During college I had to pitch a website idea in a class I was taking. My idea was to build a crowd-invest website where average investors could invest in risky start-ups. At the time, investors has to be accredited [wealthy] investors in order to be able to invest in start-ups due to security trading rules. These rules were put in place to protector investors from being taken advantage of. They figure that if someone had enough money, they could appropriate assess the risks of their investment (or pay someone to do it) and they wouldn’t be destitute if the investment failed. My idea to get around this regulation was that investors could only invest a small sum of money (let’s say up to $1k) in any one company. The website would essentially be the of equity. Years later, it seems that other people held the same idea, and this idea finally made its way into legislation as the Jumpstart Our Business Startups Act, or appropriately, JOBS Act (and sometimes referred to as the Crowdfund Act). Unlike most bills that make their way through Congress, the JOBS Act actually had bipartisan support, passing 390-23 in the House. Like most bills, this one has various components, some of which I think are beneficial, and others which are not.
Crowd Funding for Start-Ups
Companies can Work Out Disagreements with SEC in Secrecy
Previously, as was the case with Groupon, the SEC has been transparent when disputes arise about a company’s application of accounting standards. This has been beneficial to investors during the IPO process because it’s information that investors need in order to make accurate decisions about their investments. Under the JOBS Acts, companies will now be able to work through issues with the SEC in secrecy, although they must still be disclosed 21 days before an IPO. I think that this is adequate time for any investor to utilize the information so it doesn’t harm consumers at all. It also helps businesses and makes going public more appealing because they do not have to reveal some of their secrets to competitors quite so early.
Exemption from Disclosures for Emerging Growth Companies
Under the JOBS Acts, ’emerging growth companies’, which are companies with gross revenues under $1 million, are exempt from certain disclosures for the first five years. The bill also amended the Sarbanes-Oxley Act of 2002 (which was enacted after Enron and WorldCom scandals) to exempt these emerging growth companies from internal controls audits. While I understand that it is cost prohibitive for these companies to have internal control audits and make full disclosures (with a full audit), I think it’s necessary because these companies are some of the riskiest. These companies will also be experiencing growing pains and expanding their accounting departments, which means they’ll have terrible internal controls. Trust me, I was an auditor. I could see this being passed for companies with less than $300 million in revenue, but $1 billion is a decent-sized company. I think this is a threat to investors, and if I were investing in small companies, it would definitely make me pause before investing in any companies with less than $1 billion in revenue. Heck, it may keep me from investing in these emerging growth companies at all.
Overall, I think the Jumpstart Our Business Startups Act is beneficial to both investors and businesses. However, there are some parts of it, like the emerging growth company disclosure exemptions, that should not have been added to the bill. But at this point, I realize that no bill ever comes out 100% pure, and someone always has to slide something slimy into a good bill. I’m excited to see the crowdfunding platforms that come out in the next year and I think I’ll consider investing in a few small companies just to get my feet wet.