There is little or no doubt that small businesses are the driver for jobs growth in the country. As far as job creation is concerned in the past 15 years, nearly two-thirds of jobs created have come from start-ups and small businesses (those with under 500 employees). Start-ups can be a small family owned business, but can also be as big as Facebook and Google. Google launched its IPO a few years back and is now valued at or near $200 billion. This start-up and small business growth is what leads the economy in job growth and expansion.
The JOBS Act of 2012
In April of 2012, President Obama signed the Jumpstart Our Business Startups (aka: JOBS Act of 2012). Much of what President Obama approved in the past regarding job creation and economic expansion has been tax related and targeted spending based. This law is nearly all securities related.
First, under Regulation A (referring to the set of regulations derived from the Securities and Exchange Act of 1933), the $5,000,000 offering limits have been raised to $50,000,000. Now, companies of significant size can buy and sell under private issuance, whereas before the $5,000,000 limit kept a tight lid on the markets for these companies. Bigger companies tend to have better management and higher survival rates making more practical investments for the non-management investors. However, with the government raising the limit, smaller companies can seek investor capital without the formality of SEC filings.
Advertising restrictions regarding Regulation D, Rule 506 before the JOBS Act were strict and generally affected the sale of many businesses including that of family businesses. Shortly after the Enron and WorldCom scandals occurred, the SEC targeted many brokerage firms advertising business stock sales. Advertising of small business/100% stock sales, were considered by the small business and brokerage profession to be below the radar and generally of no consequence. The SEC then began enforcing advertising and sale bans based on federal authority of the 1933 and 1934 Act and subsequent court decisions. The Draconian advertising rules of the past have been softened, at least for rule 506. Advertising can now be targeted towards more accredited investors for offerings of no limit.
Another key provision of the law also affects Rule 506. Here, the broker involved in Rule 506 transactions is not required to be registered through the SEC to sell stocks relating to rule 506 and the advertising of stock sales under Rule 506. This alone is tremendous! While the Country Business Inc. (CBI) “No-Action” letter is still the authority a lot of brokers rely on to sell businesses, nobody will complain about this provision of the JOBS Act. For nearly a decade, brokers have been struggling with the issues of registration, advertising, and the size of the offerings, the JOBS Act definitely helps.
The Effect on Business Succession
Leaving your business is an inevitability. The survival of your business depends on you and your actions. While there are a number of options such as selling to key employees, passing on the business to the next generation, selling the business outright and such, no option is without its challenges. Opening new equity markets and leverage to business owners and buyers makes the transition all the more easy. Combined with the low capital gains rates and low interest rates, we are hands down in a prime time to sell a business and begin estate planning.
Small businesses could definitely use a boost when it comes to creating new jobs. The private issuance laws were and still are in need of updating to reflect inflation and the new paradigm in America reflecting technology and instant stock sales.
The JOBS Act has been referred to as the “IPO On Ramp” and hopefully will prove to be such. With these relaxed rules in place, there should be further growth of small businesses and start-ups.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors