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A number of my small business clients have been asking me how the recently passed Jobs Act can help them obtain funding. Specifically, they are asking if the Jobs Act allows them to more easily sell a portion of their company's stock in order to solve their immediate cash flow challenges.
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More traditional means of obtaining operating cash are failing like never before. Money is scarce in today's economy. The banks aren't lending. Investors seem unwilling to take any risk. It seems you can only find cash when you have so much collateral you don't need any cash in the first place.
Does the Jobs Act give suffering small businesses hope for finding cash crunch respite? Haven't the SEC rules for selling stock been eased by the Jobs Act? The answer is we don't yet know.
Though the Jobs Act (the "Jumpstart Our Business Startups Act") was passed and signed by President Obama on April 5, 2012, we still don't know exactly how small businesses can more easily go about selling their stock in order to obtain much needed operating capital. The SEC still has to publish all the regulations, and it has until the end of 2012 to produce them.
What the Jobs Act will really say in practice is still up in the air. To make matters potentially worse, word on the street is that the SEC is falling behind on the job. The regulations might not be published until sometime in 2013.
So how will the Jobs Act really help small businesses sell stock?
Assuming the SEC regulations, when finally published, don't make selling small business stock more difficult than it is worth, crowdfunding opportunities will become available that are currently prohibited. If all goes well, small businesses may soon be selling their stock through a number of easy to access online opportunities!
Nevertheless, right now, if you are a shareholder in a small corporation, you can't just go solicit investors online. Rule 506 of Regulation D and Rule 144A of the Securities Act of 1933 forbid it. A General Solicitation and General Advertising Ban are currently in place, at least until the new SEC regulations we are awaiting are published and put into effect.
Caveat, there will still be a registration process put into place. We will know exactly what it is when the SEC is finished drafting its regulations. The hope is that the spirit of the Jobs Act won't be too muddled and bogged down by the SEC's rulemaking. So, fingers crossed, when the time comes, small companies will be able to do the following.
- Fill out a simple application and registration ("Simplified Registration") that is filed with the SEC and quickly approved
- Take advantage of online crowdfunding opportunities. Go online, showcase your business, and do a mini IPO!
- Sell stock to as many as 500 "unaccredited" shareholders, or a total of 2000 mixed shareholders
- Raise as much as $50,000,000 before having to comply with traditional trading laws, rules and regulations
Ultimately, the big question is how complex and tedious this "Simplified Registration" process will be, as well as how difficult it will be to engage in crowdfunding opportunities. Even the crowdfunding opportunities, which will be known by names such as "independent stock markets" will still be regulated by the SEC. We just still don't know how heavy-handed this regulation will be.
How can you prepare to go mini IPO?
Even though there are still many unknowns, namely how heavy-handed the SEC will be with its drafting of the Jobs Act regulations, there are a few things small companies can do in anticipation of taking advantage of new mini IPO and crowdfunding opportunities:
- Due diligence. Be sure to have all your tax returns filed and all of your financial statements in order. Be able to document everything about your company. Are all of your contracts filed in one place and listed? Your leases? Do you have a complete customer list? Have you done a complete inventory? Can you show me a detailed list of equipment? Who has loaned your company money? Can you produce a list of promissory notes showing all parties, amounts, and terms?
- Potential investors. Have you made a list of all the individuals, banks, and institutions that may wish to purchase your stock when the time comes? Who will buy your stock?
- Marketing materials. If you don't have a handsome color brochure that details what your company is all about, including a review of your products and services, your customer base, the market you are in, where your company is going as well as its vision, you better get started! Go talk to someone like my friend Andrew Kolikoff if you need help. He's been on top of all the Jobs Act research and knows how to best package a business.