The recently passed bipartisan JOBS Act (Jumpstart Our Business Startups) was designed to improve access to the public capital markets for “emerging growth companies,” a new class of issuer that will enjoy relaxed financial, compensation, and other disclosures for up to five years after its initial public offering (“IPO”).
Other notable aspects of the JOBS Act include exemptions for “crowdfunding” offerings, relaxation of the current prohibitions against general solicitation in private offerings, increased flexibility to conduct Regulation A offerings of up to $50 million without SEC registration, and the raising of the threshold for triggering public company reporting, all of which aspects are aimed at easing capital formation for small and mid-sized companies and, as a result, creating private sector jobs.
Without going through an expensive and onerous SEC registration, companies will be able to sell up to $1 million of stock per year to an unlimited number of investors. Individuals who earn less than $100,000 a year can invest up to $2,000 per company per year; wealthier folks can invest 10% of their income up to $100,000.
President Obama has stated: “For business owners who want to take their companies to the next level, this bill will make it easier for you to go public. And that’s a big deal because going public is a major step towards expanding and hiring more workers. It is a big deal for investors as well, because public companies operate with greater oversight and greater transparency. Of course, to make sure Americans don’t get taken advantage of, the websites where folks will go to fund all these start-ups and small businesses will be subject to rigorous oversight. The SEC is going to play an important role in implementing this bill.”
Opponents of the bill suggest that it is based on faulty premises and will seriously hurt all investors by either eliminating or reducing transparency and investor protections. “The target audience is likely to be unsophisticated,” says Stephen Goodman, an attorney with Pryor Cashman LLP in New York. “We already know the SEC has been extremely skeptical of this process.”
Zack O’Malley Greenburg of Forbes, wrote, “When you have nearly every consumer advocate and state regulator warning you not to loosen investor protection laws, it’s almost certain that thousands will be separated from their money via this new [JOBS] law”
Since the SEC is already having problems keeping up with its Dodd-Frank financial reform mandates, one has to question its ability to add overseeing Internet-based start-ups to its responsibilities. How would the SEC monitor new internet companies’ fiduciary responsibility and protect investors from unethical businesses selling stock?
While the intent of the JOBS Act is positive, implementation may be difficult.