Yesterday, the U.S. Senate took significant action moving one step closer to enactment of a bill which would make it easier for start up businesses to raise capital through securities offerings. The Senate passed an amended version of the Jumpstart Our Business Startups Act, or “JOBS Act,” which would increase access to private investment capital for start ups. The legislation now returns to the U.S. House of Representatives, which passed a similar version on March 8, 2012. If the House and Senate can agree upon a reconciled version of the bill, President Obama is expected to sign it into law.
The stated goal of the JOBS Act is to increase job creation and economic growth by increasing access to private investment capital. The legislation is designed, in part, to increase the ease with which small and startup businesses can raise capital through private securities offerings.
Changes to Rules Governing Private Offerings
The JOBS Act aims to broaden the options available to companies to sell securities through private offerings, without registering the securities under the Securities Act. The Jobs Act:
- Removes current prohibitions on public advertisement and other general solicitations to accredited investors for private offerings taking advantage of the safe harbor under Rule 506 of Regulation D, which means startups and other companies, currently only permitted to approach prospective investors with whom they have a pre-existing relationship, would have the means by which to reach a much larger potential investor pool;
- Lifts the limit from $5 million to $50 million on private offerings taking advantage of the small offering exemption under Regulation A; and
- Creates an exemption from securities registration for “crowd funding”, a capital-raising method, typically implemented via the Internet, where would-be investors network and pool funds for investment, usually in small individual investment amounts. To date, crowd funding has been slow to take hold, largely due to concerns about whether it can be successfully implemented without running afoul of the current regulatory framework; this exemption, if implemented, will give startups a powerful new tool to raise the funds they need to grow.
Differences in Crowd Funding Rules
Both the House and Senate versions of the JOBS Act would allow private companies to raise up to $1 million from an unlimited number of investors through crowd funding. The Senate version adds the requirement that businesses disclose tax returns or financial statements to investors in advance of such offerings, while the House version does not. The House version would allow investors to invest up to the lesser of $10,000 or 10% of their annual income each year in crowd funding investments. In contrast, the Senate version would only approve such investment levels for individuals having a net worth or annual income of at least $100,000. Individuals with annual income or net worth of less than $100,000 would be limited by the Senate version to total annual crowd funding investments of $2,000 or 5% of annual income, whichever is lower.
Increases in Investors before Registration Required
Currently, a private company with more than $10 million in assets is required to undergo a costly and time-consuming process of registering a class of its securities with the Securities and Exchange Commission once that class of securities is held by more than 500 owners. The JOBS Act would increase this ownership threshold to 2,000 total owners, so long as not more than 500 of the owners do not qualify as “accredited investors” as defined in Regulation D. Importantly, the new legislation would exclude from these maximums (i) employees of the company who obtained ownership through qualifying compensation plans (e.g., stock grants), and (ii) investors who invested under the crowd funding exemption. The practical impact of these changes for growing companies is that they would now be permitted to have a considerably larger number of total investors while still operating as closely-held, more lightly regulated businesses, instead of needing to rely upon a comparably small number of larger institutional investors to grow.
This post is intended to be informational. It does not provide legal advice nor does it create an attorney-client relationship. Because the law and its interpretations change frequently, Chambliss, Bahner & Stophel cannot guarantee the accuracy of the information or its applicability to any specific situation. Please contact your legal counsel for advice regarding specific situations.