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A critical look at the Jumpstart Our Business Stamps Act: considering the Debate Surrounding Its Provisions and Implications.

The Jumpstart Our Business Startups (JOBS) Act (H.R. 3606), which was signed into law on April 5, 2012, enjoyed bipartisan support in the U.S. House of Representatives and in the U.S. Senate, but its provisions generated some controversy and will have significant implications for many capital market participants. The JOBS Act works to increase access to capital by scaling back new regulations and modifying old regulations through three main mechanisms: the initial public offering (IPO) "on-ramp," crowdfunding, and mini--public offerings. It affects an extensive list of laws, including the Securities Act of 1933, the Securities Exchange Act of 1934, Regulation FD (Fair Disclosure), the Sarbanes-Oxley Act of 2002 (SOX), and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Furthermore, the law will exempt a new class of filer--emerging growth companies (EGC)--from certain future rules.

Although there is no disagreement about the need to create jobs, there is significant dispute over which policies are most likely to make that happen. Proponents of the JOBS Act assert that it updates old regulations that have failed to keep up with the modern economy and reverses regulations that have focused too heavily on large business, leaving smaller businesses burdened with onerous regulations that hinder their ability to access capital. But the fundamental question surrounding the JOBS Act is whether previous regulations were actually preventing profitable small businesses from acquiring capital. The act implicitly takes the position that 1) prior regulations were preventing companies from accessing capital, 2) the inability of these companies to access capital is hurting job growth, and 3) the way to stimulate job growth is to remove certain regulations surrounding the process of offering and selling securities.

Evolving Regulations

The process of offering and selling securities in the United States has long been regulated. These regulations have evolved over decades in order to balance business' need to access capital with investors' need for relevant and reliable disclosures. Historically, significant changes to these regulations have occurred only after a scandal has caused massive investor losses. For example, corporate insiders' abuse of the financial markets and the resulting stock market crash of 1929 lead to the Securities Acts of 1933 and 1934. More recently, the failure of Enron and the global credit crisis led to SOX and the Dodd-Frank Act.

The JOBS Act is different because it did not result from investor losses due to abuse; rather, it resulted from a major economic recession. The act is also unique because, unlike previous regulatory changes, it actually unwinds many of the investor protections put into place over the last 80 years, including parts of the Securities Acts, SOX, and the Dodd-Frank Act.

Provisions of the JOBS Act

As previously mentioned, the JOBS Act works to facilitate private companies' access to capital by scaling back new regulations and modifying old regulations through the IPO on-ramp, crowdfuriding, and mini--public offerings. The Exhibit summarizes the act's main provisions; the sections below delve deeper into each of these three mechanisms and the act's implications for CPAs.


Summary of Provisions of the Jumpstart Our Business Startups (JOBS) Act

                              Treatment under the JOBS Act


Section 101: Definitions      * Creates a new classification of filer,
                              the EGC.

Section 102: Disclosure       * EGCs are exempt from "say-on" votes,
Obligations                   including say-on-golden-parachute.
                              * EGCs are exempt from comparing CEO pay
                              to median employee pay.
                              * The amount of information required in a
                              registration statement is reduced to two
                              years of audited financial statements and
                              two years of selected financial data.
                              * Compliance date for new accounting
                              standards must be consistent with private
                              * The number of years of selected
                              financial data does not have to predate
                              the earliest audited financial statements
                              disclosed in the original offering

Section 103: Internal         * EGCs are exempt from Sarbanes-Oxley Act
Controls Audit                of 2002 (SOX) section 404(b).

Section 104: Auditing         * EGCs are exempt from possible future
Standards                     mandatory audit firm rotation and/or
                              supplements to the audit report requiring
                              additional information about the audit of
                              the financial statements.
                              * EGCs are exempt from any new rules
                              adopted by the PCAOB, unless application
                              to EGCs is determined necessary or
                              appropriate in the public interest.

