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Understanding the Crowdfunding Elements of the New JOBS Act

April 01, 2012
By Nathaniel C. Roland, Trenam Kemker

Tampa Bay Innovation Center recently hosted a TECH Talk session with Nathaniel C. Roland, shareholder at Trenam Kemker, who discussed the Jumpstart Our Business Startups (JOBS) Act. Following is a summary of his presentation on the crowdfunding part of the legislation and how it will affect small businesses.

Many small business and startup business owners are familiar with the Jumpstart Our Business Startups (JOBS) Act signed by President Obama in April.  One of the goals of the JOBS Act is to reduce securities law burdens on startups and small businesses and make capital more accessible to them. 

One way is through “crowdfunding,” a term that generally describes a group of unaffiliated people who pool their money, usually via the internet, to support the financing needs of another person or organization.  Prior to the JOBS Act, a company could not promote its stock publicly or raise money from a large number of “unaccredited investors  without first registering its stock with the Securities and Exchange Commission (SEC) and becoming a publicly-traded company – that is, without “going public.”

Enter the JOBS Act, and, in particular, Congress’s directive to the SEC to draft a set of rules and regulations to permit companies to raise money via crowdfunding. With crowdfunding, a company will no longer be confined to raising funds quietly among wealthy friends and acquaintances or hiring a registered broker-dealer to do so on its behalf. The legislation does provide some general rules and limitations for crowdfunding, and these general rules will form the structure around which the SEC’s more detailed regulations will be built. 

  1. A company cannot raise more than $1 million annually from crowdfunding.
  2. A company can only accept certain amounts from investors.  The amount that an investor can allocate across all crowdfunding investments that he makes in a given year cannot exceed $2,000 or five percent of his annual income if his annual income or net worth is less than $100,000, or ten percent of his annual income if his net worth or annual income is $100,000 or more.
  3. All sales of stock or other equity and advertising for the offering must be conducted through a registered broker-dealer or an authorized funding portal.  The company cannot conduct the crowdfunding on its own.
  4. The company must comply with disclosure requirements, which include providing basic financial information before seeking funding. 

In addition to the restrictions above, there is uncertainty about how crowdfunding will work in practice.  It is still unclear whether companies that utilize crowdfunding will be able to use other methods to raise additional funds from investors without going public.  Also, companies that use crowdfunding will need to file certain financial reports with the SEC and it has not been determined if those reports will be made available to the public. 

The answers to these questions will remain unclear until the SEC moves further along in its rulemaking process.  However, those regulations are not expected until early next year.

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