Jumpstart Our Business Startups Act (JOBS) Act
Jumpstart Our Business Startups Act, commonly referred to with the acronym JOBS Act, is an act of the United States Congress that reduced regulatory requirements for small businesses from some provisions of the U.S Securities law. The bill allowed such companies to have a lesser strict set of disclosure for an initial public offering (IPO) and legitimized the soliciting of capital through crowdfunding over the internet.
Before the enactment of the JOBS Act, the Securities and Exchange Commission (SEC) had declared crowdfunding illegal. Also, all companies required to have minimum gross revenue of one billion dollars, and further give full disclosure on governance and internal controls before going public.
A Little More on What is the JOBS Act
The 2008 financial crisis was followed by a decrease in small business activity, and consequently, increased levels of U.S unemployment rates. Several congresspersons sponsored different pieces of legislation in an attempt to revitalize the economy and spur growth following the depression.
The bills that were tabled before the house included the following;
- Small Company Capital Formation (H.R. 1070)
- Access to Capital for Job Creators (H.R. 2940)
III. Private Company Flexibility and Growth (H.R. 2167)
- Capital Expansion (H.R. 4088)
- Entrepreneur Access to Capital (H.R. 2930), which inspired two other bills;
VI.CROWDFUND (Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure) Act (S.1970) and Democratizing Access to Capital Act (S.1791).
The current Jumpstart Our Business Startups Act (JOBS Act), is a culmination of all the above bills and their revisions combined, and each of these bills has a corresponding title in the final draft of the JOBS Act as follows;
Title I – Reopening American Capital Markets to Emerging Growth Companies
Title II – Access to Capital for Job Creators
Title III – Crowdfunding.
Title IV – Small Company Capital Formation.
Title V – Private Company Flexibility and Growth.
Title VI – Capital Expansion.
And a seventh title was included that mandates the Securities and Exchange Commission (SEC) to conduct studies and provide guidelines on capital formation, core disclosure, and registration requirements for the emerging growth companies;
Title VII – Outreach on Changes to the Law or Commission.
The final draft received bipartisan support and passed the Senate on March 22, and later the House on March 27. Consequently, the JOBS Act was signed into law by President Barack Obama on April 5, 2012, at the white house rose garden.
Purpose of the JOBS Act
The Jumpstart Our Business Startups Act aims to ease the regulatory requirements for small-medium enterprises (SMEs) or the “emerging growth companies” access to the capital formation through public markets such as IPO listing as well as private markets through crowd-funding. The Act is specifically in operation to encourage SMEs that are considered crucial players in economic growth, to take up capital, and increase business activities, consequently, create more jobs as they grow – just as the name suggests.
The term “emerging growth companies” (EGC), was created by the JOBS Act and refers to a small company with less than $1 billion in gross revenues from a recent accounting period, privately held, and issuing equity in exchange for funds to finance its operation. The EGC status is limited to a five year period subject to SEC regulations when the company is seeking funds through Crowdfunding.
Crowd-funding, on the other hand, is a means by which an EGC can accumulate funds over the internet from a large number of individual investors or non-accredited investors. Funding drives involve advertisements on social media platforms and crowdfunding websites such as Kickstarter, Indiegogo, GoFundMe, 40Billion, and many others.
Non-accredited investors according to SEC is one with a net worth of less than$1 million excluding the house as well as an annual income that is not less than $200,000, or $300,000 when combined with a spouse income.
Key Provisions of the JOBS Act
Jumpstart Our Business Startups Act was enacted with key provisions to ensure that it achieves its purpose as stated therein: “to increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.”
Some of those provisions include the following;
- An EGC is exempted from the Sarbanes-Oxley Act related rules and regulations, especially on financial reporting.
- Lifts the ban on general solicitation or advertising for equity issuance from potential investors, which was previously imposed by Regulation D.
- Provision for internet-based crowdfunding allowing investors with an annual income of $100,000 to invest up to the greater of $2,000 or 5% of their yearly income whereas those with higher income can invest up to $10,000 or 10%.
- An EGC can raise $1 million per year, subject to a five-year and $700 million market-value limit.
- Company to retain its private status and only required to register common stock with SEC when it attains 500 unaccredited shareholders or a total of 2,000 both accredited and unaccredited shareholders.
- Increased the cap on the amount of fund that an EGC can solicit through an IPO from 5 million dollars imposed by Regulation A to $50 million in share sales, and further, exempted from SEC regulations and state securities, or the “blue sky review” laws.
- Increase in Shareholder Limits in Community Banks to 2000, up from the previous 500.
- Reduced the required three years of audited financial statements for an initial public offering (IPO), to only two years.
Like all pieces of legislation, observers have identified some benefits derived from the JOBS Act as well as the cons.
- Entrepreneurs have easy access to capital to hit the ground running with their ideas and create jobs by hiring new employees.
- Removes the strict regulations that required only wealthy investors to contribute funds and opens up investment opportunities to virtually everyone by eliminating the need for an accredited investor.
- Allows businesses to expand stock ownership within the company since employees are excluded in the shareholder calculation.
- Allows companies to increase their balance sheets while remaining private enterprises long enough until the appropriate time for an IPO, thus avoiding pressured listing of securities.
The JOBS Act is likely to increase the risks of frauds and scams to the public due to loosened long-established protections provided under prior securities laws as well as the protections afforded to investors by Sarbanes-Oxley rules.
