The JOBS Act of 2012 came into law in April 2012. On May 16, 2016, the SEC regulations that will permit the sale of equity securities under the so-called “Crowdfunding” exemption contained in Title III of the JOBS Act comes into force.
The Crowdfunding exemption will permit companies to raise up to $1,000,000 in any 12-month period using an authorized “funding portal." If the amount of the offering is more than $100,000, but not more than $500,000, financial statements reviewed by an independent CPA must be provided; and if the offering exceeds $500,000, audited financial statements must be provided (except the first time a company relies on this exception when reviewed financial statements may be used). For this reason, we suspect most offerings will not exceed $100,000 (which requires only financial statements certified by the CEO plus the most recent tax return).
Securities can only be offered through a funding portal that has been registered with the SEC and licensed by FINRA.
The amount an individual may invest in any 12-month period is also limited to (i) the greater of $2,000 or 5% of annual income or net worth (if either is less than $100,000), or (ii) 10% of net income or net worth (if either is greater than $100,000), but not more than $100,000 in total. Thankfully, the SEC has allowed individuals to self-certify their compliance with this limitation.
However, most small companies do not become big companies or targets for larger companies to acquire. Picking “winners” is not easy (even for experienced investors). The funding portals are not allowed to actively “promote” the companies whose securities they offer; they operate more like a storefront. However, over time, funding portals with “success stories” may develop reputations for picking winners and, as such, will likely attract more investor interest in companies appearing on their portals.
Despite the hype, Crowdfunding will not be for everyone. In particular, businesses that will require substantial follow-on financing should be very careful. Later stage investors (including angel investors) may be reluctant to invest in companies that have used Crowdfunding and have a large number of inexperienced shareholders.
Having said that, hopes are high that the first significant change to US securities laws since 1933 will help offset the difficulties small businesses face in securing capital, something which has only become harder since 2008. In particular, we think Crowdfunding will be of value to help:
- Companies with a specifically local reach or appeal;
- Companies with a dedicated “community” of followers for its products or services; and
- Companies that do not need to raise capital in large amounts.
For more information contact Simon Inman at email@example.com or at (707) 526-4200.