The U.S. Congress has been discussing changes to the Jumpstart Our Business Startups Act of 2012 for at least a couple of years. On Tuesday, it finally made some substantive progress.
The House of Representatives passed a bipartisan package of legislation, the JOBS and Investor Confidence Act of 2018, in a 406-4 vote.
The legislation, which is really a package of 20 bills, is designed, among other things, to make it easier for small businesses to access capital markets and take advantage of the provisions of the original JOBS Act.
While the bills’ passage in the backlogged and politically divided U.S. Senate is uncertain, advocacy groups and congressional representatives are lauding the legislation. In a Wall Street Journal op-ed on July 15, Texas Republican Jeb Hensarling said the bills are “designed to breathe new life into markets suffocating under aging regulations.”
For example, one portion of the legislation expands the definition of “accredited investor,” the classification of people allowed to put money into private placements. The original JOBS Act required accredited investors to have annual income of at least $200,000 or a net worth in excess of $1 million to invest in a Regulation D offering. This new bill permits investors with the right “experience and expertise” to also participate.
That could be helpful, as one of the knocks against Title II of the JOBS Act (which deals with Regulation D offerings) is that to ensure an investor is accredited companies must review potential investors’ tax forms and obtain their bank and brokerage statements.
“When [investors] realize they have to submit to an investor verification process instead of simply filling out a confidential questionnaire, they get a little skittish and move on to another deal that doesn’t require that,” Samuel Guzik, a corporate attorney at Guzik & Associates, told CFO in February 2017.
This change in the JOBS and Investor Confidence Act of 2018, dubbed “Jobs Act 3.0,” is meaningful, says Chris Sloan, chair of the emerging companies group at Baker Donelson, because it “increases the pool of investors who can invest in early-stage companies without complicating the securities law process.”
JOBS Act 3.0 also allows angel investors and entrepreneurs to interact without running afoul of securities laws. While the original JOBS Act allowed startups to raise large private placements through general solicitations in social media and other avenues, the exemptions granted were narrow.
“There’s always been a concern in the startup community about things like pitches to large groups of angel investors or demo days for [business] accelerators,” Sloan tells CFO. “Are those solicitations? It’s always been a gray area.”
Another piece of the legislation could give a boost to Title III capital raises, the so-called crowdfunding provisions that allow startups to raise $1 million every 12 months through qualified funding portals.
Part of the legislative package, the Crowdfunding Amendments Act, allows crowdfunding investors to pool their money into a fund that is under the guidance of a registered investment adviser. These special-purpose vehicles may make Title III crowdfunding more appealing to both businesses trying to raise capital and prospective investors. In particular, they may make crowdfunding more attractive to startups daunted by the prospect of having to track hundreds or even thousands of investors in their capitalization table.
JOBS Act 3.0 also contains provisions designed to help companies that are going public, like lengthening the time that emerging growth companies (EGC) have to comply with Sarbanes-Oxley Section 404(b) and expanding the rules on confidential S-1 filings. The bill also requires the Securities and Exchange Commission to do a cost-benefit analysis of EGC’s 10-Q quarterly reporting requirements.
For small issuers that go public, the legislation proposes the creation of dedicated “venture exchanges” for companies that issue only a limited number of shares.
“Concentrating a small issuer’s trading into a single exchange would aggregate liquidity and help attract post-issuance support, including research, sales, and capital commitments by market makers,” Hensarling wrote in his op-ed. “This would be a game-changer for many small issuers.”
According to Sloan, however, the measures for IPO companies won’t be as broadly helpful to early-stage businesses.
“These are nice things, but right now, at least, the expectation is that when companies exit, it’s not going to be IPO; it’s going to be an acquisition,” he says. “That’s not to say IPOs don’t still happen, but it’s not like 15 years ago when a startup that had some success was as likely to go public as get acquired by another company.”
One change that Sloan would have liked but that didn’t make it into the legislation was a provision to create some exemptions around broker-dealer regulations for professionals that assist small companies in raising money. “Right now you can’t do that (and get paid for it) unless you’re a licensed broker-dealer,” he says. But existing licensed broker-dealers don’t want to handle such small deals.
The legislation also fails to address two significant hurdles to the use of Title III crowdfunding. The first is the requirement for the issuer to file third-party audited financial statements for offerings of more than $500,000. (That’s on top of having to convert financials to generally accepted accounting principles.) The second is the yearly $1 million cap on Title III raises, which in the past Congress has discussed raising to $5 million.
Overall, though, Sloan views this package of potential changes to the JOBS Act as beneficial.
“It continues to move things in the right direction; at least, there is nothing in there that’s a step backward,” Sloan says. “Anything that makes it incrementally easier for companies to raise money ultimately will translate into jobs.”