Download The New Landscape for Business Startups and Their Investors

Raymond James & Associates, Inc.
Andrew J. Bilotta, Jr., CFP®
Senior Vice President, Investments
744 West Lancaster Ave
Suite 120
Wayne, PA 19087
610-293-7260
[email protected]
paxpartnersrja.com
The New Landscape for Business Startups
and Their Investors
You may have heard that the Jumpstart Our Business Startups (JOBS) Act, which was signed into law by President
Obama on April 5, 2012, makes it easier for companies to attract investors, particularly smaller companies. But just
what does that mean to you if you're trying to grow your small business? And if you're contemplating making an
investment in an early-stage business, what should you be aware of? Though some of the provisions will be subject
to regulations yet to be developed, here are the general provisions of the Act.
Looser reporting/registration requirements for companies
Companies with at least $10 million in assets and fewer than 500 "unaccredited" shareholders (not including
employees who hold shares) or 2,000 total shareholders generally will no longer be required to register with the
Securities and Exchange Commission (SEC). By exempting smaller companies from registration requirements, the
Act enables them to bypass many SEC regulations that are designed to increase transparency and protect investors but that also are
demanding and expensive for smaller companies. The Act also enables companies to offer up to $50 million worth of stock annually
using streamlined registration procedures; the previous limit required any offering over $5 million a year to file a full federal registration.
The Act also permits companies to advertise unregistered private placements to the general public without having to meet the
requirements for a public offering; that would represent a major change for a hedge fund or private equity firm in managing its portfolio
of companies. However, purchasers of those offerings must be either accredited investors--an individual or couple with at least $1
million in net worth, not counting their primary residence--or qualified institutional buyers.
In addition, the Act creates a new category of securities issuer--the "emerging growth company" or EGC--and exempts it from many of
the regulatory and reporting requirements that apply to more established companies, such as those imposed by Sarbanes-Oxley. The
Act defines an emerging growth company as one that went public after December 8, 2011, and has less than $1 billion in annual gross
revenues. An EGC will be allowed to follow a streamlined IPO process, and will generally have up to five years to comply fully with
certain accounting and disclosure requirements that apply to other public companies.
An emerging growth company that qualifies under the Act needs to supply only two years of audited financial statements instead of
three before going public. It also may ask the SEC for a confidential review of its registration materials before its IPO; however, those
materials must be publicly filed at least 21 days before the company launches its road show for potential investors.
Also, representatives of an emerging growth company can test the waters with potential investors prior to the IPO as long as they are
either qualified institutional investors or accredited investors. Broker-dealers may also distribute research reports in connection with an
EGC's IPO, and securities analysts may be included in a broker-dealer's discussions with a company's management.
Crowdfunding: a new option for capital
Companies that need to raise capital but are not ready to go public will be able to raise up to $1 million a year through what's known as
"crowdfunding," a term often applied to the concept of raising money from a large number of people, typically using some sort of online
mechanism to channel the collective donations or investments.
Companies that choose to use crowdfunding will issue restricted securities through either a broker or an online portal registered with
the SEC. The financial statements to be filed with the SEC range in complexity depending on the level of a business's offerings during
the previous 12 months. Those offering $100,000 or less may file income tax returns and financial statements certified by the principal
November 29, 2012
See disclaimer on final page
executive officer. Those with $100,001 to $500,000 must submit statements reviewed by an independent public accountant, and those
with more than $500,000 will need audited financial statements.
Investing: factors to think about
• Any advertising for a crowdfunding offering, as well as the offering itself, must be done through a registered portal. However,
the funding portal is strictly an intermediary; it may not offer investment advice or recommendations, hold or manage investors'
funds, pay its staff commissions on the sale of individual securities on the portal, or solicit sales for any of its listed securities.
• In addition to the financial information outlined above, a company seeking crowdfunding must make available to prospective
investors a business plan along with a description of the corporate structure and the risks involved in the venture. Make sure
you get all the information you need to come to a decision.
• The crowdfunding option isn't authorized for ventures that invest only in other businesses, such as private equity funds or
venture capital funds, so beware of any that attempt to use crowdfunding.
• The amount you can invest in a single crowdfunded company is limited. For investors with either a net worth or annual income
of less than $100,000, the limit is either $2,000 or 5% of their annual income or net worth, whichever is greater. Individuals with
an annual income or net worth of $100,000 or more can invest as much as 10% of their income or net worth, up to $100,000.
Also, there are restrictions on your ability to transfer those investments until you have owned them at least one year.
• Some regulators fear that crowdfunding and lifting the ban on advertising of private placements could mean an increase in
investment fraud schemes and/or an increase in solicitations for investment products you may or may not understand. Before
you make a decision about such an investment, make sure it is thoroughly researched, either by you or your financial
professional, and that you understand the potential for loss, including the possible loss of your entire investment.
The Stop Trading on Congressional Knowledge (STOCK) Act
Another recent piece of legislation, the STOCK Act, prohibits federal government officials from profiting from insider knowledge
they obtain as a result of their positions. The Act applies to members of Congress; executive branch employees; judicial officers,
including justices and certain employees of the Supreme Court, federal courts of appeals, and district courts. It specifically
subjects them to all securities laws regarding insider trading, and requires that certain federal officials file a report within 30 to 45
days of a securities transaction unless the security is a widely held, publicly traded, diversified investment fund. It also prohibits
participation in IPOs except through offers made to the general public, requires disclosure of personal mortgages under certain
circumstances, and requires executive and judicial employees to disclose any negotiations for future employment that might
create a conflict of interest.
This information was developed by Broadridge, an independent third party. It is general in nature, is not a complete statement of all
information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security.
Investments and strategies mentioned may not be suitable for all investors. Past performance may not be indicative of future results.
Raymond James & Associates, Inc. member New York Stock Exchange/SIPC does not provide advice on tax, legal or mortgage
issues. These matters should bediscussed with an appropriate professional.
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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012