Family Ties Online: Family-Owned Business and the JOBS Act of 2012
Note: Family Ties Online is pleased to be able to bring our readers this important guest article, which explains how the investment scene is about to dramatically change for owners of family business and others because of the JOBS Act of 2012. The distinguished authors are …
Jonathan Friedland, attorney, is a partner in Levenfeld Pearlman LLC of Chicago. Jonathan’s corporate work includes serving as outside general counsel to a number of closely held businesses and their principals and a robust practice representing private equity funds and others in their M&A activities.
Attorney Vanessa Schoenthaler is a partner in Oashu & Schoenthaler LLP of New York City. Her practice focuses on complex business transactions, securities law, corporate finance, regulatory compliance and general corporate matters.
Meet Bob and Lucille. Bob and Lucille live in Middle America, where they own a nice house in a middle-class neighborhood. Each drives a practical car, which was bought used several years ago. Together, they own a family business.
Bob and Lucille aren’t fancy. However, in fact, if you asked either of them, they would tell you that they were ordinary people.
Meet Michele. Michele lives in a large coastal city. She owns a nice, but not over-the-top condo in a residential neighborhood and walks or relies on public transportation to get to work. Michele isn’t fancy either; she’s just an ordinary urbanite.
Finally, meet David and Isabella. They live, with their two school-age children, just outside of a mid-sized city. They also own a nice house in a nice suburban neighborhood, and each drives a nice, but not new car.
But like Bob, Lucille and Michelle, David and Isabella aren’t fancy, and if you asked them, they would also tell you that they’re just an ordinary family.
Aside from being ordinary, there is one other thing that Bob and Lucille, Michelle and David, and Isabella all have in common: they’re all accredited investors.
Who is an Accredited Investor?
A down and dirty definition of an accredited investor is someone whose net worth, either alone or with a spouse, exceeds $1 million (not including the equity in her or his primary residence) or someone who has earned more than $200,000 (or $300,000 with a spouse) for the past two years and reasonably expects to earn more than $200,000 (or $300,000 with a spouse) in the current year.
What’s the significance of being an accredited investor? In a nutshell, accredited investors are able to participate in certain alternative investment opportunities that are not otherwise available to non-accredited investors. Think: private equity, venture capital and angel investments, hedge funds, private shares, and private placements.
Being an Accredited Investor Without Investing Like One
Getting back to our accredited investors …
Bob and Lucille worked to build their business and now own a factory that employs about 50 people. It’s located in the same town that they live and grew up in. Their combined net worth is about $35 million, making each of them an accredited investor under the net worth standard.
Michele is a doctor. She works in a busy emergency room located on the opposite coast from where she grew up and went to medical school. With several years of experience under her belt, Michele’s salary is comfortably in excess of $200,000 a year, making her an accredited investor under the individual income standard.
David is a senior IT specialist at a Fortune 500 company, and his wife, Isabella, is a marketing director at a midsized private company. They met in college, married and not too long thereafter started a family. Over the last several years, their combined salaries and year-end bonuses have exceeded $300,000 a year, making them accredited investors under the joint income standard.
Bob and Lucille, Michele, and David and Isabella are each accredited investors, yet none of them has ever participated in an alternative investment opportunity requiring that they be an accredited investor. Most of their investment funds are held in IRAs, 401ks or 403bs, in publicly traded mutual funds, individual stocks, and bonds, and, in Bob and Lucille’s case, in their own business and some local real estate. So why haven’t any of these accredited investors participated in an alternative investment opportunity?
Let’s take a closer look at Bob and Lucille. They don’t live in Greenwich, Conn.; Silicon Valley; or any of the other affluent suburbs of major metropolitan cities where they are likely to have investment bankers, tech entrepreneurs or fund managers as friends and neighbors. Nor do they have a finance degree or an MBA. They are completely uninitiated when it comes to the world of alternative investment opportunities and accredited investing.
What’s more, the federal securities laws prohibit—at least for a little while longer—accredited investment opportunities from coming to Bob and Lucille unless they come through someone that they already have a relationship with. In other words, the law prohibits anyone from conducting a “general solicitation” or any sort of public advertising to attract accredited investors. As a result, without knowing the right kind of people, Bob and Lucille have historically been out of luck in terms of being exposed to alternative investment opportunities.
All that’s about to change, however, as a result of a new law enacted in April 2012, the Jumpstart Our Business Startups Act (or “JOBS Act” for short). Under the JOBS Act, entrepreneurs, companies, private equity and venture capital funds, hedge funds and others will all be able to advertise investment opportunities and solicit investments from accredited investors, including Bob and Lucille, Michele, and David and Isabella.
While there are many important features of the JOBS Act, its lifting of the prohibition on general solicitation and advertising is the most key feature for people like Bob and Lucille, Michele, and David and Isabella.
Accredited investors will be bombarded with sales calls
Once the necessary JOBS Act regulations are in place, accredited investors like Bob and Lucille, Michele, and David and Isabella are going to be bombarded by broker-dealers and other investment intermediaries, private equity and venture capital funds, entrepreneurs and others, all seeking to persuade them to allocate a portion of their investment portfolio to alternative investment opportunities.
Accredited investors who are not experienced in making such investments will suffer some degree of information overload as they get up to speed on these investment categories. There will also be scams and schemes designed to take advantage of their lack of knowledge. At the same time, however, the opportunity to diversify into these alternative investments offers accredited investors the potential for greater overall investment returns and smart diversification.
Changes in the law as a result of the JOBS Act will be well covered by the media because an overwhelming majority of the upward of 10 million accredited investors (estimates vary) in the U.S. have never made an investment that requires them to be one. Why? Because all accredited investors are in the same position as Bob and Lucille, Michelle, and David and Isabella.
If you are in the same boat, you will want to understand this area—even if only to decide it is not for you.
We are not here to try to introduce you to the next big investment opportunity or to try to convince you that alternative investments are the right kind investments for you. Our basic mission is to provide you with objective and reliable information that you can use to decide for yourself.