Last week, we discussed the Sarbanes-Oxley Act and what startups should know about it. We noted that shortly after the Sarbanes-Oxley Act was enacted, critics argued that it restricted innovation and suffocated the growth of startups and small companies because the cost of compliance was too great for them. In response to these concerns, the government, on April 5, 2012, enacted the Jumpstart Our Business Startups Act or JOBS Act. The purpose of the JOBS Act is to encourage funding of small businesses and startups by easing certain securities regulations. For example, the JOBS Act extends from two to five years, the time that certain small companies and startups have to begin complying with the requirements of the Sarbanes-Oxley Act, i.e., certifying the accuracy of financial information. It also provides an exemption from the requirement to register certain public offerings with the Securities and Exchange Commission.
According to Forbes magazine, Title II of the JOBS Act takes effect today, and it lifts the ban on general solicitation, allowing startups to publicly advertise that they are seeking investments. General solicitation means “to publicly advertise the opening of an investment round in a private company by utilizing mass communication.” As reported by Forbes, “[b]eginning today, September 23, 2013, under Title II of the JOBS Act, entrepreneurs will be permitted to publicly advertise that they are fundraising for their businesses, something that was previously illegal for the past 80 years under Rule 506 of Regulation D and Rule 144A of the Securities Act of 1933.” The only restriction under Regulation D 506C is that all investors must be accredited, generally having earned $200,000 for the past two years, or $300,000 if married, or having a net worth of $1 million not including a personal residence (see more on compliance next week).
What Does Removal of the Ban Mean for Startups