The JOBS Act: A Potential Game Changer for Startup Businesses

For the last five of my eleven plus years of practicing business law, I have focused on working with new and emerging companies.  I have seen many excellent ideas over the years, but unfortunately not all of them make it off the drawing boards.  Most often, the reason for the failure to launch is a lack of capital.

Credit markets have tightened significantly as a result of the economic downturn.  As a result, entrepreneurs find themselves turning to private sources for funds.  This method of funding, of course, requires compliance with federal and state securities laws, and the cost of such compliance is not insignificant.

In recent years, entrepreneurs have pressed lawmakers for a streamlined process for raising startup capital.  On April 5, 2012, those wishes came to fruition as President Obama signed into law the Jumpstart our Business Startups Act, also known as the “JOBS” Act.  This law provides for significant changes in federal securities regulation designed to grant easier access to startup capital.  James Morphy, a partner at Sullivan & Cromwell LLP, has written an excellent summary of the new law which I invite you to read here.

The most groundbreaking aspect of the JOBS Act is the new “crowdfunding” exemption found at new Section 4(6) of the Securities Act of 1933.  Section 4(6) provides an exemption from Securities Act registration for transactions involving the offer or sale of securities by an issuer (including all entities controlled by or under common control with the issuer), provided that:

(1) the aggregate amount sold to all investors, including any amount sold in reliance on such exemption, during the 12-month period preceding the date of such transaction, is not more than $1,000,000;

(2) the aggregate amount sold to any investor, including any amount sold in reliance on such exemption during the 12-month period preceding the date of such transaction, does not exceed (i) the greater of $2,000 or 5 percent of the annual income or net worth of such applicable, not to exceed a maximum aggregate amount sold to that investor of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000;

(3)  the transaction is conducted through a broker or funding portal that complies with the requirements of newly adopted Section 4A(a); and

(4) the issuer complies with the requirements of Section 4A(b).

While the Securities and Exchange Commission has yet to promulgate regulations to implement this new exemption, the fact that it exists at all is a welcome change for entrepreneurs.  Given that new ventures account for most of the new jobs in this economy, greater access to capital should mean more employment opportunities for Americans.  Hence, the JOBS Act is aptly named.