Section 105; Availability of  * Brokers and analysts can communicate
Information about EGCs        with investors and businesses even if
                              they are participating in the offering.
                              * Analysts are essentially allowed to
                              publish research on an EGC at any point
                              (before, during, and after) the IPO.
                              * Analysts are now allowed to communicate
                              with management of the EGC while other
                              associated persons are present

Section 106; Other Matters    * EGCs may submit a confidential IPO
                              registration statement for review by the
                              SEC, as long as the documents are made
                              public 21 days prior to the road show.
                              * The SEC will conduct a study regarding
                              the impact of decimalization on the
                              number of IPOs, the liquidity for small
                              and middle capitalization company
                              securities, and the need to continue
                              supporting trading in penny increments
                              for these securities.
                              * Pending the results of the study,
                              trading small and middle capitalization
                              company securities may be transacted in
                              an increment greater than $0.01 but less
                              than $0.10.

Section 107: Opt-In Right     * Issuers may choose to forego EGC status
for EGCs                      and/or pick and choose which of the
                              related exemptions to opt-in to (except
                              for the extended transition period, which
                              is all or none [see section 107(b)]).

Section 108: Review of        * Requires the SEC to conduct a
Regulation S-K                comprehensive review of Regulation S-K to
                              identify inefficiencies and overly
                              burdensome provisions with the goal of
                              streamlining the registration process.


Section 201: Modification of  * Removes the ban on general solicitation
Exemption                     and general advertising in Rule 506 and
                              Rule 144A offerings, as long as all of
                              the investors are accredited investors or
                              qualified institutional buyers.

Section 301: Short Title      * The title may be cited as "Capital
                              Raising Online While Deterring Fraud and
                              Unethical Non-Disclosure Act of 2012" or
                              "Crowdfund Act"

Section 302: Crowdfunding     * Amends section 4 of the Securities Act
Exemption                     of 1933 for the offer or sale of
                              securities, provided that the aggregate
                              amount sold in the previous 12-month
                              period is less than $1 million; the
                              aggregate amount sold to any individual
                              investor does not exceed the greater of
                              $2,000 or 5% of the annual income or net
                              worth of an investor, if either the
                              annual income or net worth of the
                              investor is less than $100,000, or 10% of
                              the annual income or net worth of an
                              investor, not to exceed a maximum of
                              $100,000, if either the annual income or
                              net worth of the investor is equal to or
                              greater than $100,000.
                              * Establishes requirements under section
                              4A (a) of the Securities Act of 1933 for
                              intermediaries, including the following:
                              1. Provide disclosure related to risks
                              and other investor education materials.
                              2. Ensure that each investor reviews
                              investor education information and
                              positively affirms that she understands
                              the risk of losing the entire
                              3. Require each potential investor to
                              answer questions demonstrating an
                              understanding of risks of startups and
                              4. Use reasonable measures to reduce risk
                              of fraud.
                              5, Ensure that all proceeds are withheld
                              until the aggregate proceeds is equal to
                              or greater than the target offering
                              6. Ensure that no investor, in a 12-month
                              period, has purchased securities offered
                              pursuant to section 4 (6) that in
                              aggregate from all issuers, exceed the
                              investment limits established in section
                              4 (6) (B).
                              * Establishes requirements under section
                              4A (b) for issuers, including the
                              following, among other things:
                              1. Issuers must provide names of officers
                              and directors, as well as a description
                              of the business and anticipated business
                              plan, along with the intended use of the
                              2. Issuers must provide a description of
                              the financial condition of the company
                              (including the following: if the target
                              offering is $100,000 or less, the income
                              tax returns for the most recent year and
                              financial statements certified by the
                              principal executive officer; if the
                              target funding is between $100,000 and
                              $500,000, financial statements reviewed
                              by a public accountant; and if the
                              funding target is greater than $500,000,
                              audited financial statements); the target
                              offering amount, the deadline for
                              reaching it, and updates on progress; the
                              price of the shares, with a reasonable
                              opportunity to rescind the commitment to
                              purchase; and a description of the
                              ownership and capital structure of the
                              3. Issuers must file with the SEC and
                              provide to owners annual financial
                              * Establishes liability for misstatements
                              and omissions.

Section 303: Exclusion of     * Amends section 12 (g) of the Securities
Crowdfunding Investors from   Exchange Act of 1934 to incorporate the
Shareholder Cap               shares issued under the crowdfunding

Section 304: Funding Portal   * Amends section 3 of the Securities
Regulation                    Exchange Act of 1934.

