEC issued final rules for general solicitation in July 2013, and they went into effect September 24. Quite possibly, people who never considered investing in PE and VC (and many who didn’t even realize they qualified to do so) will consider diversifying into these and other alternative asset classes. Innovation So along with a boost in the supply of deals, there will be an increased demand for high-quality deals. Result: a surging accredited investor market, with broader participation, greater innovation, and some new regulation. Other Provisions In addition to lifting the prohibition on general solicitation, the JOBS Act:
- Legalizes crowdfunding through brokers and “funding portals,” so that startups will be able to solicit a larger number of smaller investments (both equity and debt) from the public (not just accredited investors). Crowdfunding for all investors will become legal when the SEC and FINRA issue final rules, possibly at the end of 2013 or in early 2014.
- Increases the number of shareholders of record that a company may have before it becomes obligated to file SEC reports (which should allow it to stay private, and access private capital, longer)
- Reduces certain financial reporting and disclosure obligations for emerging growth companies for up to five years after their initial public offering
Most of the literature we found online about the JOBS Act comes from the corporate point of view, that is, how the Act affects emerging growth companies and their advisers and intermediaries. There is a dearth of good literature about how the Act will affect investors. Here are links to the two best summaries of the JOBS Act that we found, and how it will affect both emerging growth companies and the securities markets, from the corporate point of view:
- How Will the JOBS Act Affect You? Written by four corporate finance, securities, and M&A lawyers at Lowenstein Sandler (New York), published March 28, 2012
- The JOBS Act: Improving Access to Capital Markets for Emerging Growth Companies, by two securities lawyers at Greenberg Traurig, first published May 23, 2012
- How the JOBS Act Changes Investment Banking, by Cody Boyte at AxialMarket, published March 22, 2012
Focus on General Solicitation
AIMkts continues to research and highlight the topic of general solicitation and its implications for the accredited investor as part of an open and ongoing discussion for the purpose of information and education. You can read more here: May 28, 2013 – “Fraud using the JOBS Act is alive and well, but don’t let is scare you” April 1, 2013 – “Is the JOBS Act laying the groundwork for the next Tulip Craze?” Here are two articles about the general solicitation provision of the JOBS Act, written by New York securities lawyer Vanessa J. Schoenthaler:
- The JOBS Act in a Nutshell – Part III General Solicitation and Private Offering Platforms, published April 30, 2012
- The SEC’s Proposed Rules and Amendments to Allow General Solicitation and General Advertising in Private Offerings, September 3, 2012
Focus on Crowdfunding
Crowdfunding is a hot topic in alternative investments. How long it will stay that way remains to be seen. AIMkts will continue to follow its evolution and provide commentary, research, insight and information about regulations and trends affecting the crowdfunding vehicle. Here are some articles that will keep you ‘in the know’: April 30, 2013 – “Is NASDAQ getting into crowdfunding?” April 22, 2013 – “5 tips to help investors pick the right crowdfunding platform” April 17, 2013 – “More About Crowdfunding: Beyond the hype” April 15, 2013 – “Crowdfunding: How much of the hype is just hype?” Here is a cool infographic titled “The JOBS ACT & Crowdfunding,” at Forbes.com, September 21, 2012. And check out “8 Crowdfunding Sites to Watch,” published April 17, 2012, at CNN-Money.com.
© 2012 DailyDAC, LLC. Written by David M. Freedman, a financial and legal journalist since 1978 who is coauthoring a book on equity crowdfunding for investors based on Title III of the JOBS Act (to be published by Wiley & Sons in 2014). Posted October 2012, updated September 2013. Thanks to Vanessa Schoenthaler of Qashu & Shoenthaler for help in composing this article.