The JOBS Act Negative Impact on Friends and Family Funding

Seed Funding and the JOBS Act from The Startup Garage
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2012’s Jumpstart our Business Startups Act, known as the JOBS act, went into effect last month encouraging entrepreneurs and exciting the startup community. This act intends to increase jobs by making it easier for businesses to raise money to grow and expand their operations. One provision of the bill – the ending of the ban on “general solicitation” – can be seen as a breakthrough, but in some ways, it is actually restricting funding sources for new companies.

Many entrepreneurs and small companies first turn to their family and friends for donations and support when launching a business. It is also a smart way to get feedback from people you trust and a great starting point before you approach investors on a larger scale. This JOBS act provision makes it so that once a startup approaches accredited investors (based on $200,000 annual income or more, or $1 million net worth excluding a personal residence) the family-and-friend funding source is then banned.

The entrepreneur can still approach family and friends, it just needs to be at a much earlier stage. Once emails or online posts sound like fundraising campaigns, it becomes general solicitation. The two can’t occur concurrently. Another uncomfortable position is qualifying if your friends and family are actually “accredited investors.” This requires 3rd party verification from a combination of IRS forms, bank statements, consumer reports and written confirmation from brokers, attorneys or CPAs. Investors at a friend and family level may be unwilling to supply such personal information. Legal experts still consider this a grey area and advise founders to limit the paper trail of funding discussions with friends and family. Based on recent national security and NSA headlines, it would be safe to steer clear of this topic in any online communications.

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About Tyler Jensen

I work with entrepreneurs who are looking to attract investment and get out of the "Garage". I am passionate about helping entrepreneurs start companies that matter. I helped launch over 100 Companies, Non-Profits and Social Enterprises. I consider myself a serial entrepreneur, startup coach & trusted advisor. * Launching New Companies (For Profit, Non-Profit and Social Enterprise) * Expert Business Plan Writer * Extensive Network of Business Relationships focused on Launch & Rapid Growth of New Companies * Startup, Growth, Marketing, Technology, Web, Business Systems * Trusted Advisor to CEO’s & Entrepreneurs * Capital Raising Strategy Development * Startup Team Development The first company I started and sold is VAVi Sport & Social Club which grew to over 25,000 members in six years, was recognized as San Diego’s 30th fastest growing private company in 2006 by the San Diego Business Journal and 32nd fastest in 2007, and sold for over 25X the capital investment.