JOBS Act

Here is a post that I helped author for the ACA:


ACA Public Policy Flash
March 27, 2012

Dear ACA Member –

Unless you’ve been on a vacation on a remote island, you have heard that the US House and Senate have each passed their own versions of the JOBS Act
(Jumpstart Our Business Startups Act,
HR 3606), aimed at making it easier for small businesses to raise capital and have positive exits and thereby creating jobs. We understand that the House just voted on the Senate bill today, and the bill is being sent to President Obama for signature immediately.

The JOBS Act is complicated, but we wanted to provide you with information about the bill. The main thing to understand about this bill is that it does not deal with any tax issues, which are very difficult to pass in this partisan environment in Congress. Instead, the leaders of the House and Senate have focused on those structural and regulatory issues that inhibit startup growth, but don’t directly impact government revenue.

Many angels are asking questions about it and we know opinions about part of the bill vary quite widely (crowdfunding, anyone?). Below is a quick summary, with an eye toward how angels are or might be affected, and also links to some more detailed resources. The bill covers multiple issues:

  • Allows equity-based crowdfunding – New businesses will be able raise up to $1 million in equity capital from unaccredited investors. The Senate version of the JOBS Act creates a number of restrictions, aimed at protecting investors. Among those restrictions are limiting individual investments to $10,000 or 10 percent of the investor’s annual income (whichever is less) and registration by intermediary platforms and issuers with the SEC. Federal law would preempt state regulations, meaning that issuers could raise funds from across the United States. The SEC has 180 days after the bill’s enactment to publish rules for crowdfunding.
  • Removes prohibitions on general solicitation of Regulation D offerings – Allows for advertising of Reg D 506 offerings, as long as advertisements are focused on accredited investors. Angels should especially note the “McHenry Amendment,” which clarifies that angel and incubator platforms that do not charge a fee connected to the purchase or sale of securities are exempt from broker-dealer registration. This is helpful for Web platforms such as AngelList or Gust and venture forums aimed at accredited investors, and also for some of your angel groups.
  • Creates an IPO “on ramp” – Reduces the cost of going public for “emerging growth companies” – those with annual revenues of less than $1 billion and after the IPO, less than $700 million in publicly traded shares. These companies receive a 5 year exemption from costly Sarbanes-Oxley 404(b) requirements such as hiring outside auditors, while still requiring some quarterly and annual SEC disclosures. A number of other related technical issues are included, many recommended by a study committee of the National Venture Capital Association.
  • Increases threshold for Regulation A “mini public offerings” – Regulation A currently allows companies to go public and be exempted from SEC registration for offerings up to $5 million. The JOBS Act increases the offering threshold for this little used exemption to $50 million, perhaps making it a more useful option for more angel-backed companies.
  • Raises cap on private shareholders from 500 to 2,000 – Many private companies are forced by regulations to file as a public company once they exceed 500 shareholders and $10 million in assets. The bill increases the shareholder limit to 2,000 accredited investors or 500 unaccredited investors. The updated cap allows for flexibility to Facebook in staying private or going public, and could also benefit secondary market platforms that can offer a more robust market for the shares of private companies.

ACA has been working with our Public Policy Advisory Council to better understand many of these issues and to keep you all accurately informed. Thanks go particularly to Joe Bartlett, Bill Carleton, Dan Hansen, and Lori Smith.

The SEC will have 90 days to publish rules on most of these items, with 180 days to set the crowdfunding rules. ACA will be in contact with the SEC to provide feedback on the rules for many of these issues to ensure the best possible environment for healthy angel investment. In addition, we are currently working with VC Experts to hold a Webinar on the JOBS Act in April – before the rules are set – to catch you up on the details and to get ACA member feedback.

ACA is supportive of the JOBS Act, acknowledging its complexity and differences of opinions on the impact of crowdfunding on sophisticated angel investing and startups. We continue to generally support the concept, as we wrote you in December, while also noting some concerns about fraud and other issues. We will also point Congress to the need to catalyze angel investment – through tax credits and extension of the 100% exemption of gains on Qualified Small Business Stock – so that the companies that raise capital through crowdfunding have access to the excellent angel investment they will need to survive and grow.

We will stay in touch with you as the rules and details for the JOBS Act concepts are set. If you have questions or suggestions, please do not hesitate to contact us.

Regards,

Dan Rosen,Chair, ACA Policy Committee
Marianne Hudson, ACA Executive Director


For more information about JOBS Act:

Shugie

I don’t usually do personal stuff on my blog. However, so many of my colleagues knew my little dog, Shugie; I felt I needed to let them know of her passing. She died last Tuesday (3/12), after a brief battle with pulmonary hypertension. Shugie lived a charmed life and was just shy of 16. She was well loved and loved me and all of her friends. Her smile brought joy to everyone.

