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Chapter 11
Meet the JOBS Act
11.1 Introduction
In an effort to jump-start the entrepreneurial economy, the JOBS
(Jumpstart Our Business Startups) Act created a new provision in
the Securities Act of 1933 Section 4(6) that allows Emerging Growth
Companies (EGCs) to raise up to $1 million in any 12-month period by
selling securities through authorized intermediaries, subject to certain limi-
tations on the matter of the offering and by limiting the amount any per-
son is permitted to invest.
EGCs are a new category of issuer. EGCs are those with (1) less than
$1 billion total annual gross revenues in their most recent scal year, and (2)
have not had a registered public offering before December 8, 2012.
1
The JOBS Act (signed into law April 6, 2012) facilitates nancing across
the spectrum from seed capital to public offerings. Following are some of
the most important aspects and implications:
◾ Permitting “crowdfunding”
◾ Easing restrictions on fundraising from accredited investors
◾ Easing mandatory reporting triggers under the SEC Act
◾ Increasing the amount of money companies may raise in “mini-IPOs”
◾ Reducing many burdens on EGCs going public
◾ Providing more capital to entrepreneurs and EGCs, creating jobs and
providing opportunities for non-accredited investors to invest in both
community-based businesses and entrepreneurial companies
228 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
◾ For the last several years, the number of VC nancings in the U.S. has
continued to drop—approximately 3500 VC-led deals; VCs are raising
less capital and continue to nance only larger opportunities with sig-
nicant IRR potential and with exits of greater than $50 million
◾ Although Angel statistics are difcult to obtain, they funded nearly as
much as VCs
◾ Fewer than 10% of all accredited investors in the U.S. invest in private
nancings; except as friends or family, non-accredited investors have no
exposure to private nancings
◾ There are 25,000,000 EGCs in the U.S.; many are looking for funding
and banks are not lending; identifying investors is extremely difcult
given securities laws
11.2 The JOBS Act at a Glance
The JOBS Act seeks to accomplish this goal by, among other measures,
relaxing certain provisions of the Sarbanes-Oxley and Dodd-Frank Acts
insofar as those provisions apply to a class of newly public companies
dubbed EGCs. A primary goal of the legislation is to facilitate the ability of
growing companies to raise capital, as follows:
◾ Removes the prohibition on general solicitation in connection with
transactions dealing with Rule 508 or Rule 144A, provided that sales are
limited to qualifying investors
◾ Allows the thresholds that trigger registration of a security under
Section 12(g), including a different threshold for banks and bank hold-
ing companies
◾ Provides, to a new category of EGCs, relief from requirements and
other restrictions applicable to IPOs and on a transitional basis for up to
5 years, relief from certain reporting requirements
◾ Adds a “crowfunding” exemption
◾ Authorizes the SC to increase the amount permitted to be raised in a
Regulation A offering to $50 million in any 12-month period
◾ Modications to Rule 506 will provide substantial freedom for issuers to
promote their offerings to a wider group of investors
◾ Anyone who can convince the investing public that they have a good
business idea can become an entrepreneur
Meet the JOBS Act ◾ 229
◾ Modeled in part on campaign donations because politicians have been
collecting small donations from the general public for decades
◾ Another route for business funding because VCs reject 98% of busi-
ness plans
11.2.1 Title III of the U.S. JOBS Act
◾ The Act limits both the aggregate value of securities that an issuer may
offer through a crowdfunding intermediary and the amount that an
individual can invest.
◾ An issuer may sell up to an aggregate of $1,000,000 of its securities dur-
ing any 12-month period.
◾ Investors with an annual income or net worth of up to $40,000 will
only be permitted to invest $2,000 and above $40,000 and less than
$100,000, investors shall be entitled to invest 5% of their annual income
or net worth in any 12-month period.
◾ Investors with an annual income or net worth greater than $100,000
will be permitted to invest 10% of their annual income or net worth.
◾ Investors are limited to investing $100,000 in crowdfunding issues in a
12-month period.
◾ Investors who purchase securities in a crowdfunding transaction are
restricted from transferring those securities for a period of one year.
