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By: Kun Zhao, Esq.

On April 5, 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. The law provides many exemptions and lifts many restrictions under securities laws which allow small businesses and startups to access capital market more easily. The law provides an easy option called “Crowdfunding” for startups and small businesses to raise capital publicly by issuing securities online without registration with the Security Exchange Commission (SEC).

It exempts small offers or the sale of securities by an issuer (a startup or small business) from registration with the SEC, provided that:

(1)   The aggregate amount of securities sold during the 12-month period does not exceed $1,000,000.

(2)   Any investor that makes under $100,000 per year or whose net worth is less than $100,000 can only invest the greater of 2,000 or 5% of the annual income or net worth; 10% of the annual income or net worth if the investor’s annual income or net worth is $100,000 or more.

(3)   The sale or offer must be through a broker or funding portal (website) that is registered with the SEC.

(4)   The securities acquired generally may not be transferred within one year from the date of purchase.

To be exempted under this law, the small business or startup is required to provide to the SEC, investors and the relevant broker of the funding portal, information that is necessary for the investors to decide whether they want to acquire a piece of the company, including the capital structure, financial information, a business plan, and the offering itself. The small business or startup can not advertise the offering except for notices that direct investors to the funding portal or broker.

The broker and funding portal are required by law to make sure the investors are protected by conducting a background check of the securities, enforcement and regulatory history of each person on the management team and the major shareholders, verifying and disclosing information provided by the issuer, affirming that the investors understand the risk of the investment.

The SEC is going to have about 270 days from the enactment date to set forth specific rules and regulations to implement the law. The legislation is expected to be fully implemented by early 2013.

While small businesses and startups will gain a new avenue for raising capital, investor relations will pose a significant new challenge to management. Overnight, management will have to answer to and will owe a fiduciary duty to hundreds of shareholders who will have the right to access corporate information and have a say on how to run the business.