The JOBS Act: Economic Solution or Investor Nightmare?

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In an effort to jump-start the US economy and create more jobs, both the House and Senate passed the Jumpstart Our Business Startups (JOBS) Act, and President Obama signed the act into law April 8, 2012. With bipartisan support, the bill is designed to make it easier for small businesses, start-ups, and entrepreneurs to raise capital by decreasing government oversight and federal regulations.

Now the intrigue begins. Many questions arise from this new legislation. What kind of impact will the JOBS Act have on small businesses, start-ups, and the economy in general? Will the JOBS Act open the door for new IPOs? Or will it provide more incentive for companies to stay private? What impact will the JOBS Act have on investors who rely on full disclosure when reviewing the filings of IPOs?

These open-ended questions have answers that vary depending on who you are asking – the opponents or proponents. Those in favor of the JOBS Act see it as an opportunity for growth; while those against it worry that loosened regulations may lead to investor fraud and abuse. Whether for or against the legislation, the JOBS Act will:

Create emerging growth companies. One provision of the JOBS Act essentially creates a new category of public companies. Businesses that have under $1 billion in annual revenue during its most recent fiscal year would qualify “emerging growth companies” (EGCs) and would not be required to comply with certain Securities and Exchange Commission (SEC) reporting regulations for up to five years; less than five years if the company reaches $1 billion in gross revenue, $700 million in public float, or issues more than $1 billion in non-convertible debt in the previous three years. Companies that complete or have completed an IPO after December 8, 2011, will be eligible to qualify as an EGC. Through this legislation, EGCs would be exempt for their first five years on the public market from the compliance burdens of Sarbanes-Oxley (SOX) Section 404(b), such as requiring an auditor’s attestation report on internal controls over financial reporting. The JOBS Act will also allow pre-IPO EGCs to confidentially submit a draft registration statement for SEC review. Other reporting requirements will be “phased in” over the initial five-year period. These relaxed regulations will allow smaller companies to go public sooner.

Allow equity-based “crowdfunding.” New businesses will be able to raise up to $1 million in equity capital from unaccredited investors. This provision facilitates the utilization of online trading portals, a mechanism used to solicit a large number of smaller investors. The Senate version of the JOBS Act created a number of restrictions aimed at protecting investors. Among those restrictions are limiting individual investments to (1) the greater of $2,000 or 5 percent of the investor’s annual income or net worth if either annual income or net worth is less than $100,000; and (2) 10 percent of the investor’s annual income or net worth, not to exceed $100,000, if annual income or net worth is greater than $100,000 and also requiring registration by intermediary platforms and issuers with the SEC. Federal law would preempt state regulations, meaning that issuers could raise funds from across the United States. The SEC will have 180 days after the bill’s enactment to publish rules for crowdfunding.

Remove prohibitions on general solicitation of Regulation D offerings. The JOBS Act allows for advertising of Regulation D 506 offerings, as long as advertisements are focused on accredited investors. Affluent individuals who provide capital for a business start-up, also known as “angels,” should especially note the McHenry Amendment, which clarifies that angel and incubator platforms that do not charge a fee connected to the purchase or sale of securities would be exempt from broker-dealer registration. This exemption from registration will be helpful for Internet platforms, such as AngelList or Gust and venture forums aimed at accredited investors, and also for some angel groups.

Increase the threshold for Regulation A “mini-public offerings.” Regulation A currently allows companies to go public and be exempted from SEC registration for offerings up to $5 million. The JOBS Act will increase the offering threshold for this little-used exemption to $50 million, perhaps making it a more useful option for angel-backed companies.

Raise the cap on private shareholders from 500 to 2,000. Many private companies are forced by regulations to file as a public company once they exceed 500 shareholders and $10 million in assets. The bill will increase the shareholder limit to 2,000 accredited investors or 500 unaccredited investors. The increased limit will give some flexibility to companies like Facebook in deciding whether to stay private or go public, and it could also benefit secondary market platforms that can offer a more robust market for the shares of private companies.

From the above analysis of the bill, it is clear how the JOBS Act will help small businesses, start-ups and entrepreneurs raise capital, but the question that remains is how will the bill create jobs? Here are a couple of thoughts: (1) the $1 billion ceiling on regulation will spur job growth since it will provide an incentive for companies to go public instead of selling, and (2) the cost savings for new IPOs will allow them to spend more money on growing their businesses and hiring personnel instead of regulatory compliance.

Despite the apparent benefits of the bill, the legislation still has its detractors. Critics fear that the JOBS Act will lead to massive fraud due to a lack of regulation and oversight. Investors will not see the “full picture” when making their investments. For example, the online coupon company, Groupon (that who went public in 2011 and had over $1 billion in revenue at the time), was faced with major SEC scrutiny over its accounting methods during its IPO. The company suffered a significant market capitalization reduction when going public due to reported questionable accounting methods and the loss of investor confidence. Had the JOBS Act been in effect prior to its IPO, Groupon could have gone public before it reached the $1 billion mark and not dealt with the intense scrutiny that resulted in its reduction in market capitalization. Conversely, the investing public would not have been aware of the apparent “red flags” had the reporting regulations been relaxed.

