The Washington Post
By: Nicole Denny
May 21, 2012
Last month, President Obama signed into law one of the most influential pieces of legislation for small to midsize businesses. The JOBS Act provides several avenues for existing small businesses and start-ups alike to raise capital, one of the most difficult barriers of entry for a business to overcome.
By preparing early, many business owners will be able to raise the capital that traditional sources, such as banks, are no longer offering.
One of the most controversial provisions of the JOBS Act allows for crowdfunding, a way for entrepreneurs to solicit capital from non-accredited investors. This provision allows for companies to raise up to $1 million in capital per year via Web sites from individual investors without registering with the Securities and Exchange Commission (SEC).
Prospective investors with an annual income less than $100,000 may invest up to $2,000 or 5 percent of their income to a single issuer. Investors with an annual income greater than $100,000 may invest up to 10 percent of their income up to $100,000 in a single issuer. While the companies themselves will not be subject to SEC regulations, the trading platform Web sites will be heavily regulated. The SEC has 270 days to define what these regulations will be. All companies that receive crowdfunding will be required to issue financial statements annually, at a minimum. Financial statement requirements are based on the amount of capital raised.
For many start-ups, angel investors, venture capitalists and traditional bank financing are not an option. Crowdfunding offers an avenue for entrepreneurs to leverage their networks and online presence into the capital they so desperately need to get off the ground. While the SEC has until after Thanksgiving to decide how it will regulate crowdfunding, there are a few steps entrepreneurs interested in this new form of capital should take now:
●Invest in your online presence.
●Develop a plan -- determine how much capital you really need and create a detailed plan for the use of the capital investment.
● Be prepared to devote time and allocate some marketing dollars perfecting your pitch and answering questions from prospective investors.
●Perform a cost-benefit analysis. If you're looking for $150,000 in capital, you will be required to have your financial statements reviewed by a certified public accountant. Decide if the financial burden of paying for these reviews will outweigh the benefit of the added capital.
The JOBS Act has also removed some of the burdens of an initial public offering (IPO) for smaller filers that are defined as emerging growth companies (EGCs).
To be considered an EGC, you must have less than $1 billion in annual revenue and have had an initial public offering on or after December 8, 2011.
The process to IPO has been eased for EGCs. First, companies are now able to submit registration statements confidentially to the SEC. While these statements will still be required to become public before the IPO roadshow, EGCs will have more time out of the public eye, helping to protect trade secrets.
Under the new act, EGCs are exempt from the internal control audit required by the Sarbanes-Oxley Act. Audits of internal controls create an expensive barrier to entry for otherwise would-be public issuers. Further, EGCs would only have to provide two years of audited financial statements, rather than the three years of comparative statements of operations previously required. These changes create a reduction in audit fees as well as the time and energy spent by personnel generating schedules for the auditors, allowing entrepreneurs to focus on running their companies and building processes in those crucial first few years. However, it should be noted, management will still be required to implement internal controls as well as certify all financial statements.
Finally, for companies not ready to go public, the JOBS Act allows for more shareholders before registration with the SEC. The limit of 500 shareholders has been raised to 2,000, and the cap on private offerings has been raised from $5 million to $50 million, allowing private companies to grow significantly larger without having to adhere to the costly requirements of being publicly traded.
More information will be coming out over the next few months as the SEC proposes regulation for crowdfunding, and it would serve new and seasoned business owners well to stay abreast of the changes affecting the markets in which we operate.