JOBS Act Part I: Regulating Crowd Funding So Small Businesses and Investors Can Win

By Amber Eanes

President Obama signed the JOBS Act bill in April 2012, but it has yet to take full effect as we wait for the SEC to develop regulations. The purpose of the JOBS Act is to enable small businesses and startups to raise capital and gather investors through crowd-funding: selling small amounts of equity to many investors in order to fund a company.

The idea behind the legislation is to increase the American emerging markets sector. This sector in the United States officially includes “emerging growth companies,” which is defined by the SEC as a company with less than $1 billion in total gross revenue on a yearly basis. If you consider participating in crowd-funding, it is important to remember that extra risk is associated with these emerging growth companies. While you may be investing smaller amounts of capital in these startups it is highly likely that if you lose, you will lose everything. For instance, 85% of small businesses will fail within the first year, showing the higher risk of a total loss when putting equity into these small startups.

The JOBS Act is pioneering legislation because it is the first time individual investors in the United States will actually be able to purchase equity in startup companies that have not gone through the expense of SEC registration. The novelty of the act increases the need for the SEC to regulate in a way that balances investor protection with the interests of small business owners seeking to raise capital, as we do not know how either will be affected. Without appropriate regulation, the legislation could end badly with possible scams and exploitation of unsophisticated investors. The SEC is supposed to have its regulations for implementation in place by December 2013, but until this time investors should invest cautiously, taking into consideration the risk of total investment loss.