A Closer Look at the JOBS Act - by Edward Cambas

The JOBS Act was signed into law by President Obama on April 5th, 2012. The House originally passed the Act, and then it was amended by the Senate on March 22, 2012. This Act makes changes to a lot of different laws to attempt to make it much easier to raise private capital. This applies to a lot of emerging companies that want private capital and they wish to stay private longer. In addition, it reduces the regulatory burdens on certain public companies that are new and allows them to raise the money on the internet. If securities are held by 500 people or more issuers are required to register that class of securities with the SEC. This makes these securities extremely burdensome with regard to reporting obligations. They have to file very detailed quarterly and annual reports with the SEC. With the passing of the Act, the threshold has now risen to 2,000 holders of record. One of the provisions is that no more than 499 of those investors qualify as an “accredited investor” under SEC rules. One of the positive aspects is that persons who purchase securities pursuant to crowdfunding are exempt. This will open the door for entrepreneurs to receive a new method of funding and this is something that is extremely positive for start-ups. The enactment of the JOBS Act is effective immediately. The regulatory agency (SEC) is going to have to adopt rules and revise what they call “held of record”. The rulemaking for the SEC revisions should take place within the next 270 days. It passed Congress last week through a 73-26 Senate vote and a 380-41 House vote, including an amendment designed to protect crowdfund investors in order to make it easier for start-ups to access capital. What this means for entrepreneurs: 1. More Control over the Timing of Going Public. 2. Less Impacted by Potential Reporting Requirements. 3. Potential Impact on Secondary Markets. 4. Eliminates the Prohibition Against General Solicitation and Advertising 5. Reach a Wider Pool of Investors 6. Lowers the Investors Wealth Requirements 7. Gives the Start-up a 5 Year Plan to Develop “Simply, the JOBS Act will make funding more accessible for startups by allowing non-accredited investors to participate in the funding rounds, and this alone, I believe will be the main factor driving the increase in new companies being founded. And with new companies comes the need to hire staff. Without a doubt, this will help the current unemployment rate,” said Tanya Prive, founder of Rock The Post, a social networking platform for entrepreneurs to fund and swap resources. Rory Eakin, founder of CircleUp, an equity-based crowdfunding platform focused on established high-growth consumer and retail companies, added: “Currently, less than one percent of U.S. small businesses receive Angel investments. By opening up restrictions around general solicitation and introducing crowdfunding…these investments create up to six jobs per investment.” Companies like Indiegogo or Kickstarter were offering a way the companies could raise money from average person that did not meet the “accredited investor” criteria as defined by the SEC. The problem was that the persons contributing could not take a piece of the equity and benefit directly from profits and losses. The new law makes it much more enticing to the investors because they are allowed to participate and benefit in the upside of the company. The new law that is enacted now allows for companies to use crowdfunding to seek out and find the actual investors. It can now raise up to $1,000,000 this way. Investors with a net worth less than $100,000 may now invest up to 5% of their yearly income or $2,000 whichever is higher. Wealthier individuals can invest up to 10% of their annual income. The measure as it passed the House limits individual contributions to $10,000 or 10 percent of the investor’s annual income. The democrats in the House and Senate argued against the de-regulation and suggest that it is going to open the door to a wide variety of abuses and scandals. The republicans are in favor of relaxed regulations and they argue that we have to make it easier for start-ups to get their companies up and running. After all, small business is the engine that fuels growth and jobs in our economy. The Capital Matchpoint founder and President, Ken Honeyman and Vice President, Dave Dambro have been watching the bill as it progressed through the House and the Senate. The Capital Matchpoint is a premier online destination “where business meets capital.” They have carefully crafted an online community where entrepreneurs can develop a profile which then has a sophisticated method of using the information to match them up with the investors in the network. The website has all types of resources including an entire library of helpful videos, free e-book download and more.

A Problem for the SEC?

The ultimate question is whether or not the JOBS Act will inspire the next Steve Jobs or Bernie Madoff. The debate is landing squarely on how much help it is for start-ups versus the possibility of abuse and fraud. It is supposed to help small business get funding by easing restrictions and regulations on the process of raising capital. Small business start-ups need the SEC to get this one right and it will be a boost for start-ups around the country. It will actually depend on how the SEC structures the process so that it is functional while still protecting investors. The SEC has announced that they are “seeking public opinion” which the regulatory body will take under consideration along with all the nightmare scenarios that they are speculating could occur. As it stands the restrictions are very “entrepreneur friendly,” and the problem is that the way it is set up now can open the door to a ton of fraud. The SEC is already overwhelmed with trying to regulate what laws are already on the books and simply will not be able to regulate the entire process of crowdfunding as it goes forward. The most important part of the JOBS Act to entrepreneurs is crowdfunding which allows for companies to raise capital online. Most importantly, the ACT eases restrictions on the number of shareholders allowed to participate in the offering, amount they may invest, and removes the accreditation requirement. Another troublesome part of the crowdfuning provision is how to protect the investors from unscrupulous dealings. Ken Honeyman, President of The Capital Matchpoint recently stated that “The SEC already has its hands full, and they simply do not have the resources to scrutinize and regulate this new breed of securities.” The Capital Matchpoint has web resources in place to handle crowdfunding deals once all the dust settles and has been a proponent of the bill since its inception. During the great depression legislation was passed to protect the public. It was called the Securities Act of 1933. That was passed in part to among other things protect investors post market crash of 1929. The Securities Act requires that in order for stock to be sold publicly in the United States it must be properly registered with the SEC. The filings and statements then become public record and they contain key disclosures which protect the public. The JOBS Act creates a key exemption by not forcing registration of the shares to the SEC if they meet certain requirements. The Act allows up to 1 million dollars to be raised within a 12 month window and allows that the investors solicited have a much lower financial threshold to be able to invest. The amounts vary and depend on their income or net worth. 1. An investor’s annual income or net worth is less than $100,000. This person can invest $2,000 or 5% of his or her annual income or net worth within any 12-month period. 2. An investor’s annual income or net worth is equal to or more than $100,000. This person can invest 10% of his or her annual income or net worth, up to a maximum amount of $100,000. 3. The transaction much be done through an intermediary, such as a broker or funding portal, which must register with the SEC. These three things have already been solidified as being a done deal. The next aspect of the process is for the SEC to make a variety of additional rules which will apply in an effort to protect the investor community. The SEC will be weighing in on: •What disclosures intermediaries must provide to investors, including disclosures about risks and other investor education materials; •Standards to make sure investors have reviewed these materials and understand them; •Measures to reduce the risk of fraud; •Making sure that no investor in a 12-month period has bought more shares than the law allows; •Protecting the privacy of information collected from investors. By Edward E. Cambas - Sunny Isles Beach, FL, 33160

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