Academic Literature Review: “Does Advertising Improve Access to Capital for Small Businesses? – Evidence from the JOBS Act”

In this first decade since the beginning of the social media revolution, there have been numerous changes to society in many realms. From commerce to politics and the financial industry amongst them, using this new medium is an innovative approach to reach investors and raise funds through advertising securities to a broader investor pool. However, is this new means of raising funds effective?

That is the question Anup Agrawal (University of Alabama) and Yuree Lim (University of Wisconsin) seek to answer in their paper: Does Advertising Improve Access to Capital for Small Businesses? – Evidence from the JOBS Act, written and posted in 2020. In the quest to answer this question, Agrawal and Lim present a clear and compelling data-driven argument of the ineffectiveness of Title II of the Jobs Act.

The Jumpstart Our Business Startups (JOBS) Act was signed into law in 2012, with Title II of the Act taking effect in September 2013. As the authors explain, “Under Title II of the JOBS Act, small businesses can advertise and sell securities in private placements via general solicitations, such as advertising in the newspaper or on the internet, as long as the sales are made only to accredited investors, verified using a reasonable process.”

A firm seeking to offer or sell securities can do so without registering with the SEC under rule 506 of a Regulation D exemption. The aspect that is examined in this paper is rule 506(c), added by Title II, that allows issuers to use internet advertising and social media to contact accredited investors in order to raise capital, whereas the traditional rule 506(b) does not allow general solicitation.

The researchers propose a four-part hypothesis:

  1. H1 asserts that section 506(c) is chosen by “low quality” firms.
  2. H2a and H2b asks whether or not the securities offered under section 506(c) are more successful.
  3. H3 asserts that filings under 506(c) have “larger brokerage commissions.”
  4. H4a and H4b asks whether or not “offerings that pay larger brokerage commissions have a higher success rate.”

After presenting their points, Agrawal and Lim go on to use data provided by Audit Analytics to show that offerings under 506(c) are, in fact, less successful.

This data is consistently referenced throughout their paper to solidly support their point and is furthermore included at the end for reference. Using the data, the researchers are able to present regressions to explain the effects of the act and demonstrate the lower rates of success under 506(c).

Overall, Agrawal and Lim conclude that “…after the [JOBS] act, funding success rate and the amount of capital raised declined.” They largely attribute this decline to the cost of verifying that investors are accredited – a requirement under the new rule 506(c).  As there are strict restrictions on who can purchase offered securities, smaller firms must pay high fees to brokerage firms to verify investor accreditation, offsetting any additional capital that may be raised through the option of advertising provided under the new rule.

Based on these findings, the researchers conclude that Title II of the JOBS Act does not provide greater access to capital markets for small firms that lack previous connections to investors.

The effective use of reliable data enabled the researchers to conclude that this section of the JOBS act was ineffective and allows them to assert that their “… results imply the need to craft policies that induce better ways of signaling firm quality or more transparent approaches to reducing information asymmetry.”

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