The JOBS Act – Jammin’ On Business Startups

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Will the new Reg A “Lively Up” America’s Entrepreneurs? President Obama signed the JOBS Act into law last month. The Act is not named after the late entrepreneur, but had he lived to see its passage, I think Steve might have approved. In this case JOBS stands for Jumpstart Our Business Startups. This is potentially very good news for entrepreneurs. One of the biggest struggles facing entrepreneurs is the difficulty in raising adequate capital to see their business through the startup phase. The JOBS Act aims to dramatically expand the opportunities for companies to tap into capital from large numbers of small investors. Prior to the JOBS Act, an entrepreneur could raise capital from private investors by relying on one or more of the exemptions from the Registration requirement, but each exemption had its own limitations, and the net effect has been to make capital raising more expensive than it needed to be.

The JOBS Act has the potential to dramatically change this equation. Here’s how it works. Securities laws include statutory exemptions from costly registration requirements that otherwise generally apply to any sale of securities. The principal exemptions are found in Section 3 and Section 4 of the Securities Act. Under Section 4, the SEC created Regulation D, which permits the sale of securities without registration provided that the Company does not use any public media to solicit investors. For the last 30 years, Regulation D has been the principal tool for entrepreneurs raising capital prior to an IPO. The problem with Regulation D has been finding qualified investors given the prohibition on public solicitation. Securities sold under Regulation D were also considered “restricted” and therefore not easily resold. This tended to make investors much more cautious and thereby limited the market for company seeking capital.

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Published In: Administrative Agency Updates, Business Organization Updates, Communications & Media Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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