Home > Personal Finance > Will the JOBS Act Help Your Business Raise Money?

Comments 0 Comments

The recently enacted JOBS Act (Jumpstart Our Business Startups) is a either terrific boost for small businesses looking to raise money, or an invitation to investor fraud, depending on whom you ask about it. To learn more about the potential upside of this legislation, I interviewed small-business attorney Garrett Sutton. He is a Rich Dad adviser, founder of CorporateDirect.com, and the author of five books, including his most recent title, Start Your Own Corporation. (Disclosure: Garrett and I are co-authors of the e-book Business Credit Success: Get on the Financing Fast Track.) Here is an edited excerpt from our interview:

Gerri: Can you fill me in on what the JOBS Act means for entrepreneurs who are looking to raise money for their companies?

Garrett: The JOBS Act is a significant development in fundraising for entrepreneurs. Basically what it does is it loosens the previously very tight restrictions on fundraising in several important ways.

In the past, you may have tried to raise money with a Regulation-D, Rule-506 offering. That’s a private placement where you don’t have to register with the federal government or your state government, so it’s a fairly flexible way to raise money. But you were hamstrung by the fact you couldn’t advertise this offering. It could only go to people that you knew, people you had a pre-existing relationship with such as friends, family or colleagues. So you really couldn’t get the offering out there to a large number of people.

Well, what the JOBS Act does is allow accredited investors, which I’ll define in a second, to to receive advertisements for these private placement offerings. That’s great because previously, these accredited investors couldn’t be reached by any sort of advertising.

An accredited investor is someone who has either $1 million in net worth exclusive of their home, so $1 million on top of the price of their home. Or, they’ve earned $200,000 a year for the past 3 years, or $300,000 a year if they’re married.

So if you a have $1 million in net worth, or you’re earning a significant amount of income, the Securities and Exchange Commission says look, these people are sophisticated, they can take care of themselves. Our job is to protect widows and orphans. If someone has $1 million in net worth and a high-level of income, they can make their own decisions.

Gerri: Some of the criticisms I’ve seen about this particular act in this area was that it would open the door to a lot of fraud for unsophisticated investors.

Garrett: Yes, we’re going to talk about crowdfunding next, and there is that risk on the crowdfunding side, because with crowdfunding, anyone can invest. You don’t have to be an accredited investor. And so there is sort of a fraud issue that you have to worry about there, but they’re putting in some restrictions that hopefully will minimize that. (Crowdfunding allows companies to raise money from a large number of people over the Internet.) So on the Rule-506 side, you can raise as much money as you want, and you can advertise the offering but it has to come from accredited investors.

Gerri: What do you think is going to happen, in terms of those small businesses who want to raise money? Are they going to have to find companies to advertise for them to these accredited investors? Wouldn’t it be hard to find them yourself?

Garrett: Yes, and the SEC has 90 days to come out with rules on how the Rule-506 side is going to work. On the crowdfunding side, you can raise up to $1 million from anyone and you can advertise it on the Internet. But, you have to go through certain SEC-approved portals and the job of these portals is to make sure that the people offering the securities over the Internet are not fraudsters.

Now, will some bad apples slip through? Absolutely. I don’t know how you’re going to stop that. Most commentators I’ve talked to have said, “Look, we need to have capital formation. We need to allow people to be able to invest in these startups. We’re going to give up a little bit of, there’s going to be some fraud in the system because of this, because we’re loosening it up. Some fraudsters are going to slip through. But in order to get capital formation and job creation going, we’re willing to let a little of that in to help entrepreneurs get their projects funded.”

Gerri: So, if you’re someone with a small business or starting a small business, when can you reasonably expect this option to be available?

Garrett: On the crowdfunding side the SEC has nine months to put it together and I’m certain they could get extensions if it’s not quite right. But, the industry is moving pretty quickly to work with the SEC to establish these portals. They’re going to be establishing protocols for who can invest, what type of information has to be provided and that sort of thing. So, I would say in the next year, Gerri, you’re going to be seeing this crowdfunding starting to happen.

Gerri: So 2013 is probably the year of crowdfunding. Do you see this replacing the need to establish business credit?

Garrett: No, actually I think it’s going to accelerate the need for business credit if people are able to go out and raise money. They still need to have good business credit as they continue with their business. So, this may help some businesses get off the ground but at the same time, they’re still going to need to establish business credit as they move forward in their entrepreneurial ventures.

Want to listen to the complete unedited interview with Garrett Sutton discussing the JOBS Act? Download the interview here; or play the interview online; or listen to or download it from iTunes.

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team