By Jack Garson

The JOBS Act promotes investments in small businesses

On April 5, 2012, the new Jumpstart Our Business Start-ups Act became law. The primary purpose of the JOBS Act is to reduce the legal burdens that small businesses face in raising capital.

With this new law, the pendulum has now swung once again toward deregulation, and rather quickly at that. In the wake of the Enron scandal and, later, the financial meltdown on Wall Street in 2008, Congress passed a variety of restrictions on the financial world. First the Sarbanes-Oxley Act and then the Dodd-Frank Act imposed new regulations, including burdensome disclosure requirements for publicly traded companies. These laws were layered on top of the securities acts passed in the 1930s, largely as a consequence of another couple of economic boo-boos: the stock market crash of 1929 and the Great Depression.

To understand the significance of the JOBS Act, you first need to realize the impact in time, effort and expense imposed by current laws that regulate investing in businesses. In a nutshell, to sell stock in your company to the public (“going public”) you must register with the government, unless you are exempt. The registration requirements are extremely burdensome. For example, the registration process requires that you produce and disclose years of detailed financial statements that are “blessed” (not the technical term) by specialized accountants who have determined you pass intricate standards, such as special internal controls on your financial systems.

In addition, applicable law restricts when and how you can raise money. For example, you are limited in what you can say about your company to possible investors before the government has approved the materials you want to provide to the public. Then, for so long as you remain a publicly owned company, you must continue to provide detailed information to the government, your investors and the public. If you are thinking this is expensive and a supreme hassle you’re right.

There are exemptions from these registration requirements. But to take advantage of these legal loopholes, you are restricted in a variety of ways. Generally, the amount of money you can raise is capped. Then, for the most part, you can only obtain this money from relatively wealthy people. Further, you can only get these funds from a limited number of investors.

If you violate the registration or exemption rules, you can be barred from raising money or, for minor infractions, substantially delayed. Also, you may be subject to severe civil and criminal penalties for significant violations. So you need an expensive team of experts and a lot of time and preparation to raise money for your company from investors. The JOBS Act reduces these fundraising burdens for smaller companies.

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Jack Garson is the founder of Garson Claxton LLC and leads the firm’s business and real estate practice groups. Jack serves as a legal advisor for numerous local, regional and national companies, focusing on business transactions, commercial real estate, commercial leasing, and construction law. In addition to providing legal counsel, Jack serves as a strategic advisor and negotiator for many clients, providing guidance on issues such as the growth and sale of businesses, liability and risk reduction, the hiring and retention of key personnel, and protecting and enhancing profitability, as well as negotiating the resolution of complex commercial disputes.