The 2012 Jumpstart Our Business Startups (JOBS) Act was intended to – not surprisingly, given its name – stimulate the economy by making it easier for companies to raise money and comply with reporting requirements. Among other provisions, the Act raises the threshold at which private companies with shareholders need to register with the SEC, boosting the number from 500 to 2,000 shareholders, according to this summary from McGladrey. It also exempts from registration “crowdfunding,” or limited size offerings sold in small amounts of large numbers of investors, typically via the Internet.
When the Act passed, it was praised as “a giant step for entrepreneurship in America” and “a fantastic development in early stage finance that has the potential to disrupt the very way in which early stage startups get off the ground.” The very cost of going and being public has been seen as a significant deterrent to many companies. Indeed, a 2011 survey by Ernst & Young found that companies spend an average of $2.5 million just to be a public company, plus the cost of IPO itself.
Not everyone has been as supportive of the Act. Even before the bill passed, Mary Schapiro, SEC chair, wrote to the U.S. Senate Committee on Banking, Housing and Urban Affairs, stating her concerns about the legislation. She noted that if investor protections are gutted to the point that investors lose confidence in the markets, “capital formation will ultimately be made more difficult and expensive.” That, of course, would be the exact opposite of the goals of the JOBS Act.
In May, the North American Securities Administrator Association (NASAA) issued an advisory, warning investors to “approach crowdfunding investment opportunities with great caution.” In a statement, NASAA noted that crowdfunding investments aren’t required to provide the same level of disclosure to investors or regulators required of other securities offerings. As a result, investors need to conduct their own due diligence, the advisory notes. Moreover, crowdfunding investments typically are illiquid, so investors could end up holding them indefinitely.
More recently, NASAA released its yearly list of financial products that threaten to trap unwary investors. At the top: crowdfunding and Internet offers. NASAA notes that many of the rules under the JOBS Act, which have yet to be put in place, won’t make investments in small businesses any less risky, but they will make these investments more prevalent. “Many states and provinces report a recent increase in active investigations or recent enforcement actions involving Internet fraud, and JOBS Act-triggered activity is likely to elongate this trend,” NASAA states.
Also on NASAA’s list are Regulation D Private Offerings. These offerings can be sold to investors without registrations, and the JOBS Act relaxed the ban in place on general solicitation and advertising for Regulation D offerings. According to NASAA, fraudulent private placement offerings, more than any other security, have led to investigations and enforcement actions by regulators.
At this point, the potential dangers and benefits posed by the JOBs Act are largely theoretical, since many of the rules needed to implement the law have yet to be issued.
What are your thoughts? Is the JOBS Act likely to stimulate the economy without creating undue risks for investors? Or, is the legislation more likely to ensnare unsuspecting investors, leading to little, if any, job growth?
The JOBS Act's Stipulations? Inconceivable!/article/jobs-acts-stipulations-inconceivable-0628