The JOBS Act and Crowdfunding
In case you don’t know what crowdfunding is, I summarized it in a previous article and talked about the numbers behind it. One of the limitations that the JOBS Act hopes to fix is the inability to sell equity in a startup company; as it stands you’re only allowed to sell products, seminars, thank you letters, and packages such as that. That’s why as of April 5 President Obama and Congress passed the Jumpstart Our Business Startups Act (JOBS Act) allowing small businesses more ways to gain funding, crowdfunding being one of those ways. All the titles of the bill relate to small businesses (who would’ve guessed?), including what an “emerging growth company” is, how they go public, and how they can get funding – with crowdfunding getting an entire title to itself. The crowdfunding title goes through a number of steps to make equity and loan based funding an official form of fundraising, it does nottouch the current form of crowdfunding involving pledge packages – if you’re running a campaign like that you don’t need to worry about the JOBS Act. There are still a number of rules to be defined by the SEC by Jan 1, 2013 but we can get a picture of the act so far from an investor and a company perspective.
The JOBS Act and You(r Company)
The JOBS Act creates a number of regulations that issuers, intermediaries, and investors must adhere to. While they’re not complete yet there are a number of things that are released and can be talked about so far.
- If you plan to run a crowdfunding campaign, you must submit a number of facts about your company (owners, financial status, physical address, website address, etc) to the SEC where they will evaluate whether you are eligible to run a campaign – what makes you eligible hasn’t been defined
- Depending on how much you plan to raise through crowdfunding you have to submit more information about how you plan to use the money, by when, and a number of other things. The more you plan to raise, the more you have to submit – currently the tiers are <$100k, $100-500k, and >$500k
- You may only raise a set amount through crowdfunding every year – currently that amount is $1m
- There is a limit on how many investors may be on your campaign (this number varies between accredited and unaccredited investors)
- If the project or company does not work out and it is determined that you know a relevant fact and make “an untrue statement of a material fact or omits to state a material fact required to be stated or necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading, provided that the purchaser did not know of such untruth or omission”. Basically, if you lie about a fact and things backfire, it’s all on you (this includes lying by omission).
Crowdfunding Websites (Intermediaries)
The main goal of the intermediaries is to make sure investors know what they’re getting into by making them read SEC defined information.
- Communicate with the SEC about what issuers have registered with them, for how much, etc
- Do as much is in their power to keep fraud from being committed, either fraud on investors or an issuer attempting to raise more than the yearly limit defined by the SEC
- “Ensure that each investor reviews investor-education information, in accordance with standards established by the Commission” and then provide them with a test to affirm that they understand the risks behind investment
- There is a limit on how much each investor is allowed to invest each year based on their income
- Understand that there is a risk behind investment and they may lose the money they invest in a company
What Does It All Mean?
The JOBS Act is the government’s way of legitimizing crowdfunding as a way to invest for a company. It is a huge step forward in crowdfunding and shows that it’s not just some passing trend. There are a number of concerns people have about opening investment up to the public, many have to do with less-than-honest issuers. There is going to be a large focus on making sure everything is legitimate and nobody gets ripped off in the end. On Jan 1, 2013 we’ll get to see the final rules that the SEC releases and how the government is going to treat the democratizing efforts behind crowdfunding.