What is the Jumpstart Our Business Startups Act?

The Jumpstart Our Business Startups (JOBS) Act is a U.S. piece of legislation that was signed into law by President Barack Obama on April 5, 2012, that allays some of the regulations instituted by the Securities And Exchange Commission (SEC) on small businesses. The Jumpstart Our Business Startups Act, for example, loosens restrictions on capital raising for small businesses, such as allowing them to go public (IPO) with less than $1 billion in annual gross revenue and giving more legitimacy to the practice of crowd-funding (where firms can solicit publicly for investments) such as funds raised through platforms like Kickstarter.

Understanding the Jumpstart Our Business Startups Act (JOBS)

The JOBS Act is geared towards allowing firms with potentially innovative ideas to hit the ground running without the obstacle of strict regulatory requirements. However, given the loosening of restrictions, along with allowing for new sources of capital raising, it comes with new provisions protecting potential small investors, such as requiring startups utilizing crowdfunding to register with the SEC and provide information on their financial health and risks. Others have suggested that small individual investors are not financially sophisticated enough or lack the financial education or knowledge needed to invest in early-stage companies.

The JOBS Act specifically targets "emerging growth companies," which the SEC defines as an issuer of capita; with total annual gross revenues of less than $1 billion during its most recently completed fiscal year. The purpose is to provide easier access to capital for companies considered to be the nation's most important source for job creation and stems from the spike in unemployment seen following the 2008 financial crisis and Great Recession. Part of this access to capital includes the ability for emerging growth companies to seek money from small individual investors - or non-accredited investors - through crowdfunding platforms such as Kickstarter or GoFundMe.

Crowdfunding is a way for companies or individuals to raise money by accumulating relatively small amounts from many individual contributors. The JOBS Act specifically is concerned with equity (or investment) crowdfunding, whereby ownership shares are sold - sometimes on a fractional share basis. This is different from donation-based crowdfunding platforms (which Kickstarter and GoFundMe tend to feature), whereby companies do not offer any debt or equity stake in return for contributions, rather contributors may receive discounts on certain items or receive early access to a company's new products.

To date, the crowdfunding mechanism and allowances spelled out by the JOBS Act has not gained much traction, and there are not many important cases yet of a company taking advantage of this form of capital raising.