March 26, 2012

The JOBS Act Impact On Small Food Businesses

Impact of Jobs Act on businessIf you follow the Small Food Business facebook page or spend time perusing the business pages of various newspapers, then you likely heard that last Thursday the Jumpstart Our Business Startups Act (commonly referred to as the JOBS act) was passed in the Senate by a vote of 73-26. So what does this mean for small businesses like yours?

First and foremost, it doesn’t technically mean anything yet.  The Bill still has to go back to the House of Representatives to be voted on as this version of the Bill contains amendments which weren’t included in the first go-round in the House.  That being said, the Bill sailed through the House of Representatives fairly easily and most of the political experts out there are anticipating that this will be on President Obama’s desk before too long for signing and to officially be passed into law.  In this type of charged political environment no one wants to be seen as anti-Small Business!

So, assuming this Bill does pass as expected, what does that mean for you?  There are actually several components of the Bill that, in most cases, don’t relate directly to artisan food businesses such as how with the JOBS Act it will now be easier for you to take your company public.  I’m not saying that artisan food entrepreneurs don’t build companies that go public, but that if they do they likely have a series of financial advisors to give them guidance and they’re not waiting with bated breath to get my take on the Bill.  As such, I’m going to focus on two key pieces of the Bill that, I believe, relate most directly to businesses like ours.

1. The JOBS Act would legalize crowd-funding or crowd-sourcing for equity.  Just a minute, you say, haven’t people already been crowd-funding their businesses through sites like Kickstarter?  Yes and no.  While people have been getting money for their projects through crowd-funding, they haven’t been able to offer equity in return.  Until now, if you *invest* in a project through a crowd-funding site or just give a good buddy some money to help him start his business, the only thing you could get in return was actual product, tchotchkes, or a slap of thanks on the back.  You weren’t planning on ever recouping that money or making a profit on it if the company grew and that’s where this Bill changes things.

According to the current version of the JOBS Act, businesses would be able to offer equity in exchange for investment in their company or their project.  What makes this really exciting is that now investors may be willing to come into our small business market and plunk down some real cash.  Look at it this way, I’ve personally donated money to some crowd-funding projects before but it’s always been little amounts and really done, more or less, because I thought the project was neat or the owners were good people.  However, I wasn’t willing to put a lot of money into play because I wasn’t going to make an investment on it or be able to take a charitable donation.  Now though, perhaps I would be willing to place larger amounts (if I win the lottery!) with companies I believed in because I’d be putting that money to work and doing my best to ensure that I would choose companies that would give me the greatest chance of a good return on my money.

I also think this may make small businesses grow up a bit and start playing a little more like the Big Boys.  If someone is going to come in and make an investment of, let’s say, $10,000 into your company, they’re not going to do it simply because they like your video and think you’re a nice person.  They’re going to want to see that you have a business plan in place, that you’ve thought through your financial projections, and that you have actionable goals you’re working towards.  At the end of the day, investment or not, having some of those things in place can only help you succeed.

It should be noted that the JOBS Act does restrict nonaccredited investors (people like you and me) from making investments that exceed $10,000 or 10% of our income – whichever is smaller – or, if you make less than $100,000 annually you can invest no more than $5,000 in a company in exchange for equity.  There are some folks out there – both companies and individuals – claiming that those restrictions aren’t fair but the Senate is only trying to prevent people from getting fleeced and dumping all of their financial eggs into one basket.

According to an article in Forbes, the JOBS Bill would also require that any company that wanted to raise funds through a crowd-sourcing/equity exchange method would be required to file with the SEC and would be limited to raising no more than $1M annually or $2M if they publicly release audited financial statements.

2. The other piece of legislation within the JOBS Act that most likely pertains to businesses in our realm is that the cap on how many shareholders a business can have before they are required to publicly file their financial information has been increased from 500 to 2000.  This is great news if you don’t think that you’ll be able to find a few $10,000 investors but think you know a ton of folks who would be willing to invest $1,000 in your business instead.

Obviously, anytime anything goes back to the floor of either the House or the Senate there is the possibility that things may change so don’t take this as being written in stone.  Also, there are a few questions this raises for small food businesses like how, for example, does one determine how much equity they should give up for investments?   I have an interview scheduled with a subject matter expert later this week so look for a post early next week with some more insight into how the JOBS Act is going to shake things up for small food business entrepreneurs.

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