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Crowdfunding & The JOBS Act

Crowdfunding and the JOBS Act from The Startup Garage

Crowdfunding & The JOBS Act

In April 2012 President Obama signed the Jumpstart Our Business Startup Act (JOBS Act) with the aim of promoting small business funding by loosening securities regulations. The JOBS Act has made some of the greatest changes to securities law in the 80 years since the original Securities Act of 1933. This rang particularly true in October 2013, when the U.S. Securities and Exchange Commission (SEC) proposed new rules in response to Title III of the JOBS Act. This Title will pend for 90 days, comments will be reviewed and voted on, and the final rules are projected to be announced in spring 2014. As of now, the proposed rulings will allow for non-accredited individuals to invest in private companies through online portals. It should be noted that Title II of the JOBS Act has already allowed for accredited investors to crowdfund online. In sum, the Act allows small businesses to ask the public for financial support, so they do not have to turn to traditional funding from venture capital firms and large financial institutions.

The Investors

Title III of the JOBS Act will help to level the investor playing field because it allows non-accredited investors to participate in equity crowdfunding. Currently only accredited investors, or those who have a net worth of over $1 million or have earned over $200,000 within the past two years, can invest online. The catch is that non-accredited investors will be limited, annually, on how much they can invest in businesses. People who have either $100,000 in annual income or net worth can invest up to 10% of their annual income or net worth in crowdfunded projects. Those with under $100,000 in annual income and net worth can invest $2,000 or 5% of their income or net worth. The cap on investors will take place over the period of a year, and securities purchased through equity crowdfunding portals must be held for year. The SEC will require that funders complete investor education before backing a business. Investors will expect dividends and fair return on investment.

Online Portals

Equity crowdfunding will take place through online portals or broker-dealers that are registered with the SEC or FINRA (Financial Industry Regulatory Authority). One can only imagine that these new intermediaries will resemble portals like Amazon, where companies sell deals to the public. It is projected that funding portals will be industry specific, so there is an opportunity for new equity-based crowdfunding websites to emerge in different markets. Already, websites like WeFund are offering equity based crowdfunding to accredited investors.

Business Implications

Under the law, businesses will only be able to raise $1 million in crowdfunding investments per year. A business that chooses to participate in equity crowdfunding must disclose the business plan, stakeholders, ownership structure and how the raised capital will be used. Depending on the investment goal, financial statements may have to be reviewed or audited. Thus, if raising over $100,000, it is important to hire a good Certified Public Accountant who is familiar with the business and the JOBS Act.

The spring of 2014 promises a new exciting time for startups because the investor playing field will become more democratized and less elite. As of now it is estimated that only 8 million people in the U.S. are accredited investors and only a tiny percent of them invest startups. Once non-accredited investors can participate there will be vastly more opportunities for entrepreneurs to reach out for funding. It will alleviate small business owners of having to turn to traditional funding from venture capitalists and banks, and instead allow them to reach out to the public at large.