2012’s Jumpstart our Business Startups Act, known as the JOBS act, went into effect last month encouraging entrepreneurs and exciting the startup community. This act intends to increase jobs by making it easier for businesses to raise money to grow and expand their operations. One provision of the bill – the ending of the ban on “general solicitation” – can be seen as a breakthrough, but in some ways, it is actually restricting funding sources for new companies.
Many entrepreneurs and small companies first turn to their family and friends for donations and support when launching a business. It is also a smart way to get feedback from people you trust and a great starting point before you approach investors on a larger scale. This JOBS act provision makes it so that once a startup approaches accredited investors (based on $200,000 annual income or more, or $1 million net worth excluding a personal residence) the family-and-friend funding source is then banned.
The entrepreneur can still approach family and friends, it just needs to be at a much earlier stage. Once emails or online posts sound like fundraising campaigns, it becomes general solicitation. The two can’t occur concurrently. Another uncomfortable position is qualifying if your friends and family are actually “accredited investors.” This requires 3rd party verification from a combination of IRS forms, bank statements, consumer reports and written confirmation from brokers, attorneys or CPAs. Investors at a friend and family level may be unwilling to supply such personal information. Legal experts still consider this a grey area and advise founders to limit the paper trail of funding discussions with friends and family. Based on recent national security and NSA headlines, it would be safe to steer clear of this topic in any online communications.
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