Discussion and debate continues to stir around the Jumpstart our Business Startups (JOBS) Act. Signed into law by President Obama on April 5, 2012, the JOBS Act aims to help small to mid-sized firms through additional access to capital while reducing reporting requirements, with the expectation of using that capital to grow jobs and expand their operations.
During the signing ceremony, the President remarked:
For business owners who want to take their companies to the next level, this bill will make it easier for you to go public. And that’s a big deal because going public is a major step towards expanding and hiring more workers. It’s a big deal for investors as well, because public companies operate with greater oversight and greater transparency… [S]tart-ups and small business will now have access to a big, new pool of potential investors — namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.
The JOBS Act requires the Securities and Exchange Commission (SEC) to perform a number of activities– including rulemaking, amendments, and research– towards final implementation. On April 11, the SEC announced an opportunity for public comments, well in advance of actual proposed rulemaking expected by the end of 2012.
The JOBS Act contains a number of provisions of potential interest to social entrepreneurs and impact investors, grouped under seven title sections as follows:
- Title I: Reopening American Capital Markets to Emerging Growth Companies. Effective immediately, it establishes a new corporate category for Emerging Growth Companies (firms with annual gross revenues of less than $1 billion), and attendant compliance issues.
- Title II: Access to Capital for Job Creators. Within 90 days, removes the ban on general advertising and solicitation on Regulation D Rule 506 offerings and Rule 144A offerings for accredited/qualified institutional buyers.
- Title III: Crowdfunding. Within 270 days, the SEC must issue rules on registration exemptions for limited share/small amount offerings available to large groups of investors. The total amount of these securities sold to all investors could not exceed $1 million. Any individual investor would be limited to either (1) $2000 or 5% of their total net worth/annual income up to $100,000 or (2) 10% of net worth/annual income up to $100,000. The exemption would apply to investors with net worth/annual income above $100,000 only if transactions take place through a funding portal or intermediary in compliance with forthcoming registration and reporting requirements.
Crowdfunding portals would not be required to register as brokers or dealers as long as they meet certain requirements. Investment firms would not be allowed to sell exempted crowdfunded securities. Shareholders possessing exempt securities would not be included among the total number of shareholders that would require issuers to file registration documents.
Regulatory guidance from individual states, as well as limitations on transfers of securities, are also expected to be forthcoming.
- Title IV: Small Company Capital Formation. Enables companies to issue up to $50 million (up from the previous limit of $5 million) under a new class of exempt, non-restricted securities. The SEC will be issuing rules and guidance on pre-filing solicitation, offering, auditing, disclosure and reporting requirements.
- Title V: Private Company Flexibility and Growth.
Firms would not be required to file as a public company until it accumulates equity security held among a class of record consisting of either 2000 accredited investors, or 500 non-accredited investors. The SEC must also weigh if new enforcement measures are warranted in the case of securities held by exempt investors for the benefit of other parties. - Title VI: Capital Expansion. Within one year, the SEC must issue guidance on mandatory registration thresholds. Banks/bank holding companies that issue securities would not have to register until 120 days after the last day of their first fiscal year in which total assets exceeding $10 million and a equity (not exempted) security of record is held by more than 2000 people.
Registration for banks/bank holding companies would be terminated within 90 days upon certifying less than 1200 investors. For all other entities, registration terminates if/when total number of investors falls below 300.
- Title VII: Outreach on Changes to the Law. The SEC is instructed to inform small/medium-sized enterprises, and women-owned, minority-owned, and veteran-owned businesses of the impact of the JOBS Act.
Given the potential to open previously untapped sources of capital, most of the attention among social entrepreneurs and impact investors to date has understandably been directed towards the crowdfunding provisions.
As larger issues of accountability, governance, transparency, financial stability, and risk tolerance arise among new corporate entities and categories of investors, however, the other sections of the JOBS Act merit review and comment.
The SEC public comment page allows and displays submissions for each specific title section, in addition to information on any related meetings with interested parties, thereby enabling public review and consideration of any views expressed.
