The New Landscape for Business Startups and Their Investors


By Cyndi Barnett

You may have heard that the Jumpstart Our Business Startups (JOBS) Act, which was signed into law by President Obama on April 5, 2012, makes it easier for companies to attract investors, particularly smaller companies. But just what does that mean to you if you’re trying to grow your small business? And if you’re contemplating making an investment in an early-stage business, what should you be aware of? Though some of the provisions will be subject to regulations yet to be developed, here are the general provisions of the Act.

Looser reporting/registration requirements for companies

Companies with at least $10 million in assets and fewer than 500 “unaccredited” shareholders (not including employees who hold shares) or 2,000 total shareholders generally will no longer be required to register with the Securities and Exchange Commission (SEC). By exempting smaller companies from registration requirements, the Act enables them to bypass many SEC regulations that are designed to increase transparency and protect investors but that also are demanding and expensive for smaller companies. The Act also enables companies to offer up to $50 million worth of stock annually using streamlined registration procedures; the previous limit required any offering over $5 million a year to file a full federal registration.

The Act also permits companies to advertise unregistered private placements to the general public without having to meet the requirements for a public offering; that would represent a major change for a hedge fund or private equity firm in managing its portfolio of companies. However, purchasers of those offerings must be either accredited investors–an individual or couple with at least $1 million in net worth, not counting their primary residence–or qualified institutional buyers.

In addition, the Act creates a new category of securities issuer–the “emerging growth company” or EGC–and exempts it from many of the regulatory and reporting requirements that apply to more established companies, such as those imposed by Sarbanes-Oxley. The Act defines an emerging growth company as one that went public after December 8, 2011, and has less than $1 billion in annual gross revenues. An EGC will be allowed to follow a streamlined IPO process, and will generally have up to five years to comply fully with certain accounting and disclosure requirements that apply to other public companies.

An emerging growth company that qualifies under the Act needs to supply only two years of audited financial statements instead of three before going public. It also may ask the SEC for a confidential review of its registration materials before its IPO; however, those materials must be publicly filed at least 21 days before the company launches its road show for potential investors.

Also, representatives of an emerging growth company can test the waters with potential investors prior to the IPO as long as they are either qualified institutional investors or accredited investors. Broker-dealers may also distribute research reports in connection with an EGC’s IPO, and securities analysts may be included in a broker-dealer’s discussions with a company’s management.

Crowdfunding: a new option for capital

Companies that need to raise capital but are not ready to go public will be able to raise up to $1 million a year through what’s known as “crowdfunding,” a term often applied to the concept of raising money from a large number of people, typically using some sort of online mechanism to channel the collective donations or investments.

Companies that choose to use crowdfunding will issue restricted securities through either a broker or an online portal registered with the SEC. The financial statements to be filed with the SEC range in complexity depending on the level of a business’s offerings during the previous 12 months. Those offering $100,000 or less may file income tax returns and financial statements certified by the principal executive officer. Those with $100,001 to $500,000 must submit statements reviewed by an independent public accountant, and those with more than $500,000 will need audited financial statements.

Investing: factors to think about

Any advertising for a crowdfunding offering, as well as the offering itself, must be done through a registered portal. However, the funding portal is strictly an intermediary; it may not offer investment advice or recommendations, hold or manage investors’ funds, pay its staff commissions on the sale of individual securities on the portal, or solicit sales for any of its listed securities.

In addition to the financial information outlined above, a company seeking crowdfunding must make available to prospective investors a business plan along with a description of the corporate structure and the risks involved in the venture. Make sure you get all the information you need to come to a decision.

The crowdfunding option isn’t authorized for ventures that invest only in other businesses, such as private equity funds or venture capital funds, so beware of any that attempt to use crowdfunding.

The amount you can invest in a single crowdfunded company is limited. For investors with either a net worth or annual income of less than $100,000, the limit is either $2,000 or 5% of their annual income or net worth, whichever is greater. Individuals with an annual income or net worth of $100,000 or more can invest as much as 10% of their income or net worth, up to $100,000. Also, there are restrictions on your ability to transfer those investments until you have owned them at least one year.

Some regulators fear that crowdfunding and lifting the ban on advertising of private placements could mean an increase in investment fraud schemes and/or an increase in solicitations for investment products you may or may not understand. Before you make a decision about such an investment, make sure it is thoroughly researched, either by you or your financial professional, and that you understand the potential for loss, including the possible loss of your entire investment.

The Stop Trading on Congressional Knowledge (STOCK) Act

Another recent piece of legislation, the STOCK Act, prohibits federal government officials from profiting from insider knowledge they obtain as a result of their positions. The Act applies to members of Congress; executive branch employees; judicial officers, including justices and certain employees of the Supreme Court, federal courts of appeals, and district courts. It specifically subjects them to all securities laws regarding insider trading, and requires that certain federal officials file a report within 30 to 45 days of a securities transaction unless the security is a widely held, publicly traded, diversified investment fund. It also prohibits participation in IPOs except through offers made to the general public, requires disclosure of personal mortgages under certain circumstances, and requires executive and judicial employees to disclose any negotiations for future employment that might create a conflict of interest.


Cyndi Barnett, GPS Wealth Management, a Certified Financial Planner™ and Certified Tax Specialist™. Email to discuss your particular situation for Investments, Retirement, Insurance, Taxes, and Estate Planning.

Registered Representative and Investment Advisor Representative.  Securities are offered through Questar Capital (QCC), Member FINRA/SIPC.  Advisory Services offered through Questar Asset Management (QAM), A Registered Investment Advisor.  GPS Wealth Management is independent of QCC and QAM.  This material was prepared by Emerald. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such.


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