Small businesses and start-ups do not have the same access to capital markets as large companies and until now have been subject to most of the same federal regulatory rules and filings when soliciting investors.

A new federal law intended to address these barriers is germane to many of the enterprises in horse racing. The 2012 Jumpstart Our Business Startups Act (JOBS Act) legalized what is known as crowdfunding, or raising money on the Internet for launching and expanding small businesses. The JOBS Act also did away with onerous reporting requirements.

Nonprofit organizations and politicians pioneered the use of social media to solicit money from numerous small-dollar contributors. Small businesses can soon employ similar techniques to reach investors–and offer them an ownership position–on Internet portals like Kickstarter, Facebook, and YouTube.

A White House press release explained that “Subject to rulemaking by the U.S. Securities and Exchange Commission (SEC), startups and small businesses will be allowed to raise up to $1 million annually…through web-based platforms, democratizing access to capital.” Thus by late 2012 or early 2013, entrepreneurs will be able to make general solicitations online from sites approved by the SEC.

A company or individual seeking less than $100,000 in capital will have to stipulate that its financial statements are accurate; if the amount sought is between $100,000 and $500,000, a public accountant must review the statements; and solicitations over $500,000 but less than $1 million will require audited financial statements.

Within limits, both accredited investors (individuals with a net worth exceeding $1 million or earnings of $200,000 in the past two years) and non-accredited investors can participate. A person with a net worth or annual income exceeding $100,000 can invest up to 10% of his or her net income annually, with a $100,000 maximum investment. Anyone not meeting this threshold is limited to a $2,000 annual investment.

The JOBS Act is not without controversy, as some believe it fosters fraud. Another hazard is that novice investors may not realize that most new business ventures fail within a few years. (Racing partnerships are typically forthright in acknowledging that investors will most likely lose money.) In addition, should an investor wish to sell, the market for stock in small private companies is usually illiquid.

Once the JOBS Act is implemented, entrepreneurs and small businesses will be able to cast a wide net to find investors, absent red tape and hefty accounting and legal costs, though compliance with state securities laws will remain.

Copyright © 2012 Horse Racing Business

Originally published in the Blood-Horse. Used with permission.