With the signing of the JOBS Act 2012 (Jumpstart Our Business Startups), the ability for smaller companies to raise money—and financial institutions to get in trouble—just got easier.
Recent studies have shown a substantial decrease in the number of IPOs and start-up capital formation in recent years, both home-grown and from abroad. While acknowledging that the financial crisis has naturally affected capital-raising demand, authorities blame the inhospitable environment for the decline in corporate issues. Some of the major hurdles facing small corporations are
- The cost of Sarbanes-Oxley compliance
- The lack of research coverage
- Lower trading profits for intermediaries resulting from changes in the marketplace.
At a time when unemployment continues to hover near record numbers, the Administration and Congress recognize the urgency in helping to get start-ups (frequently the driver of economic growth) back on track.
What the JOBS Act Aims to Do
The Act attempts to address these hurdles with three dramatic changes, taking a couple of steps back in terms of compliance to relieve the smaller corporations of compliance burdens when seeking to raise equity.
As startling as the changes themselves is the breadth of the companies affected by the new regulation. The Wall Street Journal calculates that fully 97% of the companies in the United States were transfigured by the Act, from run-of-the-mill corporations to “Emerging Growth Companies” or EGC. In fact, the law designates every business earning less than $1 billion in revenue per year an EGC. That means that in 2011 over 90% of America’s 107 IPOs would have qualified for relief under the new JOBS Act.
What are the three revisions to the fund-raising process?
- Reduction in disclosure requirements
- Removal of restrictions on analyst coverage by underwriters
- Introduction of a new “crowd-funding” process that will allow start-ups to attract small investors through online sites and social media
These changes unwind some of the requirements imposed as a result of the Sarbanes-Oxley Act. That decade-old Act was instituted as a result of the fraud surrounding such infamous fraud cases as Enron and WorldCom. Some critics of the new JOBS Act suggest that by removing the restraints we may be inviting fraud back into our fund raising process.
Ann Longmore and I will examine each of these revisions in individual articles over the coming weeks and discussing their potential impact and insurance ramifications.