Jumpstart Our Business Startups (JOBS) Act: A Boon to the Startups
- Sep 25, 2018
The Jumpstart Our Business Startups (JOBS) Act is a part of the United States legislation, incorporated to support the small businesses and to protect the small investors.
Jumpstart Our Business Startups (JOBS) Act was signed into a law by the United States President Barack Obama on April 5, 2012. The Act lays down the foundation of the rules to be followed with reference to funding the emerging growth companies, the Securities and Exchange Commission regulations surrounding them, and the role of venture capital, angel investing, and the accredited and unaccredited investors.
Most significantly, the JOBS Act heralded the era of equity crowdfunding by introducing the regulated form of crowdfunding.
The Intention Behind the JOBS Act
After the financial crisis of 2008, the world economy saw a drastic decrease in the number of small businesses and startups. The business owners did not have enough money, and the investors were too timid to invest!
In the wake of this financial scenario, The United States Congress felt the need for certain rules and regulations to support and develop more small businesses and startups. The intention of the JOBS Act was to encourage the entrepreneurs to bring in more startups, work towards making them successful, and, thus, create more jobs and a better economy.
The purpose of the JOBS Act, as stated in the bill, is to increase jobs in America and to help grow the economy through improved access to the public capital markets for the emerging growth companies. The Act made it easier for private companies to either go public or to raise capital privately. This was intended to be done through regulation crowdfunding and a simplified initial public offerings process for emerging growth companies.
Structure of the JOBS Act
The Jumpstart Our Business Startups (JOBS) Act is structured in the form of Titles. Each Title covers a specific part of the legislation.
Title I: The first title pertains to reopening the American capital markets to the emerging growth companies. It deals with the provisions for the startups. For instance, a company must have two years of financial statements before commencing an IPO.
Title II: This title exempts the emerging growth companies from broker-dealer registration. It also lifts the prohibition on solicitation and advertising for offerings. The issuers can solicit and advertise the offering online and elsewhere. However, the offerers must verify that investors are accredited and qualified to invest if it is an offering that does not allow for non-accredited investors.
Title III: The third title deals with Regulation Crowdfunding. It allows small companies to raise up to $1.07 million from both accredited and non-accredited investors. In this case, such offers must be listed on a FINRA-approved crowdfunding portal (e.g., Wefunder, StartEngine, SeedInvest, Republic, Netcapital). The title puts a restriction on the amount that can be invested by each investor.
Title IV: Title IV deals with Regulation A, which has been expanded into Tier 1 and Tier 2. Tier 1 is for the offerings of up to $20 million and Tier 2 is for offerings for up to $50 million. There are different requirements for the issuers falling under these separate tiers. For instance, the issuers under Tier 2 are required to include their financial statements in the offer document, and they need to file annual, semiannual and current reports with the SEC on a regular basis.
Title V and Title VI: The final two tiles of the JOBS Act regulate the registration and deregistration threshold of securities with the SEC. The earlier thresholds were modified and the procedures were made less cumbersome for the emerging growth companies.
How do the Provisions of the JOBS Act support crowdfunding and growth of startups?
The JOBS Act has worked as a boon to high growth startups. The Act made it easier for startups to gain the necessary capital to get the business going by providing access to capital from a larger swath of the American population.
The important provisions that changed the face of equity crowdfunding and growth of startups were as follows:
Emerging growth companies are no longer bound to certain regulatory and disclosure requirements.
Small businesses are now allowed to advertise and solicit investors. This translated into what we know as equity crowdfunding.
Set a maximum offering amount for equity crowdfunding raises at $1,070,000.
The Act also required any company seeking to raise funds through an equity crowdfunding raise to file a Form C with the U.S. Securities and Exchange Commission.
The Bottom Line
The JOBS Act, essentially, acted as a boon to startups in need of growth capital. It pulled back burdensome rules and regulations for startups to help them grow, create more jobs and build up the entire economy. In the process, the Act also marked the beginning of the phenomenon of equity crowdfunding.
As startups were enabled to raise money through alternative means, with fewer restrictions, crowdfunding began to flourish. In turn, crowdfunding became the tool of choice for startups to raise growth capital from a large number of investors. The huge resulting sum becomes enough for startups to progress forward, without getting involved in the complicated processes of IPOs and complex registrations.
At the same time, the JOBS Act made it possible for everyday investors to participate in the growth of startups, the highest growth asset class in America. Everyday investors, accredited or non-accredited, became capable of apportioning small sums of savings into investing in businesses they believe in with the ability to potentially share in the upside.
It was the JOBS Act, indeed, that started the phase of new and innovative startups, backed by the crowd!