Section 305: Relationship     * Amends section 18 (b) (4) of the
with State Law                Securities Act of 1933 to incorporate the
                              shares issued under the crowdfunding
                              * Relates solely to state registration,
                              documentation, and offering requirements,
                              and has no impact or limitation on other
                              state authority to take enforcement
                              * Updates the law on state jurisdiction
                              over unlawful conduct of funding portals
                              and issuers.


Section 401: Authority to     * Increases the limit on Regulation A
Exempt Certain Securities     offerings to $50 million in a 12-month
                              * Establishes that securities can be
                              publicly sold but are not restricted
                              * Makes applicable the civil liability
                              provisions of the Securities Act of1933.
                              * Allows for solicitation of interest
                              prior to filing with the SEC.
                              * Requires annual filing of audited
                              financial statements with the SEC.
                              * Allows the SEC to require other terms,
                              conditions, or requirements necessary in
                              the public interest and to protect
                              investors both in the initial offering
                              and periodic disclosures including
                              electronic submission to the SEC and
                              prospective investors of offering
                              documents (e.g., audited financial,
                              description of the issuer's business
                              operations, description of the issuer's
                              financial condition, corporate governance
                              principles, use of investor funds).
                              * Extends the "bad-actor" provisions of
                              the Dodd-Frank Wall Street Reform and
                              Consumer Protection Act of 2010 to
                              Regulation A offerings.
                              * Requires a review of the offering
                              limitation every two years and an
                              explanation of the decision stemming from
                              the review,

Section 402: Study on the     * Requires the Comptroller General to
Impact of State "Blue Sky     conduct a study on the effect of "blue
Laws" on Regulation A         sky laws" on Regulation A offerings.


Section 501: Threshold for    * Increases the number of shareholders of
Registration                  record a company can have before it must
                              register with the SEC from 500 to 2,000,
                              as long as there are less than 500
                              nonaccredited investors.

Section 502: Employees        * Excluded from shareholders of record
                              are employees who obtained securities as
                              part of an exempt transaction in an
                              employee compensation plan.

Section 503: Commission       * Calls for the revision of "held of
Rulemaking                    record" and adoption of safe harbor
                              provisions for determining whether
                              securities were received as part of an
                              exempt transaction in an employee
                              compensation plan.

Section 504: Commission       * Calls for the SEC to examine whether it
study of Enforcement          needs greater enforcement tools to deter
Authority under Rule 12g5-1   and punish issuers who structure
                              transactions to circumvent section 12g5-1
                              of the Securities Exchange Act of 1934.


Section 601: Shareholder      * Increases the number of shareholders of
Threshold                     record a nonpublic bank or bank holding
                              company can for Registration have before
                              it must register with the SEC to 2,000.
                              * Allows a nonpublic bank or bank holding
                              company to terminate its registration
                              when the number of shareholders is less
                              than 1,200.

Section 602: Rulemaking       * Calls for enactment of this title by
                              the SEC within one year.


Section 701: Outreach by the  * Calls on the SEC to inform certain
Commission                    groups of the act's provisions, including
                              small and medium-sized businesses,
                              companies owned by women, businesses
                              owned by veterans, and entities owned by

IPO On-Ramp

Prior to the JOBS Act, SEC regulations established three distinct classes of filers: 1) nonaccelerated filers with public float of less than $75 million, 2) accelerated filers with public float of $75 million to $700 million, and 3) large accelerated filers with float in excess of $700 million. The JOBS Act creates a new classification of filer--the EGC. It is important to note that entities must elect EGC treatment; if a filer does not elect to be treated as an EGC, it will be treated as either a nonac-celerated filer or an accelerated filer. To be eligible for EGC status, companies must have had less than $1 billion of revenue in their most recent fiscal year and cannot have completed an IPO on or before December 8, 2011. EGC status continues until the earlier of 1) the passage of five years, 2) annual revenues of $1 billion or more, 3) nonconvertible debt issuances of more than $1 billion in the previous rolling three years, or 4) the entity meets the definition of a large accelerated filer.