Sarbanes-Oxley Act was enacted into law on July 29, 2002, following the collapse of Enron. The Act set out strict standards for financial reporting by public companies, and extended criminal and civil liability to the management, boards of directors, and public accounting firms tasked with auditing for failure to comply with the stipulated regulations.
Some observers have foretold a possible return of the ‘boiler room operation’ of the 1920s as well as a similar stock market crash of 1929 which prompted the enacted of the U.S. securities laws, that is, the Securities Act of 1933 and the Securities Exchange Act of 1934 to safeguard investors.
Besides, observers note that small individual investors are not financially educated enough to invest in emerging growth companies and could be the possible reason behind why crowdfunding mechanism and deregulations spelled out by the JOBS Act has not gained much traction as expected.
In conclusion, The SEC has assured the public that it will continue to monitor and update the JOBS Act rules as often as necessary to encourage entrepreneurs in capital formation while safeguarding investor interests. For example, in December 2015, the rules were relaxed to allow an EGC to begin roadshows 15 calendar days after publicly filing its registration statement, and recently In June 2016, the SEC approved an interim final rule that allows Form 10-K filers to provide links to more detailed disclosure.
References for JOBS Act
Academic Research on the JOBS Act
- The JOBS Act and crowdfunding: Harnessing the power—and money—of the masses, Stemler, A. R. (2013). Business Horizons, 56(3), 271-275. The paper looks at one section of the JOBS Act, that is, Title III -the CROWDFUND Act, and discusses how it has the potential to help millions of underfunded entrepreneurs. The paper also looks at the risks involved with crowd-funding and suggests a more informed approach by investors.
- Publicness in Contemporary Securities Regulation after the JOBS Act, Langevoort, D. C., & Thompson, R. B. (2012). Geo. LJ, 101, 337. The paper investigates whether companies should still be forced to take the public status in the current regulatory environment and suggest more regulatory processes need to be put in place in the wake of technological change. The paper suggests the increase in shareholder requirements from 500 to 2000 still misses the underlying principle of going public.
- The JOBS Act and IPO volume: Evidence that disclosure costs affect the IPO decision, Dambra, M., Field, L. C., & Gustafson, M. T. (2015). Journal of Financial Economics, 116(1), 121-143. The article examines the effects of reduced regulatory requirements on disclosure and how it has led to an increase in companies taking up IPO.
- The jobs act, Cunningham, W. M. (2016). In The JOBS Act(pp. 3-35). Apress, Berkeley, CA. The paper presents the Jumpstart Our Business Startups Act in general and discusses the provisions provided by the Act in general.
- The JOBS Act and information uncertainty in IPO firms, Barth, M. E., Landsman, W. R., & Taylor, D. J. (2017). The Accounting Review, 92(6), 25-47. The paper examines how reduced mandatory regulation on disclosure by the Jumpstart Our Business Startups Act (JOBS Act) has led to an information uncertainty in IPO firms and consequently underpricing in small firms.
- The JOBS Act and the costs of going public, Chaplinsky, S., Hanley, K. W., & Moon, S. K. (2017). Journal of Accounting Research, 55(4), 795-836. The paper examines the cost of going public for emerging growth companies and presents findings that despite deregulations there is no reduction in the direct costs of issuance, accounting, legal, or underwriting fees for EGC Initial public offering.
- The JOBS act of 2012: Balancing fundamental securities law principles with the demands of the crowd, Martin, T. (2012). The paper looks at how the JOBS Act of 2012 eliminates most laws including Sarbanes-Oxley (2002) and the Dodd-Frank Act (2010) as well as U.S. securities laws, especially the Securities Act of 1933 and the Securities Exchange Act of 1934. The paper suggests that despite the government lacking an oversight in the crowd-funding market, the benefit outweighs the risk.
- The JOBS Act-crowdfunding and beyond, Kitchens, R., & Torrence, P. D. (2012). Economic Development Journal, 11(4), 42. The paper looks at the future of crowdfunding as initiated by the JOBS Act as a means of capital formation and its overall impact on the United States economy.
- Labour market reforms in Italy: Evaluating the efects of the Jobs Act, Fana, M., Guarascio, D., & Cirillo, V. (2015). LEM Working Paper Series. The paper presents criticisms on the effect of Italy’s Law 183 of 2014, also known as the “Jobs Act” and how it has limited companies from monitoring employees as well as providing an open-ended contract to employees in Italy and how it has failed to achieve its intended goal.
- Protection from What: Investor Protection and the JOBS Act, Guttentag, M. D. (2012). UC Davis Bus. LJ, 13, 207. The paper presents arguments on investor protections and analyses the deregulation by the JOBS Act of strict rules that used to safeguards investors since 1933.
- An analysis of the tax holiday for repatriation under the Jobs Act, Clemons, R., & Kinney, M. (2008). The paper looks at how the American Jobs Creation Act (AJCA) of 2004 led to repatriations of earning by companies in the United States following the provision of the one-time tax holiday but concludes that the funds repatriated did not achieve the intended purpose.
- JOBS Act eases securities-law regulation of smaller companies, Parrino, R. J., & Romeo, P. J. (2012). JOBS Journal of Investment Compliance, 13(3), 27-35. The paper examines the impact of the JOBS Act and the overall achievement in helping emerging growth companies to list for IPO by loosening the securities laws strict regulations. The paper further suggests an increased oversight as the deregulation could lead to increased investment scams.