Silicon Valley Lawyers Back JOBS Act—Cautiously

Amy Miller

The Recorder

03-22-2012

Lawyers in Silicon Valley strongly support a jobs bill making its way through Congress that would make it easier for small companies to raise capital and go public.

But their enthusiasm is measured. They warn that a controversial "crowdfunding" provision in the so-called JOBS Act is fraught with risks, including a possible flood of securities litigation. And even if the bill becomes law, they say they'll continue to advise startup clients that crowdfunding is a last resort for raising capital.

The "Jumpstart Our Business Startups" Act would lower regulatory hurdles for "emerging growth companies" with under $1 billion in revenue. It would also let small companies take part in "crowdfunding, allowing them to use social media to raise up to $1 million from large pools of small investors — without registering as public companies with the Securities and Exchange Commission. The investments would have to be under $10,000 or 10 percent of the investor's annual income, whichever is less. "No one person is going to be investing their nest egg in one of these crowdfunded financings," said Jeffrey Vetter, a corporate partner at Fenwick & West who is representing Facebook Inc. in its upcoming initial public offering. "The idea is to make it easier for companies to go out raise some money."

The problem is that easing regulations on disclosures could expose investors to fraudulent schemes, and that could lead to problems later on for companies. The bill passed the U.S. House of Representatives two weeks ago by a 390-23 vote and was debated by the Senate on Monday. The legislation has been criticized by regulators and investors for not doing enough to protect investors.

"Having a large number of relatively anonymous, less sophisticated shareholders is not a good recipe for managing a company in an organized and rational way," said Craig Jacoby, who specializes in representing high growth companies at Cooley in San Francisco.Corporate partner Justin Hovey at Pillsbury Winthrop Shaw Pittman in San Francisco already advises his clients to seek funding from family, friends and angel investors before even considering crowdfunding. Crowdfunding is typically something that only small mom-and-pop companies or kids fresh out of college without access to other sources of cash would consider beginning with, he said.

Dealing with a large number of investors is an administrative challenge for any small business. And professional investors bring more than just cash, Hovey said.

"You're not getting access to other portfolio companies, to their network of talent, to their experience, or just having a shoulder to cry on," Hovey said. "None of that is going to come with a crowdfunded financing."

Add to those issues a lack of transparency for investors, and companies would have even bigger problems related to crowd funding, including a flood of lawsuits, said Antone Johnson, founder of Bottom Line Law Group, which works with early stage web and mobile startups in Silicon Valley.

"If you have a system set up to sell securities to unaccredited investors, in relatively small amounts, to fund risky new ventures," Johnson said, "that's a gigantic flashing sign to attract the worst scumbags on Earth."

This article originally appeared in The Recorder.