To address these concerns, the Senate attached an amendment to the bill, requiring the business to warn investors that there are risks when it comes to investments. The amended bill requires that a business “takes reasonable measures to reduce the risk of fraud with respect to such transactions” and gives the investor its company address and website, which must be kept up-to-date. The JOBs Act also requires the SEC to implement various actions on a tight time line from as little as 90 days after enactment of certain aspects of the law, while up to 270 days for other portions.

The President and Congress are hoping the JOBS Act will generate as much economic growth as it did bipartisan support. It originally passed the House by a vote of 390 to 23, and then passed the Senate 73 to 26. However, only time will tell.

Full Article: http://www.accountingweb.com/topic/accounting-auditing/jobs-act-economic-solution-or-investor-nightmare

The Ins and Outs of New Reporting Rules in 2012

by | Accounting News, Tax, Uncategorized

By Ken Berry

New cost basis reporting rules now apply, for the first time ever, to Form 1099-B sent to investors and the IRS. But other onerous reporting rules for businesses and landlords scheduled to take effect in 2012 have been repealed.

Are you confused? You’re not alone. Here’s a brief recap on what is and isn’t taking place this year.

Reporting for investments: Previously, financial institutions were required to report on Form 1099-B certain information relating to the sale of investments, such as the date of the sale and the amount of the sale proceeds. It was the investor’s responsibility, however, to provide the acquisition date and the purchase price on Schedule D, although many brokers often provided additional information when it was available.

Many clients will panic about the new rules taking effect and about rules that were supposed to take effect this year and won’t. Be a calming influence and explain the implications to your clients.
This meant that investors – and their tax return preparers – had to figure out the cost basis of investments for tax purposes before the information was transferred to Schedule D. Typically, an investor had some flexibility in choosing a method for establishing the basis of securities that were sold if he or she had acquired multiple shares of the same security at different times and prices. In essence, the investor could choose to identify the shares being sold as the ones that provided the optimal tax result. Thus, an investor could effectively decrease a taxable gain or increase a loss.

But now the rules have changed. Under the Emergency Economic Stabilization Act of 2008, financial institutions must report on Form 1009-B the relevant cost basis information, but only for “covered securities” phased in over a three-year period. The new cost basis reporting rules apply to:
Stocks (both domestic and foreign), American Depository Receipts (ADRs), real estate investment trusts (REITs), and exchange-traded funds (ETFs) taxed as corporations acquired on or after January 1, 2011.
Mutual funds, dividend reinvestment plans (DRPs), and other ETFs acquired on or after January 1, 2012.
All other remaining securities – such as options, fixed income instruments, and debt instruments – acquired on or after January 1, 2013.
Therefore, cost basis information must be reported on Form 1099-B for stocks acquired after 2010, but not for mutual fund shares acquired before 2012. The new rules for mutual fund shares acquired after 2011 will be reflected on 1099-B forms sent to investors next year.

If an investor doesn’t select a cost basis method indentifying the shares of covered securities at the time of the transaction, the institution will use a default method. The default method for stocks acquired after 2010 is the first-in, first-out (FIFO) method. For mutual funds shares acquired after 2012, the broker may choose to use the FIFO method or an “average cost” method as a default.

Reporting for businesses and landlords: Traditionally, businesses have reported on Form 1040 payments compensating parties for services rendered if the annual total received by the provider is $600 or more. This reporting requirement also applies to commissions, rents, royalties, interest and the like.

However, these reporting rules don’t extend to payments for goods. Furthermore, a business generally doesn’t have to report payments made to corporations.

Under the Affordable Care Act of 2010 (ACA) – the controversial health care legislation – a business was required to provide 1099s for payments to corporations, beginning in 2012. The health care law also imposed these extended reporting rules on payments for goods.

These onerous requirements faced strong opposition from the business sector and the tax community. Ultimately, the extended requirements were repealed by the Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011. So there are new no reporting requirements for businesses in 2012. It’s as if this provision of the health care law never existed.

Similar rules would have increased reporting responsibilities for landlords. Under the Small Business Jobs Creation Act of 2010, new reporting rules were imposed for payments for services in conjunction with rental properties, beginning in 2011. Subsequently, the ACA extended the reporting rules to payments to corporations and to payments for goods. These changes were scheduled to take effect in 2012. As with the provision applicable to businesses, the 2011 law repealed the new reporting requirements for landlords.

Calm the waters: Undoubtedly, many clients will panic about the new rules taking effect – and those that were supposed to take effect and won’t – this year. You can be a calming influence.
Set the record straight and explain the implications to your clients.

Full Article: http://www.accountingweb.com/topic/tax/ins-and-outs-new-reporting-rules-2012