Title II of the JOBS Act Goes into Effect: Golden Age of Venture Capital or the Opening of Pandora’s Box?

On September 23, a major legislative overhaul went into effect in an attempt to help entrepreneurs and start up companies raise money for new ventures.  The new legislation is Title II of the 2012 Jumpstart Our Business Start-Ups (JOBS) Act.  Title II permits start-ups and small businesses to publicly advertise their fundraising efforts and ask for equity investments without registering shares for sale.  Companies can use digital public media such as Facebook or Twitter to help spread the word as well as more conventional media like newspapers and radio.  However, only accredited investors (those making more than $200,000 a year or those with a personal net worth of more than $1 million) may actually invest in these companies.
Title II of the JOBS Act effectively gives companies access to a much broader array of potential investors than ever before.  For the past 80 years, it has been illegal for startups (or any private company for that matter) to notify the public that they are looking to raise investment capital.  The law forbidding public solicitation was enacted during the Great Depression to protect consumers from scams and fraud.  As of September 23, however, general advertising and solicitation of the public are fair game.  All a company must do to begin soliciting openly both online and offline is file with the SEC and disclose their fundraising methods within 15 days of soliciting.
There is much value to be had from the new law.  Indeed, the funding process will no doubt be accelerated, as companies can reach out to more potential investors than ever before.  This augmented process will also allow founders and CEOs to focus more of their time on the actual execution of their business as opposed to expending all of their energy on fundraising efforts.  Investors, too, will benefit from being exposed to more investment opportunities.
Some critics have argued that this deregulation of equity investment will unleash a plethora of swindlers and devious con artists looking to defraud the less savvy investor.  It’s true that restricting investments only to “accredited investors” acts as a safeguard to protect against potential fraud; the idea being that more savvy investors are less likely to invest in dubious ventures.  However, Title III of the JOBS Act, which is likely to go into effect sometime in 2014, will allow non-accredited investors to participate as well.
It remains to be seen whether the critics’ fears of rampant fraud will come to fruition or if Title II of the JOBS Act will herald a golden age for start-up companies.

(Blog entry written by Alex Diamond, IBLT/Carter DeLuca Entrepreneurship Support Fellow for the Fall 2013 semester)