8 Reasons You Should Care About the JOBS Act

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We live in a time where bipartisan action, such as the passage by both Houses and signing by President Obama last Thursday of the JOBS (Jumpstart Our Business Startups) Act, is viewed by consumer advocates with suspicion, if not outright scorn. We are in an election year, and that's usually what it takes for Congress and the Senate to pass any sort of meaningful legislation, even when that legislation does more to benefit Wall Street and the banking industry than "Main Street" and "mom and pop shops." The JOBS Act — you can read the text of the legislation here — is being touted as a jobs creation bill that makes it easier for "emerging growth companies" to raise capital and grow. But there's more to the bill than just political rhetoric. Here are eight things you should know about the JOBS Act, which goes into effect in 2013. (Photo by jurvetson licensed though Creative Commons.)

  1. The bill redefines crowd funding

    Crowdfunding sites, such as Kickstarter and Indiegogo, are delighted with the JOBS Act for the simple reason that small businesses or startups as they are defined by the bill, and we will take a look at that definition later, will now be able to offer backers shares in company stock return for their support. Using a crowdfunding platform, a startup can now raise up to $1 million. Investors with a net worth less than $100,000 can invest 5% of their annual income or $2,000, whichever is higher. Wealthier people can invest up to 10% of their income. Crowdfunding platforms will be required to register with the SEC (Security and Exchange Commission), and as an industry, are considering methods for self-regulation, since the potential for online scams is great.

  2. Get ready for lots of unsolicited ads!

    The bill lifts a ban on advertising to the general public about investment opportunities, including hedge funds, which had been banned from advertising their offerings in order to be exempt from registering their shares and interests with the SEC. There are some rules in place, and more restrictions on such advertising may be implemented by the SEC in the coming month. But critics are concerned that inexperienced, unprepared investors will be lured by false advertising to become victims of fraud.

  3. Senior citizens should beware

    In a letter to congressional leaders, Joyce Rogers, AARP (American Association of Retired Persons) senior vice president for government affairs expressed concern that loosening regulations on what the JOBS Act defines as small businesses or startups will "open the floodgates to a repeat of the kind of penny stock and other 'boiler room' frauds that have ensnared financially unsophisticated and vulnerable investors in the past." She reminded congress that senior citizens are "disproportionately represented among victims of securities fraud."

  4. You won't have to be an accredited investor to invest in a start-up

    With the JOBS Act, those who do not meet the criteria of an "accredited investor" as defined by the SEC can invest in startups through crowd funding. Advocates of the bill believe this will be a boon to small businesses and give them access to potentially millions of investors. But, consumer advocates are sounding the alarm, as there is potential for non-accredited investors to lose money in their investments. "Venture capital funds lose money in six to seven of every 10 companies they back," says Barbara Roper, director of investor protection for the Consumer Federation of America. "And these are experts. How do you think the average investor is going to do?"

  5. Executives won't be accountable for misrepresenting public offerings

    Huh? Yes, it's true. Now to be clear, before going public, a company will have to release an official prospectus, which in case you don't know, is a document that must reveal all aspects of a company's business and game plan, the good, the bad, and the ugly. They're also hard to decipher, as they're written mostly by lawyers. However, presentations to promote public offerings, be they PowerPoint slideshows or slick, colorful brochures, need not be as complete or as accurate as the prospectus, and more tellingly, people providing potential investors with such promotional tools will not be held accountable for any misrepresentations down the line. So backers should look hard at a startups prospectus before parting with any hard earned savings.

  6. The SEC can't police this

    After signing the JOBS Act, in an effort to reassure Americans concerned about getting taken advantage of by unscrupulous companies and banks, President Obama said, "…these startups and small businesses will be subject to rigorous oversight. The SEC is going to play an important role in implementing this bill." But the SEC lacks the money and resources to scrutinize what will be countless small, local offerings before they go public. To make matters worse, state regulators are prevented by the bill from reviewing or registering securities sold through crowdfunding. Crowdfunding sites believe "crowdsourcing" and social networks will effectively flag fraudulent offerings and provide regulation of the securities markets. If you just rolled your eyes after reading that statement, you're probably not alone.

  7. Start-up companies are exempt from independent accounting requirements for up to five years after they begin selling shares in the stock market

    Here's where we get to the JOBS Act's definition of a "small business" or "startup" (these are actually referred to in the bill as "emerging growth companies"). According to the bill, an emerging growth company is any company making up $1 billion in revenues. Does your local independent bookstore pull in $1 billion annually? How about your favorite after-hours pizza place? A company earning close to a billion dollars in revenue that is exempt from independent accounting requirements is a company that can lie about its profits, losses, and even how it makes or loses money in the first place.

  8. It's not all bad?

    There is a vision in this bill, in spite of the fact that it seems to favor Wall Street, big banks, and, well, criminals. Private startups can now attempt to raise as much as a million dollars through crowd funding. Backers can invest in their local independent bookstore as well as projects that are for social good. Social networking, which we maligned above, may serve to vet and eradicate cheats, and promote projects fully deserving of support. However, as we saw with Kony 2012, reality and how reality is represented on the Internet can be two very different things.

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