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JOBS Act 2012: Update on Crowdfunding, Shareholder Cap and Saving Money

The Jumpstart Our Business Startups Act, or JOBS Act for short, was signed into law by President Obama on April 5, 2012, and as the name connotes, was designed to improve the small business landscape by making it easier for small businesses to secure financing. Small businesses have always been considered the cornerstone of the U.S. job market, as they produce a large number of jobs and have a cascading effect on the U.S. economy. As major corporations keep retrenching since the 2008 meltdown, small businesses are viewed as the growth engine for the labor market. Where is the JOBS Act heading?

The JOBS Act has two main provisions for facilitating the funding of small businesses and they are:

  • Crowd-Funding Is Now Legal: Small investors can now put in $10,000 or 10% of their annual income, whichever is less.
    Startup businesses can raise up to $1 Million, $2 Million if audited financial statements can be made available. This is more than adequate for the majority of startups, which typically only require less than $500,000.
  • Shareholder Cap: The cap on the number of shareholders in each particular company has been raised from 500 to 2,000, extending the range of investors that startups have to deal with. Of course, this provision also benefits secondary markets in the business of providing financing to startups, such as Second Market, or 500 Startups, by allowing such companies to invest in a wider range of companies.

Another advantage of the JOBS Act is that it furthermore enhances the liquidity of investing in startups.

Let us take one example: A company may have received funding from crowdfunders some time back, and is now looking for another much bigger round of financing and approaches later stage VCs. The crowd funding investors can sell some of their stake to the VC group, which can now take a larger stake, and best of all, the company does not have to dilute its equity any more than absolutely necessary in this new round of funding.

Dave McClure, of 500 Startups, a two years young startup itself, is the epitome of the new breed of VCs, and has been widely acclaimed as being almost altruistic. Tiny compared to the multibillion Silicon Valley VC firms, the company has nevertheless managed to fund 300 companies during its short existence. More of a marketer than a numbers man, Dave McClure may be on his way to change the VC culture.

Where Is The JOBS Act Heading?

Here again, the law of unintended consequences applies. Instead of just funding startups, the law has also attracted hundreds of special purpose acquisition companies, more commonly known as shell companies, which are declaring themselves to be emerging growth companies. These blank check companies generally are not job creators, thus running counter to the intent of the JOBS Act.

The JOBS Act has obviously produced some good, but with the “smart money” taking advantage of every single loophole, who can tell where it is heading?

 

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