The JOBS Act: The SEC Enters to Internet Age

The JOBS Act, signed by President Obama on April 5, 2012 is the most important piece of small business/emerging growth company legislation enacted in the past decade.  There are two major facets:  (1) provisions for crowd funding of small companies  raising up to $1 million per year; and (2) reduction of the impact of Sarbannes Oxley ("SOX") rules on public companies less than $1 billion in market capitalization and giving them a five year on-ramp to full compliance with SOX.

Crowdfunding:  Congress is permitting companies to offer securities over the internet, though with limitations.  Companies are allowed to raised up to $1 miollion per year without SEC registration, through crowdfunding techiniques.  Individuals are limited to invest up to $2,000 or 5 percent of their income/assets if below $100,000 or $10,000 or 10 percent of income/assets if above $100,000.  

The issuer (company raising the funds) must utilize a broker or "funding portal" as an intermediary that, in turn, must register with the SEC and any applicable self-regulatory organization such as FINRA.  There are investor education requirements, including that (1) an investor acknowledge that they understand that this is a risky investment and (2) that they may lose the entire investment and (3) they can afford to lose the entire investment.

Crowdfunding portals will have to determine how to execute a profitable business on $1 million transactions and the accompanying requirements for investor education, protection, company due diligence and risk disclosure requirements.  In short, the portals will be required to do a lot of work to protect the investors against fraudulent investments, and protect sensitive investor data.  How to do it profitably?

Reporting companies and number of shareholders:  The JOBS Act has increased the number of shareholders to 500 unaccredited investors or 2,000 accredited and unaccredited investors, excluding employees, before a company must commence publicly reporting their financial results.  This is known as the Facebook ("FB") provision, as FB is known to have gone to great lengths to limit the number of investor entities (as opposed to investors) in order to avoid the status of a reporting company.

SOX Requirements:  While the sizzle may be in the crowdfunding legislation, we believe that the importance of the JOBS Act is in the legislation that applies to companies under $1 billion in market capitalization.  Reducing the requirement for small companies to comply with SOX is huge.  On IPO, the audit requirement is two years as opposed to three; there is a five year on-ramp, after IPO, to full SOX compliance.

Other:  Other notable points is the permittance of web-based solicitation for investments,  allowing for research reports to be issued on companies immediately following an IPO, or public companies in registration with the SEC, and confidential filing of an IPO with the SEC.

Summary:  On the whole, the JOBS Act is ten years overdue.  It's major feats are (1) allowing the SEC to tiptoe into the internet age with its crowdfunding provisions, and (2) reducing the impact of Sarbannes Oxley on smaller cap companies.   The JOBS Act moves us forward, and has the potential to greatly increase investor activity in emerging growth companies.