Saturday, November 24, 2012

How the JOBS Act Will Revolutionize IPOs

Last week, the U.S. Senate passed the JOBS (Jumpstart Our Business Startups) Act by a 73-26 vote. The legislation will make it much easier for companies to raise money and go public, and it also will allow individual investors to participate in early-stage financings.

The bill has been sent back to the House for another vote — but this is likely to be a formality, considering it originally passed the House on an easy 390-23 vote, and President Barack Obama has said he�ll sign the legislation.

Still, like much legislation, there’s a bit more to the bill than what the name would imply. So let�s take a look at some of the JOBS Act’s key provisions:


Crowdfunding involves using the Internet to allow early-stage companies to raise money. The practice actually has been around for several years, as seen with companies like Prosper. Prosper is platform where a company or even a person can borrow money — with a limit of $25,000 — by posting a profile on the site. Registered users will then bid on it.� Once the money is borrowed, Prosper will manage the loan and send payments to the registered users.

But under the JOBS Act, companies will be able to use crowdfunding to sell a maximum of $1 million worth of shares to the public.

Crowdfunding certainly will be a big boost for companies, but with that comes serious risks for investors. Keep in mind that early-stage investments often go bust or essentially become “zombie” companies.

To deal with some of the risks, the JOBS Act still will require some basic disclosures, such as the names of the directors, officers and holders of 20% or more of the outstanding shares. The company also will have to provide a description of the business and its financial status. Other requirements are based on the amount of capital raised:

  • $100,000 or less: A company must disclose tax returns and a financial statement. The CEO must certify the disclosures.
  • $100,001 to $500,000: A company must provide financial statements that are reviewed by an independent public accountant.
  • More than $500,000: A company must have audited financials.
Gutting Sarbanes-Oxley (SOX)

SOX came about as a result of the accounting scandals of Enron and WorldCom. The landmark legislation essentially bolstered the regulatory requirements for public companies — including the sign-off of the financials from the CEO and CFO, as well as stiff fines and even jail terms for violations of the law.

As a result, it became much tougher for companies to come public. Instead, it has been mostly later-stage operators — such as Zynga (NASDAQ:ZNGA), LinkedIn (NYSE:LNKD) and (NYSE:CRM) — that have been able to pull off IPOs.

But the JOBS Act will roll back the most onerous part of SOX, which is section 404(b). This requires a registered public accounting firm to attest to a company�s internal controls, which is an expensive process. But under the JOBS Act, this will not be necessary for five years after a company goes public (so long as the company’s revenues are less than $1 billion).

This regulatory change also could be dangerous for investors. The 404(b) requirement is a strong safeguard against corporate accounting fraud because it mandates a strong financial accounting system that has powerful checks and balances.

Shareholder Limits

The JOBS Act will expand the number of pre-IPO shareholders from 500 to 1,000. Once a company exceeds the limit, it will have to register with the SEC.

The rule change will allow a company to�remain private for much longer. It also will likely spur more trading on secondary markets like SharesPost and SecondMarkets, which handle transactions for pre-IPO shares.

Again, there are some risks. The secondary markets often have little disclosure of financial information, which makes it tougher for investors to evaluate the investment, and the SEC previously has cracked down on these marketplaces.

Tom Taulli runs the InvestorPlace blog�IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of��The Complete M&A Handbook”,��All About Short Selling��and��All About Commodities.��Follow him on Twitter at�@ttaulli�or reach him via�email. As of this writing, he did not own a position in any of the aforementioned securities.

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