President Obama signed the “Jumpstart Our Business Startups Act” (“JOBS Act”) into law on April 5, 2012. The purpose of the law is to ease the regulatory burdens imposed on small businesses and their ability to raise capital by securities laws. One of the key provisions of the JOBS Act permits Crowdfunding (alternately spelled “crowd funding”).
The Crowfunding provision ( titled as the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012” or “CROWDFUND Act”) amends the Securities Act of 1933 by creating an exemption to the required securities registration for Crowdfunding. Crowdfunding is a method of raising capital, which may include the internet, from a large number of investors who each invest a small percentage in the company.
The requirements for exemption include:
- the aggregate amount sold to all investors by the issuer, including any amount for crowdfunding during the 12-month period preceding the date of such transaction, is not more than $1,000,000;
- the aggregate amount sold to any investor by an issuer, including any amount sold for crowdfunding during the 12- month period preceding the date of such transaction, does not exceed—
- the greater of $2,000 or 5 percent of the annual income or net worth of such investor, if either the annual income or the net worth of the investor is less than $100,000; and
- 10 percent of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000;
- the transaction is conducted through an intermediary, such as a broker or funding portal; and
- the issuer complies with the requirements of section 4A(b) of the Securities Act of 1933 (Section 302(b) of the JOBS Act), which includes:
- complying with specific disclosure requirements and SEC filing obligations regarding information about issuer’s business;
- not advertising the terms of the offering, except for notices which direct investors to the funding portal or broker
- not compensating or committing to compensate, any person to promote its offerings through communication channels provided by a broker or funding portal and;
- filing an annual report with the Commission and provide to investors reports of the results of operations and financial statements of the issuer.
The CROWDFUND Act also provides a private right of action by an investor against an issuer for negligent representation. In addition, the CROWDFUND Act has a one-year restriction on resales, subject to some exceptions. Importantly, the CROWDFUND Act’s provision will not go into effect until the SEC completes the necessary implementation regulations.
If you are a business owner and have any questions about small business financing or your business’ potential to raise capital through Crowdfunding, please contact the Washington DC Business Lawyers at the law firm of Basyuk & Klaproth.