The JOBS Act and the Capital Raising Process (What Was the Problem Again?)
The JOBS Act sought to make capital raising for small businesses easier. We have criticized the efforts both from the lack of sufficient protections for investors but, equally fundamentally, from the perspective that they will not do much to facilitate capital raising.
But based upon a study just issued by the Commission, there is a more fundamental issue: Was there a problem to begin with? The data in the study allowed for a number of interesting observations. First, no great surprise, but in the time period studied (2010), "Reg D offerings surpassed debt offerings as the dominant offering method in terms of aggregate amount of capital raised." Moreover, an analysis of the use of the exemption in the first quarter of 2011 showed that the use of Regulation D offerings was growing exponentially. As the study noted:
Our analysis of information extracted from all electronic Form D filings in calendar years 2009 and 2010 reveals that unregistered offerings were $587 and $905 billion, respectively (Table 1). The pace of capital formation in the first quarter of 2011—already $322 billion—corresponds to an annualized rate of $1.3 trillion, far in excess of capital acquired through offerings reported in either of the previous two years, suggesting a significant increase in use of private market capital.
Nor did the exemption need to raise large amounts of capital to be cost effective. Indeed, the median offering was approximately $1 million. Likewise most of the companies that use the exemptions appear to be small.
Although a significant number of issuers decline to disclose their sizes (50%), for those that do, most have revenue less than $1 million. Only 1.8% of all new offerings are by issuers that report more than $100 million in revenues.
In other words, Regulation D, prior to the amendments in the JOBS Act, was available to small companies to raise small amounts of capital. While these numbers do not resolve whether reforms would permit even more small companies to raise capital, one possible conclusion from the data is that there was no need to "reform" Rule 506 or to add the crowdfunding provision since the companies that would use either may have already had cost effective access to the capital markets.