As part of National Small Business Week, I would like to discuss the JOBS (“Jumpstart Our Business Startups”) Act enacted on April 5th, 2012. It contains the “CROWDFUND” Act, which allows a new method of investment for start-up companies called “crowdfunding.”
The term has been used colloquially for some time, usually in a charitable context, to mean raising capital for a project with many, very limited monies contributed from a broad class of people. The Act restricts how much people may invest in a business on a graduated basis depending on the investors’ financial resources to absorb a loss. The “CROWDFUND” within the Act’s title means, “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012,” which clearly identifies Congress’ objectives and major policy concerns in drafting the legislation.
The Act allows an unlimited number of investors to invest up to a total of $1 million in a company’s securities. Investors with a net worth of less than $100,000 may not invest more than the greater of $2,000 or 5% of their annual income or net worth. Meanwhile, those with a net worth of more than $100,000 may not invest more than the lesser of $100,000, or 10% of their annual income or net worth.
The Act requires that crowdfunding take place through online portals regulated by the S.E.C. and any private regulator that the S.E.C. directs. Further, for at least one year after investors purchase their shares, the Act only permits them to sell their shares either back to the company, to high net-worth individuals, or to family members, with any additional restrictions or the manner of sale to be decided by the S.E.C. Importantly, the act allows advertising crowdfunding offerings and publicly soliciting investors.
The Act also requires companies seeking funds to make different levels of certification and disclosure to investors depending upon the amount of capital being raised, and that they continue to do so on a regular basis. Those companies seeking $100,000 or less will need to provide a copy of their most recent tax returns, and the companies’ C.E.O.s must similarly certify their financial statements in order to publicly-trade C.E.O.s under the Sarbanes-Oxley Act. Companies seeking between $100,001 and $500,000 must have their financial statements reviewed by a C.P.A. under standards still to be defined by the S.E.C., whereas companies seeking more than $500,000 must have their financial statements formally audited.
Critically, the Act does not restrict foreign persons from investing in crowdfunding companies’ securities, and we presume the S.E.C. will not in-line with how it currently regulates securities under other acts. However, any such restrictions will not be known until the S.E.C. issues its temporary and final regulations. The Act gives the S.E.C. until the end of 2012 to issue the complete regulations for crowdfunding portals and companies raising funds to follow, but we do not expect the S.E.C. rules to be practically implemented, nor for actual crowdfunding to begin, until late 1st or 2nd quarter of 2013. Until then, companies looking to raise funds through crowdfunding should continue developing their customer bases while seeking those who would be interested in becoming crowdfunding investors.