This is a complicated law. The SEC is charged with writing a number of regulations. Until they are written, we can’t know exactly how the law will affect entrepreneurs and angels. But there are key changes that have the possibility of making it easier for Idaho entrepreneurs to sell stock.
First let’s review pre-JOBS law. Under those laws, you may not sell stock unless it is registered with the SEC (an expensive and time consuming process) or qualifies for an exemption. Broadly speaking, there are two exemptions that are commonly used:
1. Offer stock only to accredited investors (generally a net worth of more than $1 million excluding the equity in the primary residence) in private transactions. A private transaction means there can be no general solicitation including advertising or the use of the Internet.
2. Offer the stock only to residents of one state in which case state law applies but federal law does not.
I wrote earlier about these two exemptions (see "State Small Corporation Registration" posted December 29, 2011).
The JOBS act removes the need for both of these exemptions for many businesses. It
1. Allows equity-based crowd funding.
2. Removes prohibitions on general solicitation.
Crowd funding is where an entrepreneur uses the Internet to solicit relatively small amounts from the universe of Internet users. Until the JOBS act was passed, this was illegal in that offers were being made to individuals who were not accredited investors, and of course, the Internet is a means of general solicitation. There are crowd funding platforms, but they ask for “donations,” not for the purchase of stock.
The JOBS allows up to $1 million of capital to be raised from non-accredited investors, so long as each individual investor does not invest more than the lesser of $10,000 or 10% individual investment on all such investments during any one year. It also allows general advertising and preempts state law so this device can be used to raise money from throughout the US.
It's not clear how the issuer will make sure a non-accredited investor has not invested more than $10,000 in all crowd-funded investments in any one year. The funding platform will have to be registered with the SEC, but it's not yet clear what this means or what obligations will be imposed upon the platform.
For offerings of more than $1 million, or where the company does not wish to be restricted to $10,000 per investor, a company may still use the accredited investor exemption, but is now allowed to advertise so long as the ads are focused on accredited investors.
We won’t know for sure how these new permitted activities will impact local entrepreneurs until the regulations are written. But generally I believe they will have a positive impact, making it easier for local entrepreneurs to raise equity capital.
Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center (www.idahosbdc.org) at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital (www.looncreekcapital.com), which assists angels in forming angel funds. He can be reached by email to firstname.lastname@example.org or by phone at 208-426-3875.