The JOBS Act creates an IPO on-ramp for EGCs by scaling back many of the regulations surrounding IPOs. For example, EGCs are only required to file two years of audited financial statements when registering their IPO; furthermore, EGCs are not required to include information for any period prior to the earliest audit period (two years) in their subsequent filings (e.g., table of selected financial data or management's discussion and analysis [MD&A]). In addition, the act called for the SEC to review Regulation S-K and report on ways to make registration more efficient for EGCs; however, the SEC missed its 180-day deadline for review and has yet to issue a report.

The JOBS Act also relieves EGCs from certain provisions of SOX and the Dodd-Frank Act. Although the Dodd-Frank Act already exempted the independent auditor's attestation on the effectiveness of an issuer's internal control over financial reporting for nonaccelerated filers under SOX section 404 (b), the JOBS Act extends that exemption for as long as five years after an IPO. In addition, the Dodd-Frank Act established a requirement for businesses to allow shareholders three nonbinding votes on executive compensation: 1) a say-on-pay vote at least once every three years, 2) a say-on-frequency vote once every six years (to set the frequency of say-on-pay votes), and 3) a say-on-golden-parachute vote. Furthermore, the Dodd-Frank Act required companies to include disclosures about these votes in their Compensation Discussion and Analysis (CD&A).

Whereas the Dodd-Frank Act originally allowed a two-year exemption for smaller reporting entities (less than $75 million), the JOBS Act extends this exemption by allowing EGCs to disregard all three of the "say-on" votes, as well as other compensation-related disclosures. The JOBS Act also exempts EGCs from the Dodd-Frank Act's requirement to disclose the ratio of the median annual compensation of all employees to that of the CEO.

The act provides EGCs with additional relief concerning auditing and accounting rules. Title I section 104 exempts EGCs from fiture PCAOB rules, stating:

  any additional rules adopted by the Board ... shall
  not apply to the audit of any emerging growth company,
  unless the Commission determines that the application
  of such additional requirements is necessary or
  appropriate in the public interest, after considering
  the protection
  of investors and whether the action will promote efficiency,
  competition, and capital formation.

At the same time, section 102 (b) allows EGCs to adopt effective dates for new or revised accounting standards, consistent with the dates for nonissuers.

The JOBS Act section 107 (a) allows EGCs to opt-in to the aforementioned exemptions on an item-by-item basis, or "instead comply with the requirements that apply to an issuer that is not an emerging growth company." At the same time, section 107 (b) describes steps that a company should take if it wants to elect out of the extended transition period for new or revised accounting standards. Section 107 (b) has received significant attention in the SEC's frequently asked questions (FAQ) section ( Key takeaways from the FAQs with respect to section 107 (b) include the following:

* Companies should notify the SEC review staff of their intentions with respect to the extended transition period for new and revised accounting standards in their draft (confidential) registration statements, according to FAQ 13.

* The term "new or revised" accounting standard refers to any update issued by FASB to the Accounting Standards Codification (ASC) after April 5, 2012, according to FAQ 33.

* The extended transition period for new and revised accounting standards only applies to standards that apply to nonissuers, according to FAQ 35.

* EGCs that are foreign private issuers may not report under IFRS for Small and Medium-Sized Entities (SME), according to FAQ 36.

* EGCs can initially take advantage of the extended transition period and then choose to forego this election, as long as the decision is prominently disclosed in the first filing following the company's decision and is irrevocable, according to FAQ 37.

These exclusions regarding auditing and accounting rules could place both an auditor and the EGC in an awkward position, because EGC status is elective. Thus, an auditor might have to perform two different jobs for two otherwise identical clients (one that elects EGC status and one that elects non-EGC status), In addition, EGC clients could be complying with different accounting rules, given the discretion allowed in Title I. EGCs could also suffer a higher cost of capital if the market discounts 1) audits that do not follow current practice, 2) a lack of information that had been included in pre--JOBS Act registrations, 3) audit reports that lack information required by the PCAOB for otherwise identical non-EGC companies, or 4) a lack of timely information due to a business's choice to apply an extended transition period for new and revised accounting standards.

It will be important for CPAs to counsel businesses on the costs and benefits of electing EGC status. If EGC status is elected, CPAs can help their clients understand how best to utilize the exemptions in Title I. Moreover, the IPO on-ramp includes a maximum of five years of exemptions; thus, accountants will want to ensure that EGC clients have carefully mapped their transition out of EGC status and are on target to comply with all relevant provisions of the Securities Acts when EGC status expires.


