How the JOBS Act Affects Small Corporations

On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (JOBS Act). This complex law contains a number of provisions designed to ease securities law and accounting burdens on companies that wish to raise capital by selling stock and other securities to the public. Many of the provisions affect only larger companies--those with at least $10 million or more in assets that are seeking to raise millions of dollars from investors. But others will have an impact on small companies and entrepreneurs who want to create start-up companies.

The changes brought about by the JOBS Act include:

New "emerging growth company" category. The JOBS Act creates an entirely new category of company for securities law purposes called an "emerging growth company" (EGC). Generally, these are new companies with less than $1 billion in revenues. The new law makes it easier for these companies to go public through an initial public offering (IPO) of stock by relaxing the initial SEC reporting requirements and phasing in ongoing reporting requirements once the company is public.

Lifting of general solicitation ban. For decades, the federal securities laws have banned companies from advertising private offerings of securities to the general public---for example, they could not advertise on television or newspapers. This was intended to protect the public from Ponzi schemes and other swindles by fast operators. The JOBS Act lifts the advertising ban provided that the purchasers of such securities are accredited investors or institutional investors like banks and insurance companies. An "accredited investor" is basically a person with a lot of money-- a net worth of at least $1 million or annual net income of at least $200,000. Doing away with the general solicitation ban is expected to greatly change the way start-ups, private equity funds, and hedge funds promote and sell their securities offerings. Expect to see websites, television and radio ads, and even cold calls from salespeople trying to sell stock in the latest hot start-up.

Loosened SEC reporting requirements. Until now, the federal securities laws required that any company that sells stock or other securities to 500 or more people and has more than $10 million in assets must register the security with the Securities and Exchange Commission. The JOBS Act increases the threshold for registration to 2,000 investors, including up to 500 people who are not accredited investors.

Crowdfunding to Raise Capital. The most radical provision of the JOBS Act, and the one likely to affect small business the most, is a new law permitting small companies to raise capital through "crowdfunding." Crowdfunding is the raising of money from a large pool of small investors over the Internet.

The JOBS Act permits a non-public company to raise up to $1 million every 12 months by selling securities through the Internet without having to register with the Federal Securities and Exchange Commission or state securities agencies. There are restrictions on how much each investor may invest through crowdfunding. Specifically, investors with annual income or net worth of:

  • less than $100,000 may invest an annual maximum of $2,000 or 5% of the investor’s annual income or net worth, or
  • over $100,000 may invest 10% of their annual income or net worth, up to $100,000.

To protect the public against fraud, companies that attempt to raise money through crowdfunding must comply with various disclosure, operational, and filing requirements. For example:

  • a company can't use crowdfunding to raise money from the public directly--its securities offering must be conducted through an intermediary—either a registered broker or a registered funding portal (numerous companies have or will create websites to serve as funding portals)
  • a company may not advertise your crowdfund offerings; however, it may issue notices directing potential investors to your designated broker or funding portal
  • companies will be required to file financial statements with the SEC and provide them to investors each year--audited financial statements must be provided for crowdfunded stock offerings over $500,000.

The crowdfunding provisions will not take effect until January 1, 2013. The SEC is expected to issue detailed regulations governing just how crowdfunding is supposed to work.

Talk to a Lawyer

Need help? Start here.

How it Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you
Swipe to view more

Talk to a Business Law attorney.

How It Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you