Shugie was a remarkable creature. Tiny in size, but huge in spirit. Her absolute favorite thing in the entire world was to go to business meetings, which she did from the time she was a tiny puppy. This picture was taken at a meeting. She understood (sometimes better than I did) how to behave at a meeting. She would greet each person, ask me to pick her up, and then sit in her seat looking at each person as they spoke.

It has been oft stated that dogs make us human. In fact, I think they often represent the best of us – showing us how important it is to be joyful even in adverse circumstances. I know that her unconditional love was showered on me. She lived a wonderful life, but will be sorely missed. To quote a friend of mine: “Remarkable that so gigantic a vacuum can be left by the absence of such a tiny creature.”

SkyCast – the cooler path to in-flight entertainment

Occasionally, you see a deal where you immediately understand both how cool it is and the impact that it will have on an industry. Couple that with one that will also have an impact on you personally and a great team, and you have SkyCast Solutions.

Founded by the inventor of the digEplayer (if you fly Alaska as much as I do, it needs no introduction), Bill Boyer, who is joined by my friend, Peter Parsons, and Greg Latimer (former VP Marketing at Alaska Air), this is a team that understands the industry. It is no secret that airlines have troubles with profitability. As fuel prices soar and the sluggish economy depress business travel, the problem gets worse. Airlines have learned that ancillary sources for revenue (like baggage fees) are an attractive way to make up any gaps. The problem with fees: customers hate paying for something that brings them no enjoyment that they think should be free.

Enter SkyCast Solutions. They make a VERY cool in-flight entertainment solution, called TrayVu™ (http://www.skycastsolutions.com/NEW/products.html). It is an android tablet that goes into the tray table, can be viewed through the table, and automatically flips up when you put the tray down. This offers many advantages, including being light weight (a short IRR for the airlines on fuel savings alone), ability to show ads or other things below 10,000 feet, having use of your tray table with the screen in a perfect viewing position, a credit card reader to buy food or pay per views, and (maybe most importantly to anyone who has had the person behind them play angry birds in a seat back system) when you play a touch game you don’t disturb the person in the seat in front. It is an exceeding economical system for the airlines to install and use, brought to you by an industry veteran who knows how to make these things work.

OK.. in-flight entertainment won’t change the world. But it will make long flights much more fun. This is why I (and other Alliance of Angels members) chose to invest in SkyCast Solutions.

AppAttach – Serving the long tail

I recently invested in AppAttach (http://www.appattach.com/about), an online marketplace for device manufacturers (OEMs) to find and sign up software vendors (ISVs) and receive a bounty the way the very largest hardware OEMs do.

It’s widely known that software preinstallation has become key to profitability for consumer electronic device manufacturers, but whether it’s major OEM bundling an antivirus application with a PC or a small Chinese handset manufacturer pre-installing Internet Search on a new mobile device, there’s no efficient way for buyers and sellers to quickly see what placement opportunities are available and easily conduct business. Most software vendors can only do such deals with the very largest PC manufacturers, because there is no efficient process for consummating, implementing and tracking such deals. Today’s market is crowded with new tablet entrants, who (other than the iPad) have limited market share. Likewise, the PC marketplace has a lot of custom-built PCs (like the one on which I’m authoring this blog).

AppAttach has created a marketplace and set of value-added tools and services that greatly reduce the cost of finding, negotiating, and monetizing pre-installed software and online service transactions. Simpler and less expensive transactions allow small/mid-size OEMs and ISVs to strike pre-installed distribution deals, while at the same time allowing large manufacturers to strike smaller, more targeted deals that maximize per device revenue and enhance the end user’s out-of-box-experience.

The appAttach Marketplace facilitates transactions in all major categories of software and online services, including security, productivity, browser, search, multimedia, entertainment and gaming, on devices ranging from desktop computers to mobile phones. The appAttach Marketplace is a neutral, secure interactive trading exchange where members can bid via auction-based or fixed-price listings for pre-installed software and online service placements, allowing its customers with the ability to negotiate and agree on pricing, quantity, delivery, quality and other terms online.

James DePoy, the appAttach founder, worked at the OEM group at Microsoft prior to founding appAttach, so he understands the industry dynamics and the needs of both hardware OEMs and software ISVs. His vision and drive should allow him to build an great company.

I like smaller companies that can customize a computer (or tablet) to your needs. I believe that appAttach is a missing piece of the business infrastructure that will enable smaller companies the freedom and flexibility to grow their revenues.

