Companies that want to sell stock to the public must comply with federal and state securities laws. A public offering is very expensive to undertake because a lengthy and comprehensive disclosure document must be prepared and given to potential investors. A more streamlined process is available for offerings that don’t involve public solicitation or advertising, and are limited to smaller groups of investors or investors meeting specific financial qualifications (accredited investors).
On April 5, 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. Passed with strong bipartisan support, the JOBS Act allows startup business more flexibility in seeking investors.
The JOBS Act increases the number of shareholders private companies can sell stock to without all the disclosures of a public offering. For example, the Act increases the “500 shareholder” rule to 2,000. Under the previous rule, private companies would have to make the full disclosures of a public offering if those companies had more than 500 accredited shareholders. With the increase to 2,000 shareholders, smaller businesses now have the flexibility to seek broader sources of investment without a full public offering.
The JOBS Act also permits the use of crowd funding, allowing startups to get infusions of cash from laymen and unaccredited investors. Startups and small businesses should be able to look for crowd funding opportunities on crowd funding websites (such as Kickstarter), and through social media outlets. The Act limits a company’s crowd funding to a total of $1 Million a year.
The JOBS Act also amends Regulation D allowing the public solicitation of investors under Rule 506 as long as all the investors to whom stock is actually sold are accredited. This provision has, perhaps, the most potential for startup businesses because broadly advertising private placements might help companies locate larger classes of potential investors.
The JOBS Act gives the SEC the broad authority to draft further regulations. That has not yet occurred. As a result, the method of compliance regarding these provisions is not yet known.
Furthermore, businesses must still comply with state securities laws of each state in which it solicits investors. Certain states may still impose stricter restrictions than the Jobs Act.
