Entrepreneurs and small-business advocates had hoped the Jumpstart Our Business Startups (JOBS) Act, which President Obama signed into law in April 2012, would be a boon for startups needing financing. But with the Securities and Exchange Commission still hammering out the rules on equity crowdfunding--the proposed initial regulations were too costly and cumbersome for many small startups--the law hasn't exactly ignited a bonanza of new businesses. Two years later, here's our progress report.
The good news: Title II of the JOBS Act went into effect in September 2013, allowing private companies to publicly advertise that they're raising capital. This general solicitation rule has greatly benefited 'treps seeking accredited investors; no longer must they keep mum in public forums about their fundraising efforts for fear of breaking securities laws.
"Title II seems to be working," says Chris Tyrrell, chair of advocacy group Crowdfund Intermediary Regulatory Advocates, founded after the signing of the JOBS Act. "In the first seven months of operation, over $100 billion in private offerings used some part of Title II."
That's not to say startups are buying billboards or magazine ads to publicize their fundraising efforts. But social media platforms--Twitter and LinkedIn in particular--have become breeding grounds for startups announcing their offerings, says Sara Hanks, CEO and founder of CrowdCheck, a due-diligence service for crowdfunding and other online alternative investments.
Another cause for celebration is the skyrocketing growth of rewards-based crowdfunding, which surely received a boost from all the publicity surrounding the JOBS Act, Tyrrell says. In 2013 alone, crowdfunding platforms raised $5.1 billion, according to crowdfunding site Fundable.
The bad news: Startups, brokers and crowdfunding platforms remain frustrated by excessive red tape and compliance costs for small businesses that wish to raise cash from the crowd--specifically, up to $1 million a year from unaccredited investors. For example, the proposed rules require that financial statements for crowdfunding securities investments be prepared using U.S. Generally Accepted Accounting Principles.
"For a lot of small businesses, this just does not make sense," says Karen Kerrigan, president and CEO of the Small Business and Entrepreneurship Council, a Washington, D.C., advocacy group. "It really is overcomplicated and burdensome."
Also cause for concern, Kerrigan says, are overly extensive disclosure requirements and mandatory annual reports for startups, as well as the inability of crowdfunding portals to curate sound investment opportunities.
Entrepreneurial advocates appreciate the SEC's need to protect unseasoned investors from fraud--and that capital is never free. But, as Tyrrell puts it, "When you look at how expensive it is under the existing rule structure to do a raise, I think that the costs may be prohibitive for companies, particularly at the smaller end of the spectrum."
In other words, the very companies that the JOBS Act was meant to help can't afford to follow the law.
What's next: SEC chair Mary Jo White has pledged to make finalizing Title III, which addresses some of the pain points above, a priority this year. That has many crowdfunding advocates hopeful. "So far," Tyrrell points out, "Chair White has been a woman of her word."