Startups and the JOBS Act

The U.S. Senate passed the JOBS Act on Thursday afternoon with a vote of 73-26. The bill, if signed by President Obama, would become law. Supporters hope the bill would create jobs, boost entrepreneurship, increase investment activity, and create more initial public offerings.

Will this bill be good for the entrepreneurial community? There are supporters and detractors of the bill. Let's see how the bill will affect startups.

 The bill's champions argue that the legislation will increase capital access for emerging businesses. Many of the growth-stage startups that we speak with in the Research Triangle or in North Carolina tells us that this is a major component of their business, and a major issue for entrepreneurs in the region.

Yet critics of the bill argue that some components of the legislation, particularly those involving investor protections, leave investors open to potential dangers or accounting/reporting issues.

In an article published on Term Sheet, a Fortune Finance blog, author Dan Primack discusses these two views and summarizes the bill and its potential impact succinctly.

Here's what the bill will do:

Remove the '500 shareholder rule': the legislation, as written, will increase the number of allowed shareholders a private company can have without having to publicly disclose certain financial legislation from 500 to 2,000.

Enable crowd-sourced funding: this provision would allow companies to issue shares in exchange for crowd-funded capital. Think Kickstarter-for-equity. One great argument for the JOBS Act was written by the founder of CircleUp, Ryan Caldbeck, and published on TechCrunch last Friday, where he argues that crowdfunding will open new markets and new geographic areas for investment, boosting our economy. It's worth a read.

Permits general solicitation: the JOBS Act eliminates the prohibition that restricts issuers of stock from soliciting the general population. Essentially, investors, funds, and private companies could now campaign for investment from the general public.

Easier path to IPO: the idea behind this is to make it easier for small private companies to go public, mostly by reducing the costs associated with such an action. The provisions to do this include reducing existing investor protections.

The crucial issues for startups is gaining access to capital, and being able to scale and grow when desired. If the JOBS Act can help facilitate the next Google, Apple, or Facebook, or even spur the growth of innovation in the United States, the legislation may be worth the risk of reducing investor protections.

If we make it easier for emerging companies to file for their initial public offering, rather than choose to be acquired, we're telling our current and future entrepreneurs that we want them to build and continue building their business as they are steering the company towards success. A great argument is made by a group of investors in an article published on PE Hub.


Update: The U.S. House of Representatives voted 380 - 41 in favor of the JOBS Act, sending the legislation now to President Obama, who has stated that he intends to sign the bill as written. Great coverage in local and national press.