What You Need to Know About the American Jobs Act
The new law makes life easier for startup companies and by extension, encourages them to create jobs.
The JOBS Act is actually a misnomer. Rather than trying to address the nagging problem (and difficult politics) of high unemployment in the country head-on, it attacks it indirectly. Somewhat redundantly, JOBS stands for “Jumpstart Our Business Startups,” and it’s not a single act but a six-bill package. Collectively, the aim of the six is to help early-stage enterprises more easily reach the later phases of development.
The act, in a nutshell, covers the following:
Crowdfunding – This is a term of recent vintage that means what it implies – funding from a number of sources, more often than not individuals. This has become an increasingly popular and effective way to finance small-scale individual projects like short films, music albums and books. This is generally effected through online portals such as Kickstarter.
The act now authorizes crowdfunding for businesses as well; they’re allowed to raise up to $1 million per year this way or $2 million if their crowdfunders are provided with audited financial statements.
A new type of firm – The bills create a fresh category of enterprise, the “emerging growth company." To qualify, a company must have less than $1 billion in revenues before being floated on the stock exchange. Once the firm goes public, it remains an emerging growth company for five years or when it hits that $1 billion revenue target, whichever comes first. EGC’s will be exempt from several restrictive securities laws such as the requirement to hire an outside auditor to verify the competence of internal financial controls, and the right of shareholders to vote on executive compensation.
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Advertising – The bill ends the ban on advertising or direct solicitation for companies looking to raise equity capital.
Reg A floats – This refers to the Securities and Administration’s (SEC) Regulation A, which limits the amount of money raised in a so-called “mini," or early-stage, initial public offering. The new laws raise this limit to $50 million, and also exempt the IPO from certain regulations as long as the shares are sold to “qualified purchasers." The catch is, at the moment the law doesn’t nail down what exactly a “qualified purchaser” is. This is to be specified at some point in the future.
SEC registration requirements – Before the act, companies with 500 shareholders of record and $10 million in assets must register their common stock with the SEC and regularly issue reports on their finances. Although the $10 million threshold remains, the former figure has been raised to either 2,000 “regular” shareholders or 500 that are not accredited investors.
Community banks – This provision is somewhat off-target considering that it deals with local banks and not startup companies. Similar to the new SEC registration requirements above, the limit in the number of shareholders invested in a community bank has been raised from the former 500 to 2,000.
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Rarely for a piece of legislation in these days of cutthroat, us-versus-them politics, the JOBS Act attracted widespread support on both sides of the legislative aisle and passed by a wide margin in Congress before being signed into law by President Obama. Although there was some vocal opposition from labor unions and the AARP, the act generally enjoyed significant backing, particularly from the business community.
Many of those who helped the bill become law (including the president) touted it as a potential job creator, and it’s easy to see why. Small and mid-sized businesses are the rocket fuel of any economy, and they can be powerful job creators. This is because, ideally, they take on workers exponentially as they grow bigger. Although unemployment has been easing recently, it never hurts to provide more chances for businesses to expand and hence boost their employment rolls. On the surface of it, the JOBS Act is a step in the right direction; hopefully it’ll create the thousands of jobs its supporters claim it will.