Entrepreneurs across the country got a reprieve April 5th from abusive business barriers that have plagued not just corporate America, but startup and fast-growth companies alike. As a result of President Obama signing into law the Jumpstart Our Business Startups (JOBS) Act, the path to new sources of capital, including an IPO (initial public offering), is not only much clearer but also, potentially, a more realistic strategy for entrepreneurial companies. The new law makes the Sarbanes-Oxley rules, which were put in place in the early 2000s, nearly moot. According to a Fox Business News report, “the bill eases corporate governance and financial reporting requirements for initial public offerings, while also loosening a variety of other rules designed to make it easier for private companies to raise capital without an IPO.”
Georgia-based companies are sure to be impacted, as the state is recognized as one of the county’s leading entrepreneurial hot-beds, especially for technology companies. According to Kurt Huntzinger, head of Habif, Arogeti & Wynne LLP’s public companies practice, “Every big company started out small. The more the government can clear bureaucratic obstacles for companies to access capital, thereby enabling them to grow, the better for our national economy. The banks are still reticent to lend, so being able to go to the capital markets in an easier way, means that companies have more options for funding growth.”
Like many prior pieces of legislation, the JOBS Act is an amalgam of loosely related ideas and reforms all tied up in a nice, neat bow. Two of the more interesting aspects of the law actually work in opposite directions regarding the IPO process.
Trail Blazed for Fan Funding
The first interesting aspect is that the JOBS Act essentially legalizes crowdfunding, a vehicle to help companies issue securities (a financial instrument representing value) in exchange for cash to fund their business. As an example, any Average Joe (i.e., a non-accredited investor) can either chip in up to 10 percent of his annual income or $10,000 (whichever is less), in return for a small stake in a startup. Like any other investor, our Average Joe is agreeing to fund the company’s growth today in the hope that his stake increases in value over time.
Mitchell Kopelman, head of Habif, Arogeti & Wynne’s technology practice, has coined the term “fan funding,” as a result of this Act being signed into law. Fan funding is a more refined approach to crowdfunding for startups who don’t have friends and family members to tap, aren’t the right size for angel investors and don’t have a large enough management team to attract professional investors like VCs and PEs.
For example, a smartphone application company may have an app that has 100,000 users globally and an additional 75,000 fans on Facebook and Twitter. As a result of the JOBS Act, that smartphone app company’s fans can now become investors and have an equity stake in their favorite app. “The JOBS Act gives young technology companies another viable avenue for capital, exempt from SOX red-tape. Fan funding, as a new capital category, is going to be an important driver of startup growth,” said Kopelman.
It is important to note that companies seeking crowdfunding investments need to file with the Securities and Exchange Commission (”SEC”) and restrict their crowdfunding financing to $1 million a year, or $2 million if they file audited financial statements.
More Shareholders is Good News for Talent Acquisition
Currently, private companies with over 500 shareholders and $10 million in assets are oftentimes compelled to go public. Young companies, short on cash, that attract top talent with stock options, can quickly find themselves at the brink of this limit, potentially forcing them to enter the public markets before they’re ready. The JOBS Act raises this shareholder cap to 2000. Private companies will likely benefit substantially from this reform, as a larger, more robust market for the shares of private companies is sure to develop over time.
What You Need to Know
- A company using crowdfunding must file with the SEC and include the names of the directors, officers and any shareholder with more than 20 percent of the company’s stock, as well as a description of the business and its financial condition.
- A company looking to raise $100,000 or less will need to provide a financial statement certified by a company principal and tax returns.
- A company looking to raise up to $500,000 will need to provide a financial statement that is reviewed by a CPA.
- A company looking to raise more than $500,000 will need to provide a financial statement that is audited by a CPA.
The most recent recession has clearly taught us that when small businesses suffer, the economy as a whole is slower to recover. The easier it is for small businesses to be successful and grow, the better in the long-run for the macro economy. It is small businesses that hire, and as they grow, their hiring will increase if government restrictions and regulations are removed.
This article was written by Kurt Huntzinger and Mitchell Kopelman of Habif, Arogeti & Wynne, LLP, an ATDC sponsor company.