JOBS Act Unlocks “Unaccredited” Investor Capital for Small Business

On March 27, 2012, Congress passed a statute that fundamentally reshapes the way private companies can raise capital and the way that a new category of companies Emerging Growth Companies, or EGCs — conduct initial public and follow-on offerings, and provide disclosure to investors. President Obama is expected to sign the new statute into law on April 5, 2012.

The Jumpstart Our Business Startups Act (the “JOBS Act” or the “Act”) was passed rapidly on a bipartisan basis by both houses of Congress. It was therefore not subject to the level of scrutiny that often accompanies such far-reaching legislation. As a result, while the general thrust of the legislation is clear, there are numerous ambiguities and questions regarding how it interacts with existing laws and regulations, some of which are fundamental to its implementation. We have highlighted these issues below.

One of the small business entrepreneurs invited to the White House on Thursday to join President Obamas for the Rose Garden signing ceremony for the Jumpstart Our Business Startups (JOBS) Act was Samantha Abrams, 25, of emmy’s organics in Ithaca, NY. Her wholesale vegan and gluten-free food company, co-founded in 2008 with partner Ian Gaffney, 29, makes coconut macaroons, chocolate sauce and snack foods with certified non-GMO ingredients.  Abrams and Gaffney sourced capital in 2010, launching an online donation campaign to crowd-source $15,000 to grow “emmy’s.”

So what does JOBS Act mean for small food businesses?

1. The JOBS Act would legalize crowd-funding or crowd-sourcing for equity.  Just a minute, you say, haven’t people already been crowd-funding their businesses through sites like Kickstarter and ioby?  Yes and no.

While people have been getting money for their projects through crowd-funding, the business has not been able to offer equity or interest in return.  Until now, if you *invest* in a project through a crowd-funding online or just give a friend some funds to help him start his business, then the only thing you could get in return was actual product, tchotchkes, or a heartfelt thanks.  The “investor” was not planning on ever recouping that money or making a profit.

According to the current version of the JOBS Act, businesses would be able to offer equity in exchange for investment in their company or their project.  What makes this really exciting is that now investors may be willing to come into the small business market and invest more freely.

I’ve personally donated money to some crowd-funding projects before — but it’s always been little amounts.  However, I wasn’t willing to put a lot of money into play because it was neither an investment with a return nor a charitable donation with tax benefits.  Now many people (including me) might be willing to place larger amounts with trusted local companies.

It should be noted that the JOBS Act does restrict unaccredited investors (as defined by the Securities Exhchange Commission) from making investments that exceed $10,000 or 10% of our income – whichever is smaller – or, if you make less than $100,000 annually you can invest no more than $5,000 in a company in exchange for equity.  There are some folks out there – both companies and individuals – claiming that those restrictions aren’t fair but the Senate is only trying to prevent people from getting fleeced and losing all their investment funds.

Businesses seeking investment capital should probably require investors to certify in writing that their income (and assets) fall within the limits that permit any given investment amount conveyed.  However, it’s intriguing to think that an unaccredited investor may now be able to make several smaller investments in an array of different companies — despite the “per company” dollar limitations, laid out above.

According to an article in Forbes, the JOBS Bill would also require that any company that wanted to raise funds through a crowd-sourcing/equity exchange method would be required to file with the SEC and would be limited to raising no more than $1M annually or $2M if they publicly release audited financial statements.

2. The other part of the JOBS Act that most likely pertains to small food businesses is that the cap on the number of shareholders a business may have before they are required to publicly file their financial information has been increased from 500 to 2000.  This is great news if you don’t think that you’ll be able to find a few $10,000 investors but think you know a ton of folks who would be willing to invest $1,000 in your business instead.

For those seeking more depth and detailed legal information, check out “JOBS Act: Impact and Open Questions” prepared by corporate law firm White & Case.

(Note: This article represents the author’s opinion and should NOT be relied upon as legal advice. Please consult an attorney before taking any action related to this article)

This entry was posted in Updates & Discussion. Bookmark the permalink.