Aug 10, 2013

JOBS Act 101

The JOBS Act, short for Jumpstart Our Business Startups Act, is starting to roll out into the real world. But just like anything coming out of Washington it's long-winded and confusing.

The impact of the JOBS Act will be so huge it will directly or indirectly impact every aspect of our economy. So I thought it might be helpful to break it down and make it as easy(er) to understand.

There are many laws, provisions and regulations included in the JOBS Act but I want to focus on just two proposed changes. These are the two changes that will impact everyone from Warren Buffett to soccer moms throughout America. First, is solicitation and second is crowdfunding.

Solicitation - Starts September 2013
Prior to the JOBS Act entrepreneurs and private companies could not solicit potential investors without having a previous relationship. For 80 years companies could not advertise, create press releases or reach out to potential investors for investment. It was like putting your house on the market and not being allowed to put a sign in the yard or list it on Trulia. You had to reach out one by one through your personal network or introductions.

Title II of the JOBS Act eliminates the SEC's ban on general solicitation and advertising. This means that entrepreneurs, venture capitalists, hedge funds and angel groups can now tell everyone that they are raising money. However, there are some rules (of course).

First the company must file Form D with the SEC 15 days before they begin solicitation and advertising. Then after the raise the company must amend their Form D filing within 30 days after they close the round.

Second, the company can only accept investment from accredited investors. An accredited investor is a person with a net worth of at least $1 million (excluding your primary residence) or a minimum $200k in income in each of the past two years ($300k if you're married). In other words rich people only still.

This is a positive step because now accredited investors in California might learn about a great investment in Ohio they might not have otherwise heard about. More investors for businesses and more opportunities for investors. Win/Win.

Crowdfunding - Coming Soon
The second major change resulting from the JOBS Act involves crowdfunding. This rule change would allow anybody to invest in small businesses, not just accredited investors.

If your net income or net worth is less than $100k you can invest $2,000 or 5% of your annual income, whichever is greater. If your net income or net worth is greater than $100k you can invest $100k or 10% of your annual income, whichever is less.

However, there are some rules that small businesses would need to follow when taking investment from non-accredited investors.

  • Company must register with the SEC 21 days prior to first sale
  • All offerings must go through a broker-dealer or licensed portal (crowdfunding website)
  • Initial and periodic disclosures to the SEC
  • Businesses can only raise up to $1 million per year
  • The Bill mandates reviews of financial statements for offerings between $100,000 and $500,000, and audits of financial statements for offerings greater than $500,000 (noting maximum offering of $1,000,000)
  • Debt and Equity Rules are still unclear
  • Some states are pushing back (like Ohio)

Conclusion - Buyer Beware
Nobody knows yet what the impact of the JOBS Act will be. But if you're a non-accredited investor interested in making angel investments you need to be careful. These type of investments are extremely risky and there is no guarantee you'll get your money back.