Where does the name come from and when was it passed?
The title does not derive from the word “job”, as in job position. Rather, it’s an acronym which stands for “Jumpstart Our Business Startups Act” (JOBS Act). The Act was signed into law by the President on April, 5th, 2012.
What is the essence of the Act?
The Act introduces the concept of the “emerging growth company” and eases the initial public offering (IPO) process for these companies. But today, we touch on a very important section of the Act – Title III, the so-called procedure CROWDFUNDING. It essentially talks about attracting venture capital by start-ups. Crowdfunding, literally meaning “popular funding”, is actually used as an acronym for «Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012». Thus, the purpose of the Act is to «improve the ability of companies to access capital using private and small public offerings without U.S. Securities and Exchange Commission (SEC) registration».
What is the difference from what it used to be?
According to the new Act, start-up companies can attract capital from any investor with a relatively small investment amount. Previously, only accredited investors and qualified institutions could participate in IPOs. Avoiding the legal details, those were high income earners making over $200,000 per year or with a net worth of $1 million, as well as some major funds.
Thus, the Act broadened the concept of the investor; in effect giving the opportunity to invest in start-up companies to more than 90% of Americans previously could not do so. For example, start-up companies raising less than $1 million per year have to comply with the following conditions:
- If an investor earns an income of up to $100,000 per year, the maximum investment may be the greater of either $2,000 or 5% of the gross annual income or net worth of the investor. For example, any investor earning $50,000 per year or has a net worth of $50,000 may invest up to $2,500 per year into a start-up company.
- If an investor earns more than $100,000 the maximum they may invest per year is 10% of gross annual income or net worth. For example, if an investor earns $150,000 per year or has a net worth of $150,000, can invest up to $7,500 per year into a start-up. It is the usual practice to use questionnaires to define the suitability of the investor for start-up private placements.
In 2011, the total income earned in the U.S. totaled to about $13 trillion, which means that an additional $650 billion per year may be invested in start-up companies at the 5% income investment rate.
What are the basic requirements and procedures set forth by the Act?
The main concern of the regulators is that worthless securities will be sold to unqualified investors. That is why, for example, prior to selling securities, all materials that are to be provided to potential investors are to be available to the SEC for inspection no later than 21 days prior to the sale date. It is also required that such information be filed onto the SEC data system.
The broker-dealer is held responsible and liable for all disclosures. For example, in order to reduce the risk of a fraudulent transaction, the broker-dealer should investigate the background and history for any violations of each officer, director, or any other person owning more than 20% of stock from any issuer offering its securities in accordance with this procedure.
What information should the issuer raising capital, disclose?
There is nothing special that an issue needs to disclose, however, for legal transparency such information should be prepared by qualified consultants: name, address, websites, management, any person holding over 20% of the issuer’s stock, business description, business plan, amount of capital to be raised, purpose of funds, risk disclosure, etc. In general, this information is found in any standard private placement memorandum.
The fundamental point is related to the amount of capital that is to be raised:
Up to $100,000 – the issuer must provide tax returns for the last fiscal year as well as financial statements which have been certified by the Principal;
$100,000 to $500,000 – the issuer must provide financial statements according to the standards approved by the SEC standards, and verified by an independent Certified Public Accountant;
Over $500,000 – the issuer must provide audited financial statements. The documents previously mentioned as well as the documents to be provided to investors must be filed with the SEC.
Can private placements be advertised?
As a general rule, advertising private placements within the United States in prohibited. The broker-dealer is prohibited from advertising the specifics of the placement, but does have the right to advertise by sending potential investors to the broker-dealer for more information.
What happens after placement?
It is the responsibility of the broker-dealer to disclose to investors and the SEC the business operational activity of the business at least once a year. Perhaps in the future, this provision will be amended as it seems utopic. Responsibility should fall on the issuer, no on the investment bank.
Can an investor resell stock purchased under the scope of this Act?
In general, there is a one year ban on the resale of stock from a private placement, except when they are resold to an accredited investor, the issuer itself, sold as part of a public offering or a sale to a family member of the investor.
Who has the right to act as a mediator in raising capital under the newly adopted Act?
Two categories of companies: the broker-dealer and the so-called funding portal. Both categories must be registered with the SEC. I believe broker-dealers will occupy the main niche as the activity of funding portals is very limited. A funding portal has no right to offer to buy, sell or disperse information regarding the offered securities on its website. I would ask the SEC, what is a funding portal permitted to do? Perhaps in the near future, we may see a more detailed description of the activities of funding portals.
Disclaimer: This article contains the opinions of the author. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service. Performance data shown represents past performance. Past performance is no guarantee of future results. No part of this article may be copied, distributed, transmitted or published without the prior written consent of the author.
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