The Jumpstart Our Business Startups (JOBS) Act was supposed to be a boon for small businesses across America, but four months after its near-unanimous passage many of its most important measures have yet to be enforced. In particular, rules have not been established for how small businesses can start soliciting for investment, although the Act was supposed to eliminate barriers to these funds. One of many entrepreneurs’ greatest hurdles is finding funding, and despite the knowledge that there are billions waiting to be invested in small businesses Congress has ironically failed to jumpstart the Jumpstart Act. For more on this continue reading the following article from TheStreet.
Today at a Joint Committee Hearing in Congress, legislators will be hearing from small business owners about the importance of implementation of the Jobs Act, the much publicized, and criticized (including from TheStreet here and here) law passed by an overwhelming bipartisan majority this spring. Despite being written into law more than four months ago, many of the key provisions of the law have not yet come into force.
The most pressing issue is when the law will come into effect for the hundreds of thousands of small businesses seeking to raise capital from accredited investors (investors who make more than $200,000 a year as an individual, $300,000 per year as a couple or have $1,000,000 or more in net assets excluding their home). Currently, these businesses are prohibited from advertising a capital raise (called general solicitation).
The law instructs regulators to remove the prohibition against general solicitation, but also gives them leeway to define adequate rules to protect investors once this advertising is permitted. The rules were supposed to be in place more than two months ago, yet a final timetable has still not been announced.
Exactly when, and how, private companies can advertise for investors is important for all Americans — whether they are investors, small business employers, consumers of products and services from local businesses across the country or simply care about job creation. Small and start-up businesses account for half of all private-sector employment in the U.S., and two out of three jobs created in the last 30 years. They are a critical driver of our national economy, and the future large employers of tomorrow.
Investors: For investors, non-institutional private investing is a $50 billion market that operates with incredible inefficiency. Without open communication, investors must spend time developing relationships and networking to gain access to "deal flow" that they may not otherwise ever find, let alone gain access to. Private equity and venture investments occupy an important place in a well-diversified portfolio for many of the largest investors in the country, but — in part because of the lack of information — these investments are largely beyond the reach of most investors (and are costly, with investors paying significant fees). As a result, less than 5% of eligible investors participate in the market, despite attractive historical returns. As an example, in consumer and retail alone, historically individual investors have received an average return of 3.6x their money in 4.4 years. Those types of returns require diversification, and patience, but many advisers would recommend an allocation within a well-diversified long-term portfolio … if the investor can gain access.
The lift in the ban on general solicitation does not change the risk, or reward, of this asset class. It simply gives investors the option to make a choice about where they want to invest.
Small Businesses: For businesses, particularly those outside of the technology sector, in many cases the old rules force managers to spend more time fundraising than running the actual business. Take the example of Episencial, the maker of baby-safe, all-natural skincare products. After several years of product development and early traction in the market, Kim Walls, the founder and CEO of Episencial, had a passionate following of customers, parents and supporters interested in helping the business grow.
Yet, because of current regulations, Kim could not make even a passing mention of the opportunity to invest in Episencial to her 20,000 fans on Facebook (FB). Instead, she had completed her fundraising successfully only after establishing relationships with angel investors, many of whom were not yet familiar with the brand. Those most interested in supporting the company were denied the opportunity, while those least familiar with the story were permitted. How does that make sense?
Job Creation: The businesses and investors with the most to gain from the change in this rule are those currently outside of the established VC hubs around Silicon Valley, Cambridge and New York. This is about spurring entrepreneurship and unlocking small business growth opportunities, and job creation, in every corner of America — including in cities and towns that many of today’s entrenched investors would not likely consider. It is about increasing the amount of information, and choice, for investors everywhere.
Two weeks ago, the SEC put forth a workable set of rules to improve the flow of information within this market. The staff has worked to balance the rules for companies, like CircleUp, that are working to connect investors and small businesses across the country. When adopted, the rules will increase the amount of information available to prospective investors and companies.
The time is now to implement these rules, fulfilling the mandate enacted with broad, bipartisan support in Congress and President Obama’s approval. With unemployment at more than 8%, and investors hungry for diversification following years of disappointing performance in public markets, we can’t afford to wait.
This article was republished with permission from TheStreet.