New JOBS Act creates opportunities
The new legislation known as the JOBS Act — officially, the Jumpstart Our Business Startups Act of 2012 — could have positive long-term effects for entrepreneurs. But the controversial “crowdfunding” break in the new law may not be right for every mom-and-pop operation.
To summarize, the JOBS Act enables a private business with revenue under $1 billion to sell up to $50 million in shares through an initial public offering (IPO) without registering with the U.S. Securities and Exchange Commission (SEC). In addition, new startups with revenue up to $1 billion are exempted from commissioning an outside audit of internal controls for five years.
Significantly, the new law also allows crowdfunding to raise capital from qualified small investors. Previously, this provision was used mostly to attract patrons of the arts.
Should you take advantage of crowdfunding for your small business? Consider the following points:
- Remember that your business will not qualify for crowdfunding if you have raised more than $1 million in the last year. If you do not currently qualify, you might have to turn to other resources as an alternative.
- You may not have enough spare time to communicate with all your new investors. By using an online funding portal, you can shift these responsibilities away from your business managers.
- Although you don’t have to give away any trade secrets, you still must provide sufficient information for investors to make sound decisions. Typically, the minimum you must provide includes the company name, address, biographies of the officers and the board of directors, a business plan and descriptions of the business and how you intend to use the funds.
- If you do not want your competitors to read all your financials, you might want to avoid crowdfunding. Otherwise, if you are raising $100,000 or less, you are required to provide your income tax returns and have your financial statements certified by the company’s top officer. For IPOs of more than $100,000 up to $500,000, you must include financial statements reviewed by a public accountant. Between $500,000 and $1 million, you will need to provide the investors with audited financials.
- Finally, you should have an attorney handle the legal technicalities and set up the necessary funding documents. The attorney can provide a memorandum disclosing the relevant risks to investors. Factor in the costs of these fees as well as other miscellaneous expenses your business is likely to incur.
Because the new law grants the SEC additional time to modify its procedures, startups are not likely to be able to benefit from the crowdfunding rules until 2013. For the time being, you should investigate the available options with the help of your business advisors.