Legislation is passed with great fanfare in Washington … federal rules are delayed … businesses and citizens alike are unsure what to do next.
Does that sound a lot like the Affordable Care Act? Probably so, but the law I have in mind is the Jumpstarting Our Business Startups Act.
Better known as the JOBS Act, the legislation was passed by Congress and signed into law by President Barack Obama about 18 months ago. The goal was to make things easier for entrepreneurs who are raising money for privately held business start-ups, as well as broaden the pool of investors for such start-ups.
The reality has fallen far short of that goal. Business start-ups are still unclear on how to go about advertising their need for investment dollars, angel investors are worried about a spate of intrusive paperwork and regulators still aren’t sure how to protect the public from scam artists.
Read this commentary in the Milwaukee State Journal here.
The uncertainty threatens to slow the process of company start-up and growth precisely at a time when the U.S. economy needs it most. Somehow, I doubt that’s what Obama and Congress had in mind.
The changes in the JOBS Act fall into two broad categories — those that allow the spread of “crowdfunding” beyond artists, causes and special projects to private equity deals, and changes in Depression-era “general solicitation” rules that affect many business owners and investors alike. A meeting Thursday of the Wisconsin Innovation Network in Wauwatosa will cover what experts think about both.
To cut down on fraud seen as a cause of the Great Depression, Washington banned private companies from soliciting investments from the general public. Since the 1930s, only relatively wealthy people — those who qualify as “accredited investors” by virtue of income or assets — have been able to buy shares of companies not listed on a public stock exchange.
For decades, the nation’s 200,000 or so angel investors have self-certified as individuals or through organized angel groups that they meet the legal rules — primarily, income and asset tests — that allow them to risk their own money in a venture that is not a “public offering.” In other words, they are affirming they have enough spare cash to invest in small, privately held firms.
The system works. Those 200,000 angels invested about $23 billion in 2012 in roughly 66,000 start-up companies, from the most complex technology firms to mom-and-pop stores. That $23 billion represents 90% of the equity such start-ups get from sources other than themselves, friends and family.
Given the role of angel investors in the nation’s start-up economy — a phenomenon also evident in Wisconsin — Congress thought it would make sense to end federal prohibitions on the “general solicitation” of capital for privately offered securities. If it became easier to invest and to attract investment dollars, Congress reasoned, more dollars would flow to job-producing start-ups.
The problem is that the SEC has replaced self-certification with a new verification process. Effective last month, individuals who want to be considered “accredited investors” may now need to provide detailed, financial information to entrepreneurs, either directly or through a third party.
The potential danger extends to entrepreneurs in other ways. Under a proposed SEC rule, entrepreneurs themselves could be subject to more paperwork or risk violating the law. Any start-up that takes part in a public pitch presentation, “demo day” or even some closed events could be sanctioned by the SEC unless they submit certain filings in advance. Those sanctions could come with a Start-up Death Penalty: No fundraising allowed for a year.
Groups such as the Angel Capital Association and the Wisconsin Angel Network have been among those weighing in against the rules. In fact, the SEC has logged 339 letters against the proposed changes and only nine in favor; the comment period has been extended for 30 days.
Meanwhile, the start-up economy is plunging ahead with “crowdfunding.” Once restricted to the nonprofit world, equity crowdfunding means small companies may sell pieces of their company in return for the cash needed to move it from start-up to success. The concept was embraced by the JOBS Act, within certain investment limits, but it ran into the SEC’s historic concern about society inventing new ways to swindle unsuspecting investors.
Rather than wait for the SEC to figure it out, a few states have moved ahead on their own with state-based crowdfunding laws. Wisconsin appears poised to join that list through Assembly Bill 350, which is scheduled for an Assembly floor vote Tuesday.
Confused? You’re not alone. More clarity will be needed soon from the feds to keep the JOBS Act from being renamed the “Jeopardizing Our Business Startups” Act.