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They Just Threw Out the Rule Book for Raising Funds

They Just Threw Out the Rule Book for Raising Funds

If you are an entrepreneur looking for capital to launch or grow your business, life will soon get a little easier. In early April 2012, President Obama signed the JOBS Act (Jumpstart Our Business Startups Act, not to be confused with the similar-sounding American Jobs Act). This bipartisan bill (a phrase rarely heard these days) is intended to untangle the jumble of funding-related regulations that have accumulated over many decades. While most of the attention has focused on the JOBS Act’s new crowdfunding provisions, it includes several other provisions that might be even more useful for many entrepreneurs.

  • GENERAL SOLICITATIONS – When the SEC implements the Act (expected in early 2013), you will be able to solicit accredited investors pretty much any way you want. The old “No General Solicitations” rule, which prohibited activates such as advertising, holding meetings with groups of prospective investors, or even sending general inquiries to your list of business contacts, will largely disappear. The only restrictions under the new rules are that you take reasonable steps to ensure you only solicit “accredited investors” who satisfy defined net worth or income criteria.
  • STAYING PRIVATE LONGER – Until now, as companies added shareholders, including through the resale of shares previously issued to employees, they could find themselves in violation of the 500-shareholder rule and thus subject to a variety of onerous reporting requirements. This encouraged many companies to go public earlier than they otherwise would have. Under the JOBS Act, private companies will be able to have up to 2,000 total investors or 500 non-accredited investors, and shares issued as part of a crowdfunding plan or to employees as part of their compensation are exempted altogether. The registration thresholds for banks and bank holding companies are similarly adjusted. Staying private under Regulation A was always a little easier, but the burdensome requirements around it, including its $5 million offering limit, meant it was seldom used. Under the JOBS Act, the offering limit is increased to $50 million and certain other requirements are eased.
  • NEW IPO ON-RAMP – If you want to take your business public and your revenues are less that $1 billion, the IPO process is now a lot less burdensome. The JOBS Act creates a new category called Emerging Growth Companies (EGCs). EGCs have substantially reduced reporting requirements leading up to an IPO. The relaxed EGC requirements can remain in force for up to 5 years after the IPO as long as revenues remain below $1 billion, the company doesn’t issue more than $1 billion in non-convertible debt during any 3-year period, and the company is not classified as a “large accelerated filer” under federal regulations.
  • CROWDFUNDING – Crowdfunding under the JOBS Act is a completely new way to raise capital, but it is not a panacea. You must list your offering on one of the new crowdfunding portals which are still being created, you can’t use crowdfunding if you need to raise more than $1 million in any 12-month period, and you will need a written business plan. But if you have an idea with wide appeal and can live with the restrictions imposed by the JOBS Act, it can be a powerful new tool for raising the funds you need to start or grow your business. The requirements for crowdfunding under the JOBS Act will be explored in more detail next week in a separate blog entitled “Crowdfunding Under the JOBS Act – Is It For You?”

The above is just a cursory overview of the JOBS Act and its implications. As with anything to do with securities law, you will need the advice of a good attorney to understand exactly how it can benefit your business.

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