JOBS Act Overview
Prior to April 2012, (the JOBS Act) a Privately-Held Company could not raise money over the Internet, because the Federal Securities Laws did not allow Financing transactions that used General Solicitation or general advertising to potential Investors.
Equity Crowdfunding Is Coming!
The reason was that this type of general outreach to potential Investors would require the offering to be registered with the SEC as a Public Offering.
On April 5, 2012, however, President Obama signed into law the Jumpstart Our Business Startups Act. The “JOBS Act” now will allow Privately-Held Companies to use certain Crowdfunding practices to raise money over the Internet. As you might imagine, this change in the Federal Securities Laws potentially will provide Startups with greater access to seed, working and growth capital. The SEC currently is working out the details of the implementing regulations and they should be available before the end of 2012.
Even though the ability to raise money through Equity Crowdfunding likely will not be available until early 2013, you should start thinking about this additional path to raising money for your business and what you need to put in place to be ready.
Crowdfunding is the collective practice of people using the Internet to network and pool their money for a variety of purposes, including funding a Startup. The JOBS Act adds a new Equity Crowdfunding exemption to the registration requirements of the Federal Securities Laws. In other words, if you follow the rules and regulations that the SEC and other regulatory agencies hand down, then you will be able to use the Internet to raise money for your company.
Here is what we know so far about the JOBS Act and Crowdfunding:
- Dollar Limit. Your company cannot sell Securities with a total dollar value greater than $1 million during any 12-month period. This limit applies to Securities sold to all Investors, including those amounts sold under the Equity Crowdfunding exemption.
- Small Investors. If your company sells Securities to an Investor whose annual income or net worth is less than $100,000, then the total dollar value of Securities sold to the Investor during any 12-month period cannot be more than the greater of $2,000 or 5% of the Investor’s annual income or net worth.
- Large Investors. If your company sells Securities to an Investor whose annual income or net worth is $100,000 or higher, then the total dollar value of Securities sold to the Investor during any 12-month period cannot be more than the lower of $100,000 or 10% of the Investor’s annual income or net worth.
- Intermediary. These Equity Crowdfunding financing transactions will need to be run through a registered Broker or “funding portal” intermediary that complies with various regulatory requirements, including registration, disclosure, anti-fraud and other obligations.
- Issuer. Your company also will have various disclosure and filing requirements, including the filing and disclosure of information about the company and its Officers, Directors, financial condition and Equity Ownership structure. Your company cannot advertise the terms of the Equity Crowdfunding offering, but it can provide notices that direct potential Investors to the intermediary. Your company also will have ongoing financial and other disclosure obligations.
- Transfer Restrictions. An Investor who purchases Securities in one of these Equity Crowdfunding transactions may not transfer the Securities until the first anniversary of their purchase, except under limited situations such as to family members or Accredited Investors.
The SEC should implement the rules and regulations for the JOBS Act before the end of 2012 and you likely will be in a position to raise money under the JOBS Act during the first half of 2013.
Practical Tips & Next Steps:
1. Is your company ready?
Your company will need to have the proper legal and ownership structures in place before it should take on new Investors. Pull together the various corporate and other contractual documents and determine whether the Corporation needs a tuneup. You also will need to have your financing tools ready to go, such as a Business Plan, Executive Summary, and Investor Pitch Deck. It also may a good idea to consider shooting a video about your company and its financing needs.
Many questions will arise when you evaluate Equity Crowdfunding:
- Who in your company has the experience and ability to take responsibility for the Equity Crowdfunding transaction?
- Does he or she understand the key terms that the Financing will require, such as voting, Anti-Dilution Protection, repurchase, Liquidation Preference and other rights?
- What are the capabilities of your outside advisors, such as accountants and attorneys, and are they ready and available to help you with this new type of Financing transaction?
2. Consider Your Alternatives
It sounds easy – your company is going to raise money over the Internet.
It is important to realize, however, that, as of April 2012, the final regulations have not been published yet and you will need to review your options before jumping into Equity Crowdfunding.
For example, it appears likely that your company would have substantial information preparation, disclosure and filing requirements with the Equity Crowdfunding alternative. Your company also would have annual disclosure and filing obligations.
You will need to evaluate the features and costs of the Equity Crowdfunding alternative against those of the other Financing options that might be available to your company. For example, the Equity Crowdfunding alternative may not work if your company is in stealth mode, and your technology or business model is not ready for public disclosure. In addition, the other financing alternatives could bring other tangible and intangible benefits to your company, such as industry contracts, mentorship and deeper pockets.
3. Watch Your Step
The Equity Crowdfunding alternative is new and evolving. You and your company will be subject to additional Federal Securities Laws and regulations, and related liability if you go down the Equity Crowdfunding path. It also will be important for you to have the right advisors in place to help you navigate the regulations, disclosures and ongoing compliance.
As a final thought, it will be very important to find efficient ways to pull these Equity Crowdfunding transactions together, so that they become a viable Financing alternative for more Entrepreneurs and small businesses. Once published, it will be important to review the implementing regulations in order to determine how to make Equity Crowdfunding cost-effective, accessible and easy for the Entrepreneur.
Do you believe that the JOBS Act will create significantly better Financing opportunities for Startups and small businesses? Will the setup, legal, intermediary and ongoing disclosure requirements be too burdensome for most Startups and small companies?
It would be great to hear your thoughts about this significant new development for the funding of Startups and small businesses. Thanks for reading and we look forward to hearing from you.