JOBS Act will ease IPOs, Crowdfunding; Introducing the "Funding Portal"

I told a friend a long time ago, "The day I start blogging will be the day Congress passes a bipartisan, business-friendly law."  Against all odds, the House yesterday passed the JOBS Act, so I guess I have to start blogging.

The JOBS Act made news as it worked its way through Congress mainly because it promised to give start-ups the ability to raise money online from anyone - directly from visitors to their websites, or using "crowdfunding" websites that would simply advertise the start-up business and take investments by credit card.  The final law doesn't go quite that far (more on that below).

I'm a fan of the JOBS Act, but it will be hard to tell whether it actually creates jobs.  The full name of the law by the way is the "Jumpstart Our Business Startups Act".  The names of laws are always contrived, but this one was a real stretch. I heard it derives from a bar in D.C. where 12 staffers struggled for an acronym over four rounds of martinis before the bartender finally chimed in and said, "How about 'Jumpstart'?"

NEW IPO RULES:  The JOBS Act will make it easier for companies with under $1 billion in annual sales ("emerging growth companies") to go public and will make it easier for smaller companies and start-ups to raise money from "accredited investors" and institutions. These changes are likely to be good for the capital markets and growth businesses.  The law also allows emerging growth companies to file IPO registration statements on a confidential basis for SEC review and delay the disclosure of filings until three weeks before a roadshow.  The law also will relax the rules that restrict securities analysts from meeting with and publishing research about emerging growth companies pre- and post-IPO. It's very hard to connect those last two provisions with any new job creation, except perhaps creation of future opportunities for class-action lawyers.

CROWDFUNDING: The final bill that will go to President Obama for signature includes amendments by the Senate which make crowdfunding a lot less sexy than it would have been under the original House bill. Under the House bill, a start-up company could have raised up to $1 million (double that if it has audited financial statements) through its own website by posting some basic information and disclaimers and allowing investors to fill in an online form.  This might have been a bonanza opportunity for everyone from launchrock to volusion to rockethub.  It also might have threatened the ability of angel investment and incubator firms to attract the cream of the start-up crop. Heck, I was ready to roll out my crowdfunding Javascript widget for a mere $99 per download.

Then the Senate fuddy-duddies stepped in. Now, under the final bill, entrepreneurs can't sell shares to the masses on their own. Businesses must use either a broker or a new animal called a "Funding Portal".  A Funding Portal can be a start-up web business itself. It doesn't have to be a registered broker-dealer. But it does have to comply with a list of regulations.  Among other things, these start-up funding websites must (1) register with FINRA (formerly the NASD) or other self-regulating securities dealer association; (2) comply with yet-to-be-written SEC rules (due out in about 9 months); (3) guard the private information and personal data of investors; and (4) have no financial stake in the company raising money.

And if you have a business with an exciting new product or service and would like to raise up to a million dollars from your Twitter followers using one of these Funding Portals, what do you have to do?  Well, we don't know for sure until the SEC issues its rules in about 9 months. But the law makes one thing clear: if you are an officer or director of a company that raises money this way, you are personally liable for any false or misleading statements that result in a claim by an investor.  So the securities laws actually will continue to apply to start-ups, even the ones destined to change the world.

For the attorneys, bloggers and algophilists among you, here's a link to a PDF of the final bill that passed: http://1.usa.gov/JOBSActFinalBill.

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