» Securities

Why is disclosure important when small businesses raise capital?

Remember that the reason for disclosures is to enable investors to make decisions based on all the relevant information needed to assess risk and reward. All publicly owned companies must make detailed periodic disclosures on business operations and financial health to shareholders and the SEC. Private small businesses typically need not make detailed disclosures because the law assumes an investor knows enough about the private small business such that no additional protections are necessary. When a small business goes public, then it will be subject to the same disclosure rules as large publicly owned businesses. It’s a fact that disclosures are tougher for small businesses to handle, so the SEC provides ways to balance the public’s need for transparency against small businesses facing hardship in capital formation. For example, small issue exemptions, private placement exemptions, and less stringent filing parameters are some of the ways the SEC eases the burden of disclosure on qualifying small businesses.

To be on the safe side, small businesses should keep meticulous records and err on the side of accurate disclosure. Hashing out in court whether or not you needed to disclose more can be a headache. If a court finds your disclosures insufficient, you may be subject to rescission and other penalties. Not only that, but disclosing relevant financial information, even when the SEC does not absolutely require it, sows seeds of trust with your investors—that’s priceless. Giving proper disclosures, as expected by both SEC and best business practices, is a murky area for entrepreneurs, but the attorneys of Bjornson Jones Mungas provide experienced, tailored advice for each unique client.

What effect does the JOBS Act have on Montana businesses raising capital?

The JOBS Act is a boon for investors and Montana businesses, including start-ups in the high tech and biotech sectors. Montana Sen. Jon Tester played a big role in the inclusion of many elements that will make it easier for Montana businesses to raise much needed capital. More capital means more growth, more development, and more jobs. 

The JOBS Act raised the maximum yearly value of securities a company may offer while still benefitting from simplified regulations: the maximum is now $50 million, up from $5 million. In addition, private companies may have up to 2,000 investors, up from 500. This, combined with the change allowing general solicitation and advertising of some private stock offerings, helps raise significantly more capital for new companies. Before the JOBS Act, private companies publicly advertising to raise capital from investors outside of preexisting relationships was illegal, and only large public companies that could afford to be listed on stock exchanges could generally solicit for capital this way. Allowing general solicitation for private companies has the effect of democratizing raising capital in a way never before seen in our country, and this fuels start-up growth. The JOBS Act also addresses a very popular form of raising money, especially online: hello, “crowdfunding,” you’re here to stay. Via crowdfunding, private companies can now raise up to $1 million annually from an unlimited number of investors. Easing the restriction on general solicitation means that small businesses are freed up to use online solicitations, including crowdfunding, as a powerful, modern way to get off the ground. 

It is important to know that businesses seeking to generally solicit must comply with restrictions and requirements such as filing with the SEC to let them know you intend to generally solicit, accept only accredited investors, and disclose details on your general solicitation within the first 15 days of the first solicitation. A business in violation of these requirements will be banned from fundraising for a full year, which can spell doom for a fledgling company. The Missoula-based attorneys of Bjornson Jones Mungas we understand the benefits and pitfalls start-ups face, and we are your best asset in maneuvering the JOBS Act to your benefit.