April 23, 2012 | last updated June 4, 2012 12:05 pm

JOBS Act pushes reset on financing strategies

Hartford lawyer James M. Saya says the newly enacted JOBS Act, which gained bipartisan support in Congress, will have a significant impact in Connecticut, making it easier for small companies looking to raise capital in private placement deals.
Howard Pitkin, Connecticut Banking Commissioner

The new federal JOBS Act recently signed into law by President Barack Obama will make it easier for small, private companies in Connecticut looking to raise capital.

With a vast number of wealthy residents in the state, the ability for small businesses to advertise or publically solicit investments for private offerings, and use the web to raise up to $1 million annually from small-dollar investors, could be a game changer for Connecticut, some industry experts say.

"It's a major change to securities laws that will fundamentally reshape how private placement deals function," said James M. Saya, a securities lawyer for Rogin Nassau in Hartford. "With issuers able to access capital from more investors, private placements could significantly increase in Connecticut over the long term."

Saya said of all the provisions in the Jumpstart Our Business Startups Act, the one likely to have the biggest impact is changes made to Rule 506 of Regulation D, which small companies have traditionally used to raise capital. The rule exempts companies involved in a private placement deal from having to register certain securities with the U.S. Securities and Exchange Commission and the state banking department.

That means they face less paperwork and oversight from government regulators.

But as part of that exemption, companies have been restricted from publically advertising the securities they offer. That has severely limited the potential investors they could attract.

The JOBS Act, however, removes that restriction and allows companies to market their securities offerings to "accredited investors," or individuals who have a net worth of at least $1 million, or have made at least $200,000 each year for the past two years.

"In the past a small business owner had to rely on personal contacts or people they had personal relationships with to raise money through a private placement," Saya said. "Now the law has largely been turned on its head. It will greatly expand the universe of potential investors."

The JOBS Act was a bipartisan law that gained favor with both Democrats and Republicans in Congress as well as President Obama to encourage growth of startups and small businesses.

The goal is to allow small companies and high-growth enterprises to raise capital from investors more easily, so that they can grow and hire faster.

It mirrors efforts being made in the state of Connecticut, as elected officials increasingly bet on start-up companies as the answer to future job growth.

Last October, for example, the state legislature passed a $626 million jobs bill that was layered with incentive programs for small businesses and startups.

Even though the JOBS Act received bipartisan support, however, it does have its detractors.

Connecticut Banking Commissioner Howard Pitkin said he is concerned that some measures lack enough consumer protections because of the minimal disclosure requirements, which could put investors at risk.

He is particularly concerned with a capital raising method legalized under the JOBS Act known as "crowdfunding," which will allow startups and small businesses to raise up to $1 million annually from many small-dollar investors through web-based platforms.

Traditionally, crowdfunding couldn't be used for equity investments in companies. It was mainly available to charities and performing arts groups.

Now startup companies can use it to tap into investments from individuals across the country and they don't need to be accredited investors.

"The danger is people getting involved in purchasing securities they don't understand very well," Pitkin said. "People are going to be investing in companies that may not be very transparent."

The JOBS Act does include some safeguards including a requirement that all crowdfunding must occur through platforms that are registered with a self-regulatory organization and regulated by the SEC. In addition, investors' annual combined investments in crowdfunded securities will be limited based on an income and net worth test.

But there are still plenty of risks, Pitkin said.

"Congress was trying to balance consumer protection with the need to create jobs," he added. "It's not an easy thing to do."

Other aspects of the JOBS Act include a provision that will allow larger companies to offer up to $50 million in a public stock offering without having to register with the SEC. That is up from a previous $5 million threshold.

It also establishes an "IPO On-Ramp" that exempts certain young, high-growth firms from some SEC regulations, including Sarbanes-Oxley auditing requirements, in the first five years after an initial public offering.


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