In the hours before President Obama signed the JOBS Act into law this afternoon, warnings of the bill’s faults were being trumpeted under headlines such as Ex-Con Man Says JOBS Act Makes Guys Like Him Rich and Could JOBS Act “Bring Fraud Back to Wall Street”?
Nevertheless, after stating that the bi-partisan bill will make it easier for companies to go public, “remove barriers preventing entrepreneurs from getting funding,” and give “startups and small business … access to a big new pool of investors, namely the American people,” the President signed it into law at 2:45 pm today.
So, now what? If you’re an owner of one of the small businesses the JOBS Act was designed to help, here’s what you need to know.
1. The new law doesn’t take effect until the rules are established. The Securities and Exchange Commission has until January 2013 to define how the legislation will be enforced. Considering that SEC Chairman Mary Schapiro has been vocally opposed to the law, rules to protect investors are likely to be stringent.
2. Plenty of Yahoo Small Business Advisor readers' companies would fall into the newly created category of “emerging growth companies” by virtue of having under $1 billion in annual revenues, but only the tiny percentage of those who are interested in making an initial public offering will care about that aspect of the bill.
For most small businesses on the scale of the mom-and-pop shop, the bill’s crowdfunding measure is the main point of interest. The Crowdfunding Act included in the JOBS package permits companies to raise up to a total of $1 million in small stake investments from large groups of unaccredited investors without registering with the SEC or providing audited financial statements.
Today a group of 13 crowdfunding platforms and industry experts announced they have come together under the umbrella of the Crowdfunding Accreditation for Platform Standards program to develop a self-regulatory organization that hopes to collaborate with the SEC on developing industry standards.
3. If you're an entrepreneur hoping to use crowdfunding to raise capital for a startup or existing business, it’s not too early to start looking into how you will do that. Several sites have already launched in anticipation of equity-based crowdfunding being legalized. You can sign up now to get emails and news from them about how to participate. They include EarlyShares, Crowdfunder, CircleUp, and WeFunder.
There are also businesses at the ready to help you comply with JOBS Acts rules once they’re written. One organization, CrowdfundingRoadmap.com, promises cloud-based, turnkey technology to help you navigate your way. Crowd Fund Advisors, offers to help you design your pitch and choose a crowdfunding portal.
To be sure, non-equity-based crowdfunding (known as donor-based or rewards-based crowdfunding) is already widespread, and success stories abound. In a market study published last week, The Daily Crowdsource reported that projects raised more than $102 million on rewards-based crowdfunding platforms in 2011.
If you’re not familiar with the existing platforms and approaches that the most successful projects are employing to win funding, check out sites like IndieGoGo, RocketHub and Kickstarter to see what the fuss is all about.
4. Another potentially useful aspect of the law to small businesses is the elimination of an SEC ban that prevents them from using advertisements to solicit investors.
An anecdote from journalist Amy Cortese’s book Locavesting best explains why this could be interesting to mom-and-pops. Cortese tells the story of Dante Hesse, the proprietor of Milk Thistle Farm, in Ghent, New York, with $750,000 in annual sales. In 2008, rejected by banks for a loan to expand his organic dairy cow operation, Hesse tacked up a short note at a farmer’s market to let his loyal customers know he was looking for investors.
But that was a violation of SEC rules. Cortese writes, “Little did Hesse know he was on his way to becoming a white-collar criminal.” Come 2013, however, business people like Hesse would be in the clear. The JOBS Act changes a longstanding SEC prohibition against private businesses soliciting funds from the public without going through a costly registration process. It means small businesses can look to their communities for support, and that members of a community can more easily invest in local businesses instead of getting mixed up in all that fraud on Wall Street.