This article is an excerpt from our upcoming title, CONSUMER CONFIDENCE: Trends, movements, and technologies shaping and reshaping how entrepreneurs access capital to start and/or scale their businesses.
Throughout human history, more specifically in the last fifty years or so, there have been events that have caused all of us, to question, examine, and rethink some of the very pillars, norms, and socio-economic systems of our modern society. The great depression, World War II, the great recession, and now COVID, are all examples of such change-making events.
The last non-pandemic financial calamity that befell us forced us to deconstruct and reconstruct various long-held economic principles. Particularly in the often esoteric areas of the flow of capital, financial regulation, and energy procurement.
It is now clear to us all that financial equity begets shared exponential growth of individual wealth. Which results in higher standards of living and an overall higher quality of life for all. I wouldn't be completely off the mark if I postulated that the majority of Obama's tenure was spent trying to create some sort of foundation to try to address these very real problems.
It is also my belief, as I write this in early 2021, that the New Biden administration plans to pick up where the former president left things and try to get us closer to these goals.
I can run through the greatest hits: Healthcare reform, Lilly Ledbetter Fair Pay Act, Free trade agreements, Climate change (The Paris Agreement), and The Dodd–Frank Wall Street Reform and Consumer Protection Act. Atop the heap of financial regulations and economic policies came The Jumpstart Our Business Startups Act, or JOBS Act.
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What is the JOBS Act?
In general, the JOBS Act, which passed in both houses of the U.S Congress with overwhelming bipartisan support and signed into law by then-president Barack Obama back in 2012, was meant to significantly increase funding for small businesses in the United States.
The JOBS act came as a final (Beta version) solution to an issue that had plagued the U.S economy even before the financial crisis of 08. But even more so as a result.
If at first, you don't succeed...
Congress, in an effort to encourage funding for small businesses, had passed several bills prior to the JOBS Act being signed as law. There was The Entrepreneur Access to Capital Act (H.R. 2930), which was spearheaded by U.S. Representative (R), Patrick McHenry.
There were many other bills that took aim at the same issue: Making funding and opportunity available to small businesses and startup firms. Most felt that the government needed to rewrite some of the laws that governed the flow of investment capital to small businesses. For far too long, access to public capital, which is the lifeblood of the world's economies had been available to only a few deep-pocketed and/or well-connected firms.
For the most part, the JOBS act addressed the following specific issues by way of provisions within the bill:
Increase the number of both accredited and non-accredited shareholders a company can have until it is required to file reports with the Securities and Exchange Commission, thus making it a public company. The previous thresholds were assets of $10 million-plus and/or 500-plus shareholders. As a result of the JOBS Act, Small companies can now have up to 500 accredited shareholders or 2000 total shareholder before it is required to file with the SEC.
With an annual cap of $1,000,000 (for companies), restrictions on the use of the internet and equity crowdfunding sites were reworked in various ways. For one, the bill made it so that non-accredited investors, those with a net worth or annual income of less than $1 million, could participate in these types of offerings. Startups and small companies could raise capital via these platforms under less restrictive regulations. The government placed the reporting responsibility upon the shoulders of the equity crowdfunding portals and not on the small companies looking to raise capital. Normal folks could invest from 5% - 10% of their annual income if they are non-accredited. The bill mandated thorough financial reviews for firms looking to raise more than $100,000.
The bill also allowed for general circulation or marketing of various private placement deals to non-accredited investors as long as such marketing efforts contain the appropriate disclosures and are based on confirmation from a third party.
Raise the limit on private placement securities in general from $5 million to $50 million. This action was meant to allow smaller firms the wiggle room to have access to larger pools of funds without the cost-prohibitive aspects of having to register these deals with the various State and Federal regulatory bodies.