A remarkable feature of the economy of the United States is that in the 30-odd years prior to the most recent recession, young companies (no more than five years old) created almost all of the new jobs in the private sector. If history repeats itself, and it usually does, we need to see the formation and growth of more and more new businesses if we want to see sustained economic recovery and development in this country.
This is a large part of the reason behind the passing of the Jumpstart Our Business Startups Act (JOBS Act) in April 2012. It allows new businesses to raise the startup and growth capital they so desperately need by accessing public markets and soliciting investment without having to pay potentially crippling transaction costs. This benefit alone could be enough to inspire entrepreneurial risk takers to launch and grow their own businesses - and this is very much what the US needs.
Benefits for Issuers
- Certain businesses can apply for Emerging Growth Company (EGC) status, which allows them to access the public markets while being exempt from having to comply with several costly regulations.
- The act lifts the ban on general solicitation and advertising for certain types of private placements, making it far easier for businesses to find investors.
- The act raises an exemption that previously was capped at $5 million to $50 million; in doing so, it also gave new life to an exemption that was previously largely unused.
- Companies can now have up to 2000 shareholders (previously the limit was 500) before having to register with the SEC.
Benefits for Purchasers
Previously, investing in startups and private placements was generally unavailable to the general public. The JOBS Act makes it easier for deals to reach the marketplace, and therefore it also makes it easier for more people to access these deals and invest in them.
Of course, with all the changes that allow companies to solicit and sell to more of the general public, there is an increased risk of fraud. It's important to understand that the new laws made it easier for companies to tap the capital markets and for investors to find and invest in deals. The new laws, however, generally still require anti-fraud compliance. Essentially, companies must provide all material information to prospective investors that a reasonable investor would want to know prior to making an investment decision.
While the JOBS Act doesn't get everything perfect, it is a step in the right direction. With time, amendments to the JOBS Act will make it more useful and beneficial for both issuer and investors.