Does the JOBS Act make sense for you?

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Rapidly growing companies. Companies with a great new product. Both of these sorts of entities typically have a need for capital. Banks generally don’t loan money for capital needs. Those funds come from friends and family, angel investors, or venture capitalists.

Since 1999, some companies have raised funds via SCOR, “Small Company Offering Registration” (also called U-7, due to the form employed). These firms receive state- and not federal- approval, and are not limited to accredited (typically, this means wealthy investors), the 35 investor rules, or the full-blown requirements of an SEC registration.

Going the SCOR route limited one to $ 1 million of investment, with a stock price exceeding $ 5 a share, and sales via registered agents (certified by the state to handle securities regulations) which can also include the CFO of the firm. With these limitations- especially the maximum of $ 1 million of investment, many start-up or growth firms were not very interested.

Which is why in April of 2012, HR3606 was proposed and enacted into law. The JOBS Act (Jumpstart Our Business Startups Act) allows “emerging growth” companies, those with less than $ 1 billion in revenue, to raise up to $ 1 million of equity investment a year. Small investors are limited to either providing $ 2000 total or up to 5% of one’s total income.

The requirements  for the firms taking advantage of the JOBS Act include filing financial statements with the SEC (these forms remain confidential) and a disclosure of risks to the investors. Potential investors must also received recent tax statements and certified financials, before they can be allowed to invest in your firm. While not required, we believe (as do others) that it would be useful to provide the potential investors with the proposed use of funds and to plan to provide financial results to investors on a quarterly basis.

Now, the regulations under which companies are expected to offer these investments  have not yet been finalized by the SEC (Securities and Exchange Commission). And, yes, those final rules are required by January 2013- but don’t hold your breath, especially now that the SEC chairperson, Mary Schapiro, has resigned.

On 11 October, 2012  the Financial Industry Regulatory Authority (FINRA) issued final regulations. These regulations for combatting fraud and manipulation, as well as trading principles, and crowdfunding rules can be found here.

These are critical, since the law stipulates if one wishes to sell equity online, one must use registered websites, even thought broker-dealers do not have to be registered individuals. As such, the existing platforms are a little leery of running full-tilt with the programs, only letting investors obtain mugs, T-shirts, and gifts (such as “first products off the line”) for their investments.

For example, KickStarter and Crowdtilt only let projects get funded right now, not the raising of capital for the firms themselves. IndieGogo is, right now, primarily for projects and campaigns that promote the public good. AngelList is really a marketplace to have investors and companies meet one another. MicroVentures is more like an investment bank for startups, performing due diligence and helping the approved ventures find investors. SecondMarket and WeFunder are akin to an Over-The-Counter (OTC) market for private funding.

There are other issues to consider. Venture capitalists offer mentoring and connections to the firms in which they invest. Crowdfunding offers no such services (but firms like Adjuvancy do offer such services to entities desiring to take advantage of this new program).

There also is the issue of pricing the offering. While there are no hard and fast rules, we feel that the methods used by firms that followed the U-7 (SCOR) process have merit. Limit the offerings to 10 or 20% of the total equity of the firm. (We typically choose 10%.) Given that dilution, one uses the annual revenue of the firm two years after receiving the investment or twice that level as the total valuation of the firm. So, if your annual sales in 2015 would be $ 10 million, then 10% of your firm would be worth $ 1 to $2 million.

Those who develop the best successes from this program are going to be those with the highest “sex appeal”, the highest potential for revenue and profits. Are you ready to jump in?

 

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