Startups and the JOBS Act: What Business Owners Need to Know

Startups and the JOBS Act: What Business Owners Need to Know

Many small businesses and startups look for funding when starting. This funding, often referred to as “capital,” can come from many different sources, including investors. However, funding from investors is regulated by the United States Securities and Exchange Commission (SEC), and there are many laws to comply with. 

In 2012, Congress passed the JOBS Act, aimed at making it easier for startups to gain access to capital funding from a wider pool of individual investors by loosening and changing some of the SEC regulations. In this article, we will cover how capital investment funding works, what the JOBS Act entails, and how the revised regulations might apply to your business.

Capital and Securities Explained

One thing many early-stage companies need is money. It costs money to rent an office space, pay for advertising, purchase supplies, and pay employees. Startup expenses are just a fact of life, and the funds used to pay these are often referred to as capital. 

There are many ways to obtain capital. You may have your own savings, borrow money from friends and family, or even take out a small business loan. However, an alternative is to find investors. Investors buy securities, a tradable financial asset that gives them a stake of ownership in your business. A common example are shares of a company. By selling these shares of equity, you can create liquid capital funding to grow the business. In return, the shareholders have partial ownership of the company.

If you want to sell shares of equity, there are many rules and regulations surrounding how you may do so, as laid out by the Securities Act of 1933 and other similar acts that followed. The Securities Act of 1933 came about in response to the Great Depression, and rules associated with this act are enforced by the SEC.

What is the SEC?

The SEC is an independent agency created by the U.S. federal government in response to the stock market crash of 1929 and the subsequent Great Depression. The goal of the SEC is to “protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation,” ultimately with the goal of preventing financial disaster. 

As such, the SEC is responsible for enforcing the laws related to the creation and exchange of securities offerings, including the Securities Act of 1933, and the more recent JOBS Act of 2012. Although the rules and regulations enforced by the SEC are for the protection of investors and the market, securities laws can be challenging to navigate. The complexity of maintaining compliance and submitting filings can be cost-prohibitive for startups.

What is the JOBS Act?

In 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. The goal of this act was to make it easier for startups and small businesses to raise capital by changing some SEC regulations to allow smaller contributions from individuals.

The JOBS Act is broken down into seven titles, each outlined as follows:

The most important parts of the JOBS Act for small businesses are Titles II and III.

Title II of the JOBS Act

Prior to the JOBS Act, Regulation D of the Securities Act of 1933 stated that companies were allowed to privately sell securities to accredited investors without registering them with the SEC, but they could not publicly advertise those investment opportunities. An accredited investor is anyone with a net worth of $1 million or more or who has a regular annual income of $200,000 or more ($300,000 or more with a spouse). 

If a company or issuer wanted to advertise publicly and gain access to more investors, they had to become a public company, form a board of directors, adhere to SEC listing and reporting requirements, register all shares with the SEC, and complete additional paperwork, including annual reports.

Title II of the JOBS Act changes this and allows for an exemption where companies can engage in “general solicitation” or public advertising of investment opportunities without needing to become a publicly traded company, provided they do the following:

There is no limit on the number of investors or the amount of money that can be raised under Title II. What this means for small businesses and startups is that they can now use the internet or other resources to seek investors that they wouldn’t have had access to otherwise without going public. They can then raise capital without having to deal with as much red tape. 

Title III of the JOBS Act

Title III of the JOBS Act opens up investment to smaller investments under new crowdfunding rules. First, it’s worth noting that there are different types of crowdfunding. You may be most familiar with crowdfunding platforms like Kickstarter or Patreon, which allows users to fund projects in exchange for some type of personal benefit. 

The type of crowdfunding offerings referred to in the JOBS Act is a little different and is referred to as equity funding. This means that funders get an equity share, similar to a traditional investor.

Title III crowdfunding opportunities come with the following stipulations:

Small businesses and startups now have access to a whole new group of potential investors, and can raise funds from a wider variety of sources. This, coupled with the ability to advertise those investment opportunities, makes it much easier for companies to gain capital without excessive red tape. This is particularly important for smaller ventures and microbusinesses that may have significant difficulty obtaining funding otherwise.

In fact, any small business can go on an SEC-registered crowdfunding site today and set up an account to start soliciting funds. You can share your funding goals far and wide, and everyone who is interested can invest, regardless of their income and if you know them personally.  

Find More Small Business Resources with ZenBusiness

The JOBS Act makes it much easier for first-time small businesses and startups to acquire the capital funding they need to get off the ground. If you would like more information and tools to make funding and growing your small business easier to manage, check out the resources and support available at ZenBusiness today.

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