Virticus Acquired by LSI

One of my AoA portfolio companies was acquired today by LSI Industries. http://www.nasdaq.com/article/lsi-industries-inc-announces-acquisition-of-virticus-corporation-20120319-00192

Virticus is an integrated set of products and services that reduce energy and maintenance costs by 30-50% through a communication and control system that allows the management of lights individually and collectively. It is a cost-effective solution that scales from 10 lights in a church parking lot to 10,000,000 lights managed by a city. Virticus is a great example of how modern network and software technologies can be a green way to lower energy consumption, while maintaining (or improving) functionality. Its customers were delighted with what it could do.

The decision to sell a company early in its life cycle is always a difficult one. While Virticus had enormous promise, it also participated in an industry with many mega-players. Customers, like municipal governments, are generally not very quick to adopt new technologies, even when they have the potential to safe budget dollars. Selling to large governmental customers (or large industrial ones, too) is particularly difficult for a small startup.

Virticus was completely financed by angels.

Congratulations to the Virticus team and board for building a great product, company and team. And then having the wisdom to sell at the right time.

Clarisonic – what a fabulous exit for AoA

Clarisonic, a signature Alliance of Angels portfolio company, was acquired by L’Oreal at the end of 2011 (http://clarisonic.com/about_us/press_releases/press/claire_release_12_15_11.php). David Giuliani, the CEO of Clarisonic, was an AoA member at the time and brought the deal to the group. Naturally, many AoA members immediately invested; I was among them. Those fortunate enough to be in that first round received a return over 20x at the time of the acquisition.

And when Clarisonic raised its second round, most reinvested and even more AoA members invested too. That round returned over10x.

This is a great success story for the community. David and the Clarisonic team kept the production in Western WA, creating over 500 jobs.

Partially as a result of this exit, we have also seen many of the angels begin to reinvest the proceeds in new deals. This is what angels do!

Crowdfunding and Angel Investing

My friend, Bill Carleton, posted a very thoughtful blog on Crowdfunding and angel investing: http://www.geekwire.com/2012/angels-crowds

Bill has teed up some excellent questions. See my response.

While you should definitely read the entire post, here is brief excerpt:

Crowding out angels from startup financings?

March 3, 2012 at 1:52 pm by William Carleton

As early as next week, we may know whether Congress will change US securities laws to permit startups to sell stock to the general public over the internet.

You know how, today, companies raise money on Kickstarter by offering products, t-shirts, and other bennies? Imagine those same companies selling stock to investors over a Kickstarter-like platform. If the law changes – and this is something that one chamber of Congress has already passed and that President Obama supports – entrepreneurs seeking capital will have one more alternative to angel investors and venture capital firms.

Sound too good to be true? There is a catch. The proposed law (known as a “crowdfunding exemption”) would apply only to offerings that place strict limits on how much money can be raised and how much an individual investor may invest. For example, the new crowdfunding exemption might say that the startup may raise no more than $1,000,000 in a given year. And that each investor may invest no more than $1,000 per deal. (Actual limits are still being debated in Congress.)

My reply to his blog:

Bill – as always, great and thoughtful post. The original intent of the Crowdfunding bill (as drafted by Scott Brown) was to help replace Friends & Family money that has dried up with real estate prices. (Gone are the days when an entrepreneur could take out a mortgage on their home!)

As every professional angel knows, angel investing is not for the faint of heart. Many deals (even ones that seem like a sure thing) go to zero. Some are successful, but take a very long time. Almost every deal will take multiple rounds. (There is a reason for the “accredited investor” rule!) I don’t think anyone believes that a company can be funded from inception to exit by Crowdfunding.

And, angels provide much more than capital – they provide knowledge and assistance.

One historical perspective: in the early days of angel investing, VCs often would not invest in angel deals. Less experienced angels (particularly those not in groups) would screw up the valuation and terms, so VCs wouldn’t want to take the time to fix them up. As you highlight, Crowdfunded deals might follow the same path – the terms might just not be right to incent angels to invest. And cleaning up the deal for angels to follow might be a great deal of work, especially at a time like this where there are a lot of deals vying for our attention.

This next year will tell a lot about how this will play out. It’s going to be interesting!

Angel Investing on NPR

NPR ran a great story on Angels and entrepreneurs in Milwaukee. Worth hearing. http://www.npr.org/2012/02/10/146697508/angel-investors-and-startups-mingle-in-milwaukee

This is another example of government beginning to understand the impact of the benefits of high-growth startups backed by angels. It is good public policy to encourage angels to help create companies through extension of the zero percent capital gains (Extension of 100% gains exemption on Qualified Small Business Stock (Sec 1202) – Current Senate bill 2050, Small Business Tax Extenders Act of 2012) and a 25% tax credit for investing in these businesses (Current Senate bill 256, American Opportunities Act, which would provide a 25 percent tax credit for investments in innovative startups).