The “crowdfunding exemption” is one of the most talked-about provisions of President Obama’s new Jumpstart Our Business Startups (JOBS) Act. In short, the exemption allows startups and smaller issuers to raise funds through social media via small contributions from many individuals (ie, “the crowd”). Touted as the next big thing, it purportedly simplifies the process of raising capital and therefore will boost the overall economy through the formation and funding of more businesses.
But how will crowdfunding work, exactly? What are the rules? And what will small businesses need to do before they can tap the resources of the crowd? Here are seven key takeaways:
1. You can’t raise more than $1 million:
“The crowdfunding exemption will allow startup companies, emerging businesses, and other small issuers to solicit investments directly from the general public and sell up to $1 million of securities in crowdfunding transactions within a 12-month period, subject to certain restrictions…” (It Takes a Crowd to Raise a Startup by Manatt, Phelps & Phillips, LLP)
2. You’ll need to find a lot of investors:
“The amount any individual investor may invest must not exceed (1) the greater of $2,000 or 5% of the annual income or net worth of the investor, as applicable, if either the annual income or net worth of the investor is less than $100,000, and (2) 10% of the annual income or net worth of the investor, as applicable, not to exceed a maximum aggregate investment of $100,000 by the investor, if either the annual income or net worth of the investor is equal to or more than $100,000.” (President Obama Signs New Capital Formation Bill by Bilzin Sumberg Baena Price & Axelrod LLP)
3. You can’t reach out to the crowd on your own:
“The offering must be conducted through an intermediary—either a registered broker or a registered funding portal. The intermediary must provide certain disclosure about the offering as the SEC may determine and it must take affirmative steps to, among other things, ensure investor education, eligibility and suitability, as well as to reduce the risk of fraud by the issuer.” (JOBS Act Reduces Securities Law Burdens on Startups and Capital-Raising by Bryan Cave)
4. You can’t advertising the offering yourself:
“The issuer may not advertise the offering, although it may issue notices that direct potential investors to the issuer’s designated broker or funding portal.” (President Obama Signs Into Law The Jumpstart Our Business Startups Act by Womble Carlyle Sandridge & Rice, PLLC)
5. You’ll need to find investors willing to stay in for the long run:
“An investor purchasing securities in a crowdfunding offering cannot transfer those securities during the one-year period beginning on the date of purchase other than to (i) the issuer, (ii) an accredited investor, (iii) as part of an SEC-registered offering, or (iv) to a member of the purchaser’s family or the equivalent, or in connection with the death or divorce of the purchaser.” (Major Reforms Enacted to Stimulate Public and Private Capital Raising in the United States by Osler, Hoskin & Harcourt LLP)
6. You’ll have to file statements with the SEC:
“Issuers that rely on the crowdfunding exemption will be required to file their financial statements and disclosures about the results of operations with the SEC and provide them to investors on an annual basis.” (JOBS Act to Make It Easier and Less Burdensome to Raise Capital in Securities Offerings by Sutherland Asbill & Brennan LLP)
7. The crowdfunding exemption isn’t for everyone:
“Issuers must be organized under domestic law, may not be a company required to file reports under section 13 or section 15(d) of the Exchange Act, and may not be an investment company (as defined in Section 3 of the Investment Company Act of 1940).” (President Obama Signs the Jumpstart Our Business Startups (JOBS) Act: An Attempt to Ease Access to Capital and Reduce Regulatory Hurdles for Small and Emerging Businesses by Lewis and Roca LLP)
- Crowdfunding Bill Moves Closer to Law
- House Passes Jobs Legislation; Crowdfunding Rules Eased
- Will Crowdfunding Supporters Be Disappointed When Legislation (Finally) Arrives?
- Crowdfunding & Startup Capital: A Look at Legislative Initiatives to Ease Restrictions
- Startup Financing: SEC Sending Mixed Signals with ‘Bad Actor’ Rule?
- Crowdfunding: The Future of Startup Financing?
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