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The Jumpstart Our Business Start-ups (JOBS) Act may not have been specifically designed for franchisees, but industry observers have no doubt they, too, will benefit from the ease in restrictions and new opportunities to secure funding. Two big changes the Act will make in securing start-up funds will be allowing small businesses to crowdsource to raise funds as well as advertise, both without the usual wrangling with the Securities and Exchange Commission. Restrictions will apply, but for the “average” small business start-up the Act is expected to open many new avenues for investment. For more on this continue reading the following article from Blue MauMau.

On April 5, 2012 President Obama signed a new law that holds promise to open new funding sources for franchisees. The JOBS (which stands for Jumpstart Our Business Start-ups) Act is an amalgam of six different bills that were collectively directed at helping small businesses access public capital markets and generate jobs and economic growth.

The two most significant parts of the new law for would-be franchisees center on new twists on some old concepts. Crowdfunding has been around for a while now but the new law expands the concept from a funding-for-rewards mechanism to a portal for small investors to make equity investments in small businesses. Similarly, raising money outside of the registered public offering process dates back to the enactment of our basic securities laws in the early 1930s. What's different under the JOBS Act is that unregistered private offerings of securities will now have one of the key advantages of raising money through the public capital markets – the ability to engage in general solicitation and advertising – without all of the headaches that go with a public offering.

At its simplest level, crowdfunding has been a means to fund creative projects, various social campaigns and causes and small businesses and entrepreneurs through small amounts of cash from a large number of investors. The "investors," who as a practical matter are donors, receive an artist's reprint or some other nominal gift or reward for their generosity. The JOBS Act effectively ups the ante from a limited edition reprint or logoed coffee mug to an equity investment. Specifically, the new law permits small businesses such as franchisees to sell equity in their companies to many small retail investors.

The SEC has until the end of the year to issue regulations implementing the crowdfunding provisions (although many experts believe the final regulations may take longer), which are subject to a number of restrictions including:

  • A $1 million cap on all securities offerings in the 12-month period leading up to and including the crowdfunding transaction
  • Limitations on the amount that an individual may invest in all crowdfunding transactions that depend upon the investor's annual income or net worth and, in any case, that cannot exceed $100,000 in any 12-month period
  • A requirement that the transaction be conducted through a registered broker or "funding portal"
  • Filing and disclosure requirements for the equity issuer
  • 1-year transfer restrictions
  • Liability provisions.

Separate from crowdfunding, the JOBS Act loosens some of the restrictions on private offerings of securities. By way of background, the federal securities laws generally prohibit securities offerings unless a registration statement is filed with and declared effective by the Securities and Exchange Commission, or the SEC. Certain private securities offerings need not follow these registration requirements, but these "exempt" offerings nevertheless cannot be made through any form of general solicitation or advertising. The JOBS Act directs the SEC by early July 2012 to lift these restrictions on general solicitations, like TV, web or radio advertising, for private securities offerings to "accredited" (i.e., high income, high net worth individuals or certain institutions) investors and qualified institutional buyers. This will remove one of the key disadvantages of private versus public securities offerings.

The crowdfunding and private securities offering provisions of the JOBS Act promise to open new gateways for franchisee funding. Blaise Brennan, an Of Counsel with Gibson, Dunn & Crutcher who specializes in securities regulation, says the new provisions "could create significant new funding opportunities for people seeking to open a franchised business." He adds that "franchisors may be able to lay the groundwork for the franchisee's equity offering by establishing a connection with a funding portal, and lend a measure of credibility to a franchisee's offering by linking its name to the franchisee."

Of course, the all-in costs of raising equity funding through crowdfunding or generally advertised private placements may not compare favorably to debt financing like SBA loans but, unless the SEC's final regulations contain some unfavorable surprises, the JOBS Act right now looks like a welcome lift for franchisees and the jobs they create.

Mike Sheehan is a franchise consultant and attorney. He is the president of Focus Ventures, LLC (www.focusonfranchise.com) and formerly served as a securities attorney and as general counsel for a Fortune 100 financial services company. His Franchise Focus Blog (www.franchisefocus.blogspot.com) focuses on helpful information, tips and current news for prospective franchisees.