Deep Dive into Regulation D; Part 2 JOBS Act

The aftermath of the Great Recession of 2008 left no business owner, no manager, no contractor or employee untouched. The area of devastation was not limited to the United States alone; the crisis zone was worldwide. Fortunately in America, a widespread plan was legislated for businesses to raise capital in less restrictive manner.

The Jumpstart Our Business Startups Act (JOBS Act), signed into law in 2012, was designed to stimulate economic growth by easing regulations on small businesses and startups, making it easier for them to raise capital. The legislation sought to address the funding challenges that many small and emerging companies face when trying to grow or go public. The JOBS Act focused on reforming securities regulations to facilitate entrepreneurship, job creation, and capital formation.

Key Objectives of the JOBS Act

1. Facilitating Access to Capital for Emerging Companies

- The JOBS Act was primarily aimed at helping smaller businesses and startups access the capital they need to grow. As we learned in Deep Dive into Regulation D Part 1, the traditional regulations had not been updated since their inception in 1982, making it difficult for these companies to raise funds, particularly in public markets. By reducing the regulatory burden, the act aimed to encourage more investment in early-stage companies.

2. Encouraging IPOs

- One of the central goals was to make it easier and less costly for companies to go public. The JOBS Act introduced the concept of the Emerging Growth Company (EGC), which allows newly public companies (with annual revenues of less than $1.235 billion) to phase into compliance with certain regulatory requirements. This was meant to reduce the cost and complexity of going public, allowing smaller companies to consider IPOs earlier in their development. The ramifications of this have been a more diversified company stock selection within the public markets, narrowing the gap between being relegated to only monopoly sized entities.

3. Expanding Crowdfunding

- The act introduced a framework for equity crowdfunding, which allows small businesses to raise capital from a large number of small investors through online platforms. This opened up a new avenue for startups to tap into a broader investor base, beyond traditional venture capital or institutional investors.

4. Promoting Private Offerings

- The JOBS Act allowed companies to more easily raise capital through private offerings, particularly through changes to Regulation D. Notably, it created Rule 506(c), which permitted companies to engage in general solicitation and advertising of private securities offerings to accredited investors, provided they took reasonable steps to verify investor accreditation.

5. Reducing Disclosure Requirements for Emerging Companies

- The act reduced the regulatory and reporting burden on emerging growth companies by phasing in disclosure obligations over time. This lighter regulatory approach allowed companies to focus more on growth while easing them into full compliance.

Key Benefits of the JOBS Act

1. Lower Cost of Raising Capital

- By easing the regulatory requirements, the JOBS Act reduced the costs associated with raising capital, both in private markets and through IPOs. For small companies, which often face significant legal and administrative costs, this was a crucial benefit.

2. Expanded Investment Opportunities

- The act opened new avenues for investment, particularly for retail investors. Through equity crowdfunding and expanded private offering options, individual investors were able to invest in startups and early-stage companies that were previously out of reach. It democratized access to high-growth investment opportunities.

3. Increased Capital Flow to Startups

- By allowing broader advertising of private placements under Rule 506(c) and legalizing crowdfunding, the JOBS Act funneled more capital into startups and small businesses, which often have trouble attracting traditional sources of funding.

4. Greater Flexibility in Public Offerings

- The concept of the Emerging Growth Company gave companies up to five years to comply fully with certain SEC reporting and regulatory requirements, such as audited financial statements and executive compensation disclosures. This phased approach allowed them to go public earlier, without being burdened by the full range of regulatory compliance from day one.

5. Increased Transparency in Crowdfunding

- While the JOBS Act enabled new methods of fundraising, it also put in place investor protection measures. For example, companies that use crowdfunding must provide certain disclosures to investors, and crowdfunding platforms are required to register with the SEC and FINRA, creating a more regulated environment for this new form of investment.

6. Job Creation

- By facilitating capital raising and supporting business growth, the JOBS Act was ultimately intended to foster job creation. The rationale was that by making it easier for small businesses and startups to access funds, these companies could expand, hire more employees, and contribute to economic growth.

Key Provisions of the JOBS Act

- Title I: "IPO On-Ramp" for Emerging Growth Companies (EGCs)

- Reduced disclosure requirements for EGCs going public, making it easier and less expensive to conduct an IPO.

- Title II: General Solicitation and Advertising

- Amended Regulation D Rule 506 to allow companies to engage in general solicitation for private offerings, provided they verify accredited investor status.

- Title III: Crowdfunding

- Established the framework for equity crowdfunding, allowing startups and small businesses to raise up to $5 million from a large pool of retail investors in a 12-month period.

- Title IV: Regulation A+ (Mini IPOs)

- Expanded Regulation A, allowing companies to raise up to $75 million (previously $5 million) in a "public" offering with fewer regulatory requirements than a full IPO.

- Title V & VI: Increased Shareholder Thresholds

- Raised the number of shareholders a company can have before being required to register with the SEC, giving private companies more flexibility to stay private longer.

Conclusion

The JOBS Act was a landmark piece of legislation that aimed to stimulate entrepreneurship, ease access to capital, and promote job creation by making it easier for small and emerging companies to raise funds through both private and public markets. By streamlining regulations, encouraging innovation in fundraising, and expanding opportunities for a wider range of investors, it has had a lasting impact on the landscape of capital formation in the U.S.

Structuring Your Capital Raise

Navigating the formation of your offering can be daunting and expensive -- some law firms and startup incubators charge between $50,000 - $350,000+ depending on which exemption your company files. As investors in companies ourselves, we {Poplar Equity Group} believe these costs are entirely unnecessary, and even unwise for a startup venture to accumulate that much debt -- before you've taken on any capital!

We put our heads together and created a better way. If you've been considering raising capital for your business in a structured, compliant manner, we want to help. Send me a message and let's get to work!

Your best days are ahead! ??

-Blake E. Robbins

Reg CF, Reg D 506(B), Reg D 506(C), Reg A+ Reg S, Equity Crowdfunding, Capital Raising, startup, angel capital, venture capital, private equity hedge funds

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