JOBS Act 101: Bringing Investment Opportunities to the 99%
A key component of any prosperous and equitable society is equal access to opportunity. Our team at Orthogonal believes that individuals should be able to participate in activities that will catalyze social and economic mobility. One of these activities includes investing. Company investments were once reserved for financial institutions, venture capitalists, and high-net-worth individuals. However, the JOBS Act is changing this dynamic and opening up the playing field for all social classes.
What is the Jobs Act
The JOBS Act (Jumpstart Our Business Startup) was created to provide more funding opportunities for startups and small business in the U.S. by easing many of the country’s securities regulation. It enables companies to use equity crowdfunding to issue securities and was signed into law on April 5th, 2012.
Three Core Components To the JOBS Act
The first is that it allows accredited as well as non-accredited investors to participate in early-stage pre-IPO investing via equity crowdfunding. As previously mentioned, such investments have been traditionally reserved for financial institutions and high-net-worth individuals.
The second component involves the creation of new securities issuers. EGC’s (emerging growth companies ) are privately held and have less than $1 billion in revenues. These companies can maintain their status as an EGC for a maximum of five years or until they exceed $1 billion in gross revenues.
And the last component, the act now allows the advertising and general solicitation of potential investors.
Empowering the Public
The JOBS ACT was partially created to give the general public more access to extremely lucrative investments. At the core of any investment is risk-and-reward; risk and reward have a positive correlation, meaning if one goes up the other goes up and vice versa. Before the JOBS Act, the government took a paternalistic and restrictive approach to investing — unless individuals had a net worth of $1 million — not counting their homes — or an annual salary of more than $200K, they were excluded from investing in PRE-IPO startups. The justification for this exclusion was that individuals who didn’t meet the investor qualifications couldn’t afford the risk, and consequently, they couldn’t access the potential upside.
The following example highlights the magnitude of the opportunities that have been missed in the past. If an individual invested in Facebook’s IPO, they would’ve purchased each share for about $38, now (as of this writing) each share would be worth $173, roughly a 5x return. Meanwhile Peter Theil, Co-Founder of Paypal and one of Facebook’s early investors, reportedly had a return of over 2000x on his pre-IPO investment of $500K back in 2004. The JOBS Act was created to enable the general public to pursue the same returns that were once reserved for the wealthy and Peter Theil’s of the world.
The Pros
Increased Investment Opportunity: The act has given more individuals access to private placements of equity for the first time. Investments are no longer reserved for investors with a unique relationship with the company issuing securities, or accredited investors.
Increased Startup Investment: Startups can now receive investment from larger and more diversified pools of individuals. The lack of restrictions on advertising and solicitation, as well as crowdfunding, allows smaller entrepreneurial, first-stage companies to successfully solicit investments from a much larger base of potential investors; this opens up doors to new capital that was once difficult for many startups to obtain.
Companies can Remain Private Longer: Since companies now have more options for obtaining capital, they can remain private for longer periods of time. The act also allows EGCs to increase the number of shareholders from 500 to 2,000, improving company balance sheets until they are prepared for an IPO. By remaining private, companies have greater control over their operations, leaving them insulated from the expectations and havoc associated with public markets.
The Cons
Increased Failure Rates for Small Business: Unfortunately, many businesses fail from a combination of unrealistic expectations and poor management — not lack of capital. The JOBS act gives more companies access to capital, even if they are poorly managed.
Little-to-No Net Effect: When testifying before the Senate Committee on Banking, Housing, and Urban Affairs, Jay Ritter, a finance professor at the University of Florida said, “by making it easier to raise money privately, creating some liquidity without being public, restricting information that shareholders have access to, restricting the ability of public market shareholders to constrain managers after investors contribute capital, and driving out capital, the net effect of these bills might be to reduce capital formation and/or the number of small IPOs.”
How To Participate in Equity Crowdfunding
Several companies have capitalized on the JOBS Act, building platforms which enable equity crowdfunding. Among them is Wefunder; often referred to as the Kickstarter for investing. Their platform provides a seamless process for accredited and non-accredited investors to invest in companies for as little as $100 through a SEC regulated offering. Unlike Kickstarter, Wefunder is focused on the investor, so instead of customers receiving products for their contributions, investors are given equity for their investment. Wefunder has become immensely successful, in fact, Orthogonal is currently running a Wefunder campaign to grow our team and build on our vision of helping socially conscious startups scale and succeed. To get started with equity crowdfunding check out our Wefunder campaign.
The JOBS Act is an incredibly exciting opportunity for the general public. But it doesn’t excuse investors from doing their due diligence and research. In fact, access to information was one of the leading factors behind the legalization of the act. The opportunity is there, and it’s up to the new-age of investors to seize it.
