On April 5, President Obama signed into law the the Jumpstart Our Business Startups (JOBS) Act, a bill designed to relax strictures that impede small companies and entrepreneurs from raising capital.
The Act received bipartisan support in Congress, but many are critical, including editors of The New York Times' DealBook, who argue that the Act “dismantles some of the most basic protections for the most susceptible investors.” They believe the Act could jeopardize investors because it undoes important reforms from the Sarbanes-Oxley Act of 2002—which was prompted by the Enron and WorldCom scandals—that discourage fraud.
However, proponents say it reduces the burden on small companies looking to go public. If a company wants to trade publicly, it owes a significant amount of periodical financial information to its investors, which can be a burden for fast-growing companies with small staffs.
The JOBS Act would allow emerging companies seeking to go public to have private conversations with the S.E.C. about planned disclosures. This could be helpful for mid-sized companies in the natural products market, or any startup that might currently be disinclined to go public because of intense examination over accounting practices. However, some argue this might be dangerous for investors who rely on transparency.
Crowdfunding for natural businesses
Perhaps the most interesting part of the act for the natural products market is the feature that allows companies to use crowdfunding via the Internet to raise funds, so that anyone can help invest in a new company they believe in. Consider the recent successes of platforms like Kickstarter and IndieGoGo as examples of this burgeoning investment structure.
Ryan Caldbeck, co-founder of CircleUp, a targeted crowdfunding website for accredited investors, spoke to Nutrition Business Journal about his thoughts on how the bill might change the game for small and mid-sized companies. (Read his blog post in The New York Times on what a small company needs to know about crowdfunding)
“Natural products companies will be helped most by the lift of general solicitation and the crowdfunding provision, which allows unaccredited investors to invest into small companies,” Caldbeck said.
“The benefit to these brands is that they will attract investors from the same consumers that love their products. A $5 million natural foods business likely has hundreds of thousands of consumers that love its products. Now, for the first time, this company can notify this informed group of supporters that the company is raising capital.”
Natural fans to become natural investors?
Natural products consumers—known to be intensely loyal to their favorite brands—tend to consider themselves part-owners in companies just by buying their products. The JOBS Act could opens up the option to cement that loyalty into actual ownership.
“Another benefit to companies in the natural products space is Title III, [a provision of the act] which will allow unaccredited investors to invest into private companies through crowdfunding platforms like CircleUp. Currently only accredited investors—those that make less than $200,000 per year or have less than $1 million in assets excluding their home—can invest in crowdfunding platforms,” Caldbeck said.
“It is a remarkable shift, one that could profoundly change the way small businesses relate to external constituencies.”
However, Caldbeck did address the lack of oversight and restrictions.
“Over the next nine months, the S.E.C. will put into place crowdfunding rules to help protect both companies and the investors. We think this period is critical. While there is certain information that should be required, for example, a third-party background check on the entrepreneur, we think the most important thing the S.E.C. can do is to create transparency.”
While the JOBS Act could put many amateur investors at risk of being beholden to uncouth entrepreneurs—the traveling snake oil salesman comes to mind—overall the new law appears to be a boon to the natural products market, which is at heart a very entrepreneurial industry.
And now, with the recent IPO of natural products mainstay Annie’s, smaller companies in this space may consider taking advantage of the relaxed reporting requirement and jump on the Wall Street bandwagon.