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Title II of JOBS Act Goes Into Effect, Creating Exciting New Opportunities for Start-ups

On Monday, September 23, 2013, Title II of the Jumpstart Our Business Startups Act (JOBS Act) went into effect allowing start-up companies to seek equity investments publicly without having to register ownership shares for public trading.  Title II is a significant aspect of the JOBS Act, a post-recession initiative to stimulate the American economy, in large part by making it easier for small businesses to raise capital and by reducing their tax obligations.

Title II going into effect is a huge step in the right direction for small business owners and entrepreneurs nationwide.  Although entrepreneurs will only be able to publicly seek equity investments from “accredited investors”until Title III of the JOBS Act goes into effect, geographical burdens that have hindered entrepreneurs in the past have been substantially diminished.1  Entrepreneurs will no longer have to rely exclusively on leveraging personal relationships with venture capitalists and other wealthy individuals to secure funding for their start-up companies.2  In the long-term, this legislation will encourage economic efficiency and facilitate technological advancement by increasing the likelihood that the best start-up ideas are more easily recognized and funded.

However, it should be noted that this will not be the first time start-up companies are able to seek capital from the public.  Entrepreneurs have promoted their start-ups on the Internet (e.g., Kickstarter and Indiegogo), but they have been limited to asking for donations and prohibited from asking for equity investments.  Now, by allowing entrepreneurs to ask for equity investments in exchange for an ownership stake and return on their investments, the JOBS Act will usher in a new era of funding for start-up companies.  Many who have been hesitant or unwilling to donate capital to support start-ups in the past will be more likely to provide capital in hopes of extraordinary returns.  Therefore, it could be much easier for entrepreneurs to raise funds for their projects by utilizing social media and various other Internet outlets to target investors.

Moreover, the fact that entrepreneurs do not have to register their shares in order to publicly ask for equity investments is yet another key aspect of this legislation.  Public registration of shares can be a source of great frustration, time, and expense for an early-stage company and can sometimes result in financial setbacks that the company cannot overcome.  Alleviating start-up companies of this duty, and all of the reporting requirements that go with it, will further encourage entrepreneurs to take advantage of this legislation.

Still, despite all of the positive implications that Title II going into effect has, there are some potential downfalls.  As mentioned above, entrepreneurs will only be able to raise money from accredited investors.  Thus, entrepreneurs will have to be careful in the way they promote their requests for investments to the public until Title III goes into effect.  Critics have scrutinized Title III, which will allow “crowdfunding” from the general public, claiming that allowing companies to publicly seek investment from the general public could lure unsophisticated investors into risky investments with the promise of extraordinary returns.34  I would argue that this concern should be attributed to Title II as well.  Accredited investors under the JOBS Act are defined as investors with a personal net worth of more than $1 million or whose individual income is greater than $200,000 annually.  An individual’s wealth alone does not necessarily qualify them as a sophisticated investor, and because such individuals have more disposable income available to them relative to an unaccredited investor, they could be even more susceptible to being taken advantage of by opportunistic capital-seekers.

Nevertheless, we will have to wait and see what effects this legislation has on entrepreneurs, big- and small-time investors, and the American economy as a whole.  One thing that can be said with a reasonable level of certainty, however, is that this legislation will increase the number of opportunities entrepreneurs have to get their start-up companies off the ground.

  1. “Accredited investors”, as used by the JOBS Act, includes investors with an individual net worth, or joint net worth with their spouse in excess of $1 million, or investors whose individual income is greater than $200,000 annually, or whose joint income with their spouse is greater than $300,000 annually.  17 C.F.R. § 230.215 (2011). 

  2. Jenna Wortham, Law Opens Financing of Start-ups to Crowds, N.Y. Times, Sept. 22, 2013. 

  3. Wortham, supra note 2. 

  4. Crowdfunding, as defined by the Oxford Dictionary, is “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.  Oxford Dictionary. 2013. (last visited Sept. 27, 2013).