Yesterday President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, which got wide bipartisan support. That’s because the legislation makes it easier for companies to raise capital and should lead to more job creation.
With the JOBS Act, companies won’t have to meet some of the typical regulatory requirements — such as audits of financial systems — when going public. This applies to firms with less than $1 billion in revenues or a market cap under $700 million. Instead, they’ll have up to five years — after their IPO — to meet the rules.
The legislation will also allow small companies to raise money via the Internet — a process known as crowdfunding. With this, a company will generally be required to provide only minimal disclosures, such as tax returns, a basic business description and a list of the principals.
So yes, investors may have a chance to get in on the next Pandora (NYSE:P), LinkedIn (NYSE:LNKD) or Zynga (NASDAQ:ZNGA) at the early stages. However, the fact remains that the risks are likely to be substantial. Indeed, many early-stage companies wind up failing, which wipes out the common shareholders.