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The JOBS Act: A Summary of What it Means for Businesses

The Jumpstart Our Business Startups Act or JOBS Act, intended to encourage funding of United States small businesses by easing various securities regulations, was signed into law by  President Obama on April 5, 2012.

By Louis A. Zambrio

On April 5, 2012, the Jumpstart Our Business Startups Act (“JOBS Act”) was signed into law. The fundamental change that it will have on companies is their ability to raise capital through a private placement under Rule 506 of Regulation D of the Securities Act of 1933, as amended (“Rule 506 Offering”). The JOBS Act, among other things, will eliminate the prohibitions under the U.S. federal securities laws against general advertising or general solicitation in connection with a Rule 506 Offering; provided that all purchases are made to accredited investors. The elimination of the general advertising and general solicitation restrictions could have a significant impact on a company’s ability to raise capital because it allows companies to reach a more diverse group and larger number of potential investors through their marketing efforts. The enactment of the JOBS Act directed the U.S. Securities and Exchange Commission (“SEC”) to revise Rule 506 of Regulation D within 90 days of its enactment, or by July 4, 2012. The current rules are still applicable to Rule 506 Offerings until the SEC amends Rule 506 of Regulation D.

Currently, under Rule 506 of Regulation D, companies are prohibited from soliciting investors through general advertisements or general solicitations, which makes it difficult for startups and small companies to raise capital since, as is often the case, they do not have enough contacts who are accredited investors that have the financial capability to invest in their company. With the implementation of the JOBS Act, a company will have the ability to tap a larger pool of investors than they originally had access to since they will now be allowed to solicit investors through general advertisements and general solicitations. This should open up access to more funding opportunities then companies previously experienced. The one caveat is that all investors must be accredited investors as such term is defined under Rule 501(a) of Regulation D (“Accredited Investor”).

An Accredited Investor is generally someone who has enough knowledge and business experience and acumen that they do not need to be afforded the full protection of the securities laws. Since this was a difficult standard to interpret, the SEC enacted Rule 501(a) to clarify the meaning of an Accredited Investor. There are eight (8) different categories of investors under the definition of an Accredited Investor, the most widely used by startup and small companies is:

  • 501(a)(6) any natural person whose individual net worth, or jointly with their spouse, exceeds $1 million at the time of purchase, excluding the value of such person’s primary residence; or
  • 501(a)(7) any natural person with income exceeding $200,000, or joint income with a spouse exceeding $300,000, for the two most recent years with a reasonable expectation of achieving the same income level in the current year.

A company can avail itself of the elimination of the advertising prohibitions in a Rule 506 Offering by taking “reasonable steps to verify that purchasers of the securities are accredited investors”. The meaning of this standard is unclear as of now, but hopes are that the SEC will clarify its meaning when it revises Rule 506 of Regulation D.

Once the SEC amends Rule 506 of Regulation D, companies will be able to conduct private placements through the facilitation of general advertisements and general solicitations as long as they reasonably verify that the securities are sold to Accredited Investors only.