On April 5th, 2012, President Obama signed the JOBS Act – or Jumpstart Our Business Startups. This new legislative package has the opportunity to help small businesses with funding by removing many of the regulatory barriers associated with raising capital.
Prior to this legislation, if you were an entrepreneur trying to raise funds you were restricted to either:
- Getting a loan from a bank or other alternative lending organizations
- Getting loans from friends / family / private lenders
- Raising equity funds
The challenge with the first two options is that they restrict a company balance sheet – as technically they are debts – not equity – which means further funding of the company through other debt sources in the future posed a challenge.
There were many restrictions with the third option – namely the number of investors you could have and the requirement that they be 'accredited' with the SEC – meaning they were considered sophisticated investors.
The same restrictions applied to private equity funds that looked to raise money to invest in startups – their pool of potential investors was equally as restricted.
Under the JOBS Act, many of the hurdles associated with equity raises go away. Click here for a summary of the JOBS Act.
Highlights of the changes are as follows:
- A new category of public companies called Emerging Growth Company – with lower regulatory requirements. Also raises the threshold for SEC registration from $5m to $50m.
- Removal of SEC restrictions related to funding – companies can pool up to $1m from small investors that are not 'accredited' without having to have audited financial statements – and up to $2m with audited financial statements. Contributions are limited to $10,000 per individual or 10% of an investor's annual income.
- Raises registration thresholds on investors from 500 investors to 1000.
- Increase in community bank investor counts from 500 to 2000, which should allow community banks to raise more capital.
All of these changes were made with bi-partisan support and should prove helpful to raising capital for small businesses.
What can be very interesting is the second item, as it means that there will likely be a substantial increase in on-line resources that will allow micro-investing – which has proved very popular in other countries and has slowly gained traction in the United States. It also has the opportunity for these same websites / resources to pool many, many investors and make many different investments – very similar to how a private equity fund operates today.
As with all things though – the opportunity for fraud will be substantial in this new environment – as investors one should consider the 'vetting process' associated with on-line investing resources and the reporting associated with direct investments.
Overall though private equity historically has provided about double the return of traditional equity markets – however it's a lot of misses and limited number of home runs, rather than very consistent returns associated with safer and more transparent investments.
