JOBS Act Provides Access to Capital

Last Thursday, President Obama signed into law the bipartisan Jumpstart Our Business Startup (JOBS) Act, which makes it easier for Main Street small businesses to gain access to capital. Key to the act is a provision that loosens SEC regulations so that start-ups and entrepreneurs can use “crowdfunding” to raise money from many individual investors.

“America’s high-growth entrepreneurs and small businesses play a vital role in creating jobs and growing the economy,” said President Obama, in a statement.  “I’m pleased Congress took bipartisan action to pass this bill. These proposals will help entrepreneurs raise the capital they need to put Americans back to work and create an economy that’s built to last.”

Noting that small businesses and start-ups are driving the recovery and job creation, the White House said that the JOBS Act will allow “Main Street small businesses and high-growth enterprises to raise capital from investors more efficiently, allowing small and young firms across the country to grow and hire faster.”

Regarding crowdfunding, startups and small businesses will be allowed to raise up to $1 million annually from many small-dollar investors through web-based platforms, subject to rule making by the SEC.

The new legislation provides investor protections, including a requirement that all crowdfunding must occur through platforms that are registered with a self-regulatory organization and regulated by the SEC. Moreover, investors’ annual combined investments in crowdfunded securities will be limited based on an income and net worth test.

Writing on CNN.com, Amy M. Wilkinson, a senior fellow at the Harvard Kennedy School of Government and a public policy scholar at the Woodrow Wilson International Center for Scholars, noted that the JOBS Act will provide a “funding source for start-ups that might otherwise have never made it past the business plan stage…. With the recent recession, lines of credit have been difficult to obtain ….  Crowdfunding opens a new source of capital, especially for underserved communities. Crowdfunding could invigorate local economies outside of Silicon Valley and other entrepreneurial centers.”

In a discussion of the new law’s potential pros and cons, however, CNET News said the JOBS Act could end up being a “field day for scammers…. Just as there will be emergent properties that help start-ups thanks to the JOBS Act, there will be unintended consequences. Several groups are forming up to come up with ways new crowdfunded businesses can self-regulate. This is critical, as even now the JOBS Act isn’t fully baked regarding the best ways to prevent crowdfund investors from getting bilked. There is a 270-day regulation-writing period that starts today, during which this is all supposed to get sorted out. It won’t be easy, and it may not be possible to foresee all the clever ways scammers will be able to rip people off.”

The JOBS Act has set deadlines for the SEC to create the regulatory framework under which the Act will be implemented, theHuffington Post noted. The deadlines vary from 90 to 270 days, depending on the provision in the bill, as reported by JDSupra.com. The White House explained that the President is directing the Treasury Department, Small Business Administration, and Department of Justice to closely monitor the implementation of the legislation to ensure that it is achieving its goals of enhancing access capital while maintaining appropriate investor protections.

These agencies, consulting closely with the SEC and key non-governmental stakeholders, will report their findings to the President on a biannual basis, and will include recommendations for additional necessary steps to ensure that the legislation achieves its goals.