Crowdfunding--that is, methods of using the Internet and social media to generate funding for a specific project--represents a growing source of funding for small business projects. Typically, a project receives small dollar investments from a large number of people via Internet advertising and social media. Investors receive incentives, such as services, information, early opportunities to purchase products, free advertising, or inclusion of their name in a list of contributing founders; thus, they are not purchasing a share of the company. In essence, crowd-funding provides small businesses access to funding without going through the capital markets or giving up partial ownership of their company. The website is an example of this relatively new phenomenon.

The JOBS Act takes the novel approach of adapting crowdfunding to the issuance of securities. According to the theory behind crowdfunding, a large group of investors will, on average, make better decisions than individuals. Whereas securities laws have traditionally recognized the difference between sophisticated (qualified) and unsophisticated investors, the JOBS Act moves toward equal treatment of all investors in order to allow the broadest possible pool of capital.

To adapt crowdfunding to securities, the JOBS Act amends section 4 of the Securities Act of 1933 to exempt issuers from the registration requirements of section 5 of that act when they offer and sell up to $1 million in securities in a 12-month period (JOBS Act Title III section 302[a][6][A]). The JOBS Act also includes some investor protections. For example, individual investments must not exceed certain thresholds, and an issuer must satisfy other conditions. More specifically, the aggregate amount sold to any investor within a 12-month period may not exceed I) the greater of $2,000 or 5% of the investor's annual income or net worth, if either annual income or net worth is less than $100,000 (JOBS Act Title III section 302[a][6][B][i]), and 2) 10% of the investor's annual income or net worth, not to exceed a maximum aggregate amount sold of $100,000, if either annual income or net worth is greater than or equal to $100,000 (JOBS Act Title HI section 302[a][6][B][ii]). One of the conditions established by the act is that if issuers use the services of an intermediary, that intermediary must be either a broker or funding portal registered with the SEC. The latter is defined in section 3(a)(80) of the Securities Exchange Act of 1934 as an intermediary that does not--

(A) offer investment advice or recommendations;

(B) solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal;

(C) compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal;

(D) hold, manage, possess, or otherwise handle investor funds or securities; or

(E) engage in other activities as the Commission, by rule, determines appropriate.

The funding portal is subject to the SEC's examination, enforcement, and rulemaking authority. It must also become a member of a national securities association registered under section 15A of the Securities Exchange Act of 1934. As of this writing, only the Financial Industry Regulatory Authority (FINRA) meets this criterion.

Among other things, the crowdfunding intermediary may not--

* compensate promoters, finders, or lead generators for providing the intermediary with the personal identifying information of any potential investor, or

* allow its directors, officers, or partners to have a financial interest in any issuer using the services of the intermediary.

Title III section 302(b) of the JOBS Act requires the following of individuals acting as intermediaries in a transaction involving crowdfunding:

* Provide disclosures that the SEC determines appropriate, including the potential risks of the transaction.

* Ensure that investors review the investor education materials and positively affirm that they understand that the entire investment may be lost.

* Take steps to protect the privacy of information collected from investors.

* Take measures to reduce the risk of fraud of the transactions, as established by the SEC.

* Make available to the investors and the SEC, at least 21 days before any sale, disclosures provided by the issuer.

* Ensure that proceeds are given to the issuer only after the target offering amount is achieved.

* Ensure that no investor has purchased crowdfunded securities that exceed the investment limits under Title III of the JOBS Act.

* Follow any other requirements that the SEC deems appropriate.

Title III section 302(b) of the JOBS Act also requires issuers to file with the SEC and make the following information available to investors, brokers, and funding portals:

* The names of the directors and officers and each person holding more than 20% of the issuer's shares

* A description of the business and the anticipated business plan

* A description of the financial condition of the issuer, including the following: 1) for offerings of $100,000 or less, the income tax returns from the most recent year and financial statements certified by the principal executive officer; 2) for offerings between $100,000 and $500,000, financial statements reviewed by a public accountant who is independent of the issuer; and 3) for offerings in excess of $500,000, audited financial statements

* A description of the stated purpose and intended use of the proceeds

* The target offering amount, the deadline to reach the target, and regular updates on progress towards meeting the target

* The price of the securities or the method of determining the price; investors must also have a reasonable opportunity to rescind the commitment to purchase the securities.

