Updated: Jun 19
The Jumpstart Our Business Startups (JOBS) Act is a piece of legislation that created the industry known as "equity crowdfunding." Signed into law by President Barack Obama on April 5, 2012, it reduces barriers to investing in startups by easing many of the country's securities regulations.
This, in effect, allows everyday investors to invest in top startups and small businesses and allows small businesses to raise funds from their customers, supporters and community. This has created tens of thousands of American jobs and gives everyday investors a new wealth-creation device.
Historical Context of the JOBS Act
The JOBS Act emerged during a period of decreased small business activity following the financial crisis. The legislation's purpose was to boost small businesses and stimulate job creation by providing a more accessible and efficient way to secure funding. It was an attempt to democratize access to capital, largely aided by internet technologies which provided a wider reach for both entrepreneurs and investors.
Despite being signed into law in 2012, the SEC did not adopt specific rules to allow startups to begin raising until May 16th, 2016. In May 2016, startups officially began raising from their communities and the first equity crowdfunding campaigns went live. When the rules went live, anyone could raise up to $1.07 million from their communities through Regulation Crowdfunding (Reg CF) and up to $50 million from Regulation A (Reg A). These numbers were increased and improved on March 15th, 2021, allowing issuers to raise up to $5 million from Reg CF and $75 million through Reg A.
The Purpose of the JOBS Act
The JOBS Act was conceived in a post-2008 world with a depressed economy. Previously, venture capital held the startup world hostage, and if they closed the doors, a startup's only option was debt, government funding, or bootstrapping. Equity crowdfunding opened up a new method for small businesses to receive funding. This means small businesses and high growth startups are no longer held hostage by the venture capital industry.
It also means that anyone can invest in startups. Most of the world's billionaires made their fortunes in the world of startups. Investing in a seed-stage startup that becomes a unicorn (a billion-dollar company) can result in 50-100x gains at a minimum. If a company becomes a multi-billion dollar company, the gains only multiply. This means it only takes one exit to make a portfolio.
Who Pioneered the JOBS Act?
Eric Cantor introduced the JOBS Act to Congress. The act was approved with bipartisan support. However, a number of individuals helped make it happen. For example, Wefunder was one of the first advocates of the bill and helped lobby congress to help the law come to fruition.
Who Regulates Equity Crowdfunding?
Equity crowdfunding is regulated by the Securities and Exchange Commission. The commission qualifies for every raise. However, they do not approve or endorse any companies that raise through equity crowdfunding by qualifying a raise. The Commission also regulates the equity crowdfunding portals themselves and have clarified they expect the portals to be the 'gatekeepers' of fraud and abuse on their platform.
Funding portals specifically are also regulated by FINRA.
Benefits of the JOBS Act
There are a number of obvious benefits to the JOBS Act. Collectively, the JOBS Act and equity crowdfunding have helped create over 100,000 American jobs. It has democratized an entire industry allowing anyone to invest in startups. And it has given power back to American small businesses to raise capital.
80% of venture capital funding goes to white males, effectively disenfranchising women and minorities. Equity crowdfunding statistics have restored those statistics and could act as a catalyst and wealth-creation device for these previously excluded communities.
Equity crowdfunding is also specifically unique because it allows for investors to make a change by investing. When you buy Apple stock, you're simply exchanging money to another investor. When you invest in a startup, that money goes to the business paying salaries and product research. Meaning if you invest in a startup trying to reduce carbon emissions, your investment could directly help make an impact on global warming.
Downsides of the JOBS Act
One of the biggest cons is the stigma surrounding equity crowdfunding. While this is quickly going away, there is a stigma that the only companies that raise from equity crowdfunding are those that can't get venture capital funding. This has made it difficult for some founders to receive following on funding from venture capital after raising from equity crowdfunding.
There are also strict annual reporting requirements and legal issues that startups encounter when raising and after raising. This can cost a lot of money. Many raises aren't successful, which can end up costing the startup a lot of money without any return.
While the industry is regulated by the SEC and securities fraud statutes still apply, there is still potential for fraud and abuse within equity crowdfunding. There are dozens of pages of filings and disclosures associated with every raise. But it is difficult to know whether someone is ultimately engaging in a raise in good faith.
Finally, investing in startups is risky. Roughly 80% of startups fail to provide a return. Those that ultimately do give a return take as much as 5-10 years before IPO. This means investors who invest are unable to sell for several years, and most of the companies they invest in will fail. This means there are also decently high barriers to entry with this type of investing because diversification is vital. If you only invest in one startup, you will likely lose all your money. So you need to invest in ten to twenty startups in order to see a good return. That can be a lot of money for some.
The JOBS Act is a major legislative milestone that aims to invigorate the small business sector in the United States. By loosening certain regulations and creating new avenues for raising capital, it provides a valuable platform for entrepreneurs to start and grow their businesses, consequently stimulating job growth. However, the reduced regulations also bring a degree of risk, emphasizing the importance of investor diligence and transparency in business operations.