This restriction is subject to certain exceptions, including transfers: (i)
to the issuer; (ii) to an accredited investor; (iii) pursuant to an offering
registered with the SEC; or (iv) to the investor’s family members.
11.2.2 Equal Access and Disclosure
Equal access to and disclosure of material information is a core principle of
federal and state securities regulations. It is essential for investors to have
the necessary information to appreciate the potential risks and rewards of
an investment. The JOBS Act requires issuers to provide investors with a
description of the following:
◾ Company: the issuer and its members, including the name, legal status,
physical address, the names of the directors and ofcers holding more
than 20% of the shares of the issuer.
◾ Offering: the anticipated business plan of the issuer, the target offering
amount, the deadline to reach the target offering amount and the price
to the public of the securities.
230 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
◾ Structure: the ownership and capital structure of the issuer, including
terms of the securities of the issuer being offered.
◾ Valuation: how the securities being offered are being valued, and exam-
ples of methods for how such securities may be valued by the issuer in
the future, including during subsequent corporate actions.
◾ Risks: the risks to purchasers of the securities relating to minority own-
ership in the issuer, the risks associated with corporate actions, includ-
ing additional issuances of shares, a sale of the issuer or of assets of the
issuer, or transactions with related parties.
The intermediary crowdfunding portals are also required to make avail-
able to the SEC and to potential investors any information provided by the
issuer no later than 21 days prior to the rst day on which securities are sold
to any investor.
11.3 Crowdfunding
Crowdfunding refers to the funding of an EGC by selling small amounts of
equity to many investors. This form of crowdfunding has recently received
attention from policymakers in the U.S. with direct mention in the JOBS
Act, legislation that allows for a wider pool of small investors with fewer
restrictions.
2
With the passing of the Act, the word of the day seems to be crowdfund-
ing. While this concept has arguably been around a long time, it is still for-
mally recognized as a new industry to many consumers, particularly those
outside the U.S. Crowdfunding is, by denition, “the practice of funding
a project or venture by raising many small amounts of money from a large
number of people, typically via the Internet.”
Crowdfunding has its origins in the concept of crowdsourcing, which
is the broader concept of an individual reaching a goal by receiving and
leveraging small contributions from many parties. Crowdfunding is the
application of this concept to the collection of funds through small con-
tributions from many parties in order to nance a particular project or
venture.
3
Theoretically, crowdfunding allows EGCs to sell securities to anyone,
without being compelled to produce the onerous amounts of information
currently required by existing federal law. A number of U.S. organizations
Meet the JOBS Act ◾ 231
have been founded to provide education and advocacy related to equity-
based crowdfunding as enabled by the JOBS Act. They include:
◾ National Crowdfunding Association
◾ Crowdfunding Professional Association
◾ CrowdFund Intermediary Regulatory Advocates
Crowdfunding is not available to non-U.S. companies, public companies,
or investment companies, including companies exempt by Section 3(b) or
3(c) of the Investment Company Act of 1940. In addition, securities sold in
a crowdfunding deal may not be transferred for one year from the date of
purchase, except in limited circumstances.
11.4 Issuer Requirements
EGCs seeking to raise capital under Section 4(6)
4
are required to provide
certain information to potential investors, such as
◾ the company
◾ its business
◾ ofcers and directors
◾ major stockholders (greater than 20%)
◾ terms of the offering securities being offered for sale
Importantly, the JOBS Act requires that EGCs must provide more detailed
nancial disclosures for larger offerings. Thus, if the aggregate amount of
the offering is $100,000 or less, the issuer must only provide tax returns for
the company’s most recently completed scal year, and nancial statements
certied by the company’s Chief Executive Ofcer.
In contrast, if the aggregate amount is $100,000 to $500,000, the issuer
must provide nancial statements reviewed by an independent public
accountant. If the aggregate amount being offered exceeds $500,000, the
issuer must provide audited nancial statements.
11.5 Intermediary Requirements
The JOBS Act requires that crowdfunded offerings be conducted through
authorized third-party “intermediaries.”
5
Intermediaries, crowdfunding
brokers, and funding portals have signicant duties under the JOBS Act
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