The SEC missed its 270-day deadline to write rules to implement the crowdfunding provisions of the JOBS Act; thus, at present, no one may receive the crowdfunding exemption from section 5 of the Securities Act until the SEC has completed this process.

Mini--Public Offerings

Historically, businesses that wish to avoid the costly and time-consuming IPO process have utilized Rule 506, as well as other Regulation D exemptions to access capital. The JOBS Act removes significant constraints on general solicitation for Rule 506 of the Regulation D exemption; it also makes changes to Regulation A, which should make this exemption much more attractive.

Regulation A is a type of exempt offering designed to balance a small business's need to access capital with investors' need for protection. More specifically, Regulation A allows businesses to have mini--public offerings with filings that are significantly less costly and burdensome than disclosures for a normal IPO, which involves registration with the SEC. Companies may sell Regulation A securities to either the public or to nonaccredited investors. The shares are not restricted and, thus, can be freely traded. But Regulation A offerings are capped at a maximum dollar amount during any 12-month period. This amount has grown over time., it began at $100,000 in 1933, reached $500,000 in 1970, and was $5 million in 1980.

Prior to the passage of the JOBS Act, the Regulation A exemption was criticized for its relatively small $5 million dollar cap on proceeds. The act increased the maximum proceeds to $50 million, which should make Regulation A significantly more attractive to small businesses seeking capital. Furthermore, this exemption will allow issuers to solicit interest in their offering before they commit to it. This allows companies to gauge the demand for their securities before they incur the time and expense of filing an offering circular with the SEC.

Because a primary concern with introducing a higher ceiling on proceeds from Regulation A offerings is the expanded risk of loss to investors, the JOBS Act also includes investor protections. Regulation A requires disclosures such as audited financial statements, a description of the issuers operations and financial condition, corporate governance principles, and intended use of the proceeds. Furthermore, the civil liability provision in the Securities Act of 1933 will apply to those offering or selling securities in accordance with Regulation A.

Criticism of the JOBS Act

The act has met with significant criticism that can be categorized into two groups. First, many argue with the underlying logic of the act, insisting that existing regulations do not prevent profitable companies from accessing capital. This argument contends that--consistent with "Economic Darwinism"--capital flows to the best ideas; thus, poor business models will not and should not receive funding.

Critics would also argue that the reduction in IPOs from 2001 through 2011 (as compared to 1980 through 2001) is not a result of regulations. Jay Ritter, the Cordell Professor of Finance at the University of Florida, and his colleagues analyzed IPOs from 1980 through 2011 and offered an empirical argument that larger companies that can speed products to market and capitalize on "economies of scope" are acquiring businesses prior to an TO; moreover, due to economies of scope, a larger entity may be the profit-maximizing form of an organization (

If correct, this economies of scope argument has at least two implications: 1) regulatory changes such as the JOBS Act are unlikely to increase the volume of profitable companies completing IPOs, and more importantly, 2) the JOBS Act could harm the overall economy by encouraging smaller businesses to continue to operate instead of becoming part of a larger, more economically efficient organization. This argument suggests that the reduction in IPOs resulted from companies choosing to be acquired prior to an IPO, not from regulatory barriers.

The second group of arguments directly attacks the act's provisions, asserting that current regulations are in place to protect investors as a result of previous abuses. Any modification to or lessening of regulation is likely to result in significant investor losses similar to those that gave rise to the regulations in the first place.

Indeed, some have argued that the act is "dangerous for investors and could harm already fragile financial markets" ("Small Biz Jobs Act Is a Bipartisan Bridge Too Far," Bloomberg, Mar. 18, 2012). A New York Times editorial described the act as "a terrible package of bills that would undo essential investor protections, reduce market transparency and distort the efficient allocation of capital" ("They Have Very Short Memories," Mar. 11, 2012). Floyd Norris, chief financial correspondent of the New York Times, summed up the bill by stating: "Wall Street will still have a major victory and investors will have less protection than they do now" ("Paving Path to Fraud on Wall St.," New York Times, Mar. 16, 2012). Although existing regulations may not have been perfect, many have viewed any attempt to lessen or remove such regulations as a step backward in terms of investor protection.

