A fine example of unintended consequences, the JOBS act (Jumpstart Our Business Startups) was supposed to make it easier for startup companies to raise capital and to talk about their financing needs without getting into hot water with the SEC. The law was passed with bipartisan support, and was signed into law by President Obama on April 5, 2012.
As this GeekWire article points out, the new law has made it somewhat easier for startups to conduct IPOs. Unfortunately, that’s the last thing a startup does before it gets transformed into a public company.
The provisions of the JOBS act can actually jeopardize the fundraising activities of a startup during the critically important early stage, before significant capital has been raised and probably before the companies can afford expensive attorneys to advise them.
The main issue with the JOBS act from a startup perspective is that it has complicated rather than simplified the rules around “general solicitation,” the prohibition against publicly offering equity in the company in exchange for investment. The prohibition applies to participation in pitch events, very common forums where startup CEOs present their pitches to a crowd containing a mixture of people, including (it is hoped) a few angel investors.
At least one Internet-based angel investor “crowdsourcing” site, Poliwogg, is counting on the new law to attract novice angel investors to its online marketplace for healthcare company investment opportunities. It remains to be seen if the details of the regulations have a chilling effect on what could be an important resource for early stage startups and for prospective angel investors.
Dan Rosen, a prominent Seattle angel investor who was interviewed for the GeekWire article, pointed out that the “death sentence” can occur if a startup makes two mistakes regarding general solicitation. The penalty from the SEC is a one year prohibition against fundraising. That would sink most startups.
What’s next? A number of organizations are lobbying for changes to the law or at least a more lenient interpretation by the SEC. Given the polarized climate in Washington, D.C., it may take some time for this issue to be resolved.
Takeaways: Startup CEOs should educate themselves about the provisions of the JOBS act as it applies to them. As the saying goes, ignorance of the law is no excuse. I’ve been reading the blog of a Seattle attorney who has a special interest in this matter, William Carleton. You can reach his blog here: http://www.wac6.com/ It’s also wise to engage a corporate attorney who is experienced in startups and startup financing law. Yes it’s expensive but it may be the best insurance you can buy for your startup.