The JOBS Act, passed in 2012, is intended to lift regulation and make it easier for firms to raise money. A new part of the law just went into effect.
The JOBS Act, a 2012 law intended to promote start-up and small business activity, is chugging forward. The latest piece to go into effect makes it possible for entrepreneurs to use advertising – anything from tweets to t-shirts to TV — to seek investors for their company. Some start-ups are already exploring creative ideas, like putting T-shirts on window washers.
Here’s what you need to know:
It’s now legal to advertise but only wealthy people can invest
In the 1930′s, the federal government banned private companies from advertising shares to prevent scams. The SEC has now lifted that ban, meaning entrepreneurs — anyone from start-ups to hedge funds — can use billboards and other types of ads to seek capital.
But only “accredited investors” — people worth more than $1 million (not counting their home) or who make more than $200K a year — can buy shares. Companies have to take reasonable steps to ensure investors meet this criteria.
There are still some formal SEC requirements
Companies seeking money must file a Form D with the SEC 15 days before seeking investment. They must then file an amended form 30 days after the offering is terminated. The SEC will use these forms as data to evaluate the system. (The SEC’s full list of rules is here.)
Other important parts of the JOBS Act have yet to go into effect
The Jumpstart Our Business Start-ups law also contains a provision to let companies raise up to $1 million through crowd-funding — this would open up the door to all investors, no matter how small. Regulators, however, have yet to grant formal approval. But, for now, companies can still crowd-fund through sites like Kickstarter so long as they don’t grant equity in the company.
The advertising provisions are also likely to benefit companies like FundersClub, which lists companies seeking funding; in March, the SEC confirmed its business model was legal.
More useful reads
The Wall Street Journal profiles a popcorn start-up and others that describe how they plan to advertise — including T-shirts on window washers.
The New York Times has an overview of how the rules will affect the capital markets as well as quotes from critics.