The Free Market Argument

Some free market enthusiasts feel that the unregulated market is the most efficient method of allocating capital, and thus they support removal of any and all regulations. Other proponents did not oppose regulations per se, but argued that these regulations have a disproportionate effect on smaller businesses because the dollars spent on compliance have tentacles that extend far beyond their direct dollar costs.

The Kauffman Foundation for Entrepreneurship articulates this point about compliance costs in its "Startup Act" proposal:

  For large companies, such costs do not represent
  a significant burden, and well may be justified
  by the benefits of enhanced transparency. But for
  smaller, growing companies, after-tax compliance
  costs up to and exceeding $1 million can prove to
  be substantial hurdles to going public (p. 5,

This argument implies that legislation like the JOBS Act, which removes these costs from EGCs, will increase early-stage investors' returns and will likely encourage investment

Implications for CPAs

The unprecedented rollback of rules governing access to public capital will create numerous opportunities for CPAs, though these opportunities come with significant risks. Given the dollar limits on crowd-funding, issuers utilizing this funding vehicle will tend to be smaller and possess less business and financial sophistication. These businesses will need help with many accounting issues, from establishing an accounting system to tax compliance, and will eventually require assurance services. CPAs should carefully consider the independence issues that arise when choosing which services to offer.

For many CPAs, crowdfunding will introduce a new type of client, one that is very widely held but also relatively small. This will likely alter the calculus when CPAs attempt to balance the increased litigation risk of a small, broadly held client with commensurate fees. The litigation risk increases not only because the company is widely held, but also because a crowdfunded issuer is not likely to have a robust internal control structure. In addition, investors will not need to be "qualified" to invest; therefore, shareholders might lack the financial sophistication to fully understand their investments.

Some CPAs will undoubtedly choose to specialize in helping issuers through the crowdfunding process--this could be especially true if the entity chooses not to use an intermediary--and providing other advisory services (e.g., bookkeeping, information systems design and implementation, internal audit outsourcing), while foregoing the assurance service, due to the combination of the ligation risk and independence issues. Furthermore, if crowdfunding works as intended, it should lead to an increase in transaction services, as large companies acquire the crowdfunded issuers. Regardless of how CPAs choose to work with crowdfunded issuers, high-quality client-acceptance practices will remain critical, because some professionals fear a significant uptick in fraud and investor abuses (Norris 2012).

The modifications of Regulation A and the IPO on-ramp will also likely produce significant opportunities, but the risk/reward profile should be more consistent with CPAs' current practice. CPAs working with EGCs will need to develop open lines of communication and clear expectations with their clients. While EGC status will exempt issuers from certain requirements, that exemption is limited to five years. Thus, CPAs can provide value to EGCs by helping them understand compliance issues

that will arise once EGC designation expires. The Regulation A exemption should also begin to see more use. Given the lack of restrictions on public solicitation and unrestricted trading, as well as the significant increase of the limit on issues to $50 million, expertise in the Regulation A exemption may become an area of specialization for some CPAs.

The JOBS Act reduces regulatory barriers to the issuance of securities in an attempt to increase economic activity in the United States. CPAs need to be familiar with its provisions in order to help businesses take advantage of these new opportunities. The authors are confident that the JOBS Act will spur economic activity and create jobs--hopefully, this job growth will not be in litigation support and increased employment and fees for the securities bar.

Leigh Salzsieder, PhD, CPA, ABV, is an assistant professor of accountancy in the Henry W. Bloch School of Management cit the University of Missouri--Kansas City, as well as a member of the Missouri Society of CPAs Accounting and Auditing Committee and its Technical Issues Group. David W. Cornell, PhD, CPA, CMA, is an associate professor of accountancy, also in the Henry W. Bloch School of Management at the University of Missouri--Kansas City, as well as a member of both the Kentucky and Missouri Societies of CPAs.
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Title Annotation:IN FOCUS
Author:Salzsieder, Leigh; Cornell, David W.
Publication:The CPA Journal
Geographic Code:1USA
Date:Jun 1, 2013
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