CFO.com, a publication geared specifically for finance executives, says that the JOBS Act may not be all it’s cracked up to be, as there are both more new regulations and less incentives for start-ups to go public than has previously been reported in some financial publications (“JOBS Act Turns Spotlight on Crowdfunding,” by Sarah Johnson, CFO.com, April 5, 2012).
The JOBS Act, signed into law by President Obama on April 5, seeks to increase the number of initial public offerings, in part, by promoting equity financing through crowdfunding via the internet. The idea is that start-ups can raise up to $1 million in equity capital from numerous small-dollar investors on these crowdfunding websites without having to make the disclosures and jump through other hoops normally required by the securities laws.
For example, the JOBS Act gives a 5-year reprieve to certain small-cap emerging growth companies from compliance with several SEC regulations. The hope is that easier financing and relaxed regulations will result in jobs that are desperately needed by both American citizens and incumbent politicians.
But CFO.com points out that the JOBS Act may actually cause companies to delay going public because of a provision that increases the number of shareholders they are allowed to have before being forced to go public from 500 to 2,000.
In addition, the crowdfunding provisions may be more troublesome to some companies than they are worth, because they contain new requirements that do not exist in other securities law. Under the JOBS Act, the seller of the shares must register with the SEC as a broker-dealer. The seller must further “provide a background check on every executive, director, and person who owns more than 20% of the company behind the equity.” Additionally, the seller-broker must undertake to assure that investors understand the risks associated with their investment.
What is more, we don’t know how thorough and effective the background checks and assurances required by the new regulations will be in protecting investors from fraud. Merely being registered as a broker-dealer and promising to perform due diligence does not automatically mean that adequate due diligence will be performed, as many investors in private (Reg D) offerings have discovered to their detriment.
Due to their high failure rate, investing in a start-up is a high-risk gamble, even for the so-called “angel investors” who generally have more resources and investment experience than the average investor. It should be avoided by most investors.
Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.