Crowdfunding Is Soon to Become a Regulated Means for Businesses to Raise Capital

Crowdfunding has hit the mainstream and is soon to become a sanctioned—and regulated—means for new ventures to identify and obtain funding.  In the next few months, the Securities and Exchange Commission (“SEC”) is expected to issue final regulations that will implement the exemption from securities registration that was created by the Jumpstart Our Businesses Act (the “JOBS Act”). This exemption will provide start-up ventures with the opportunity to obtain investments through crowdfunding websites with less risk that the venture is violating securities laws by doing so.

As a general matter, a business that solicits investments from the general public is required to register its securities—which include stocks, notes, and other evidence of an interest in a profit-sharing venture—with the SEC and state regulatory agencies.  Complying with the securities registration process is time and cost prohibitive for most companies.  As a result, most companies are not able to solicit investment from the general public, which severely constrains the capital that is available for start-up ventures.

However, the JOBS Act will allow ventures to solicit investment from the general public without requiring registration of the securities issued to investors, provided a number of conditions are met.  Most importantly, a venture issuing securities is not permitted to raise more than $1 million in a consecutive twelve month period through the use of the JOBS Act exemption and, without obtaining substantial personal information from investors, will be limited to accepting no more than $2,000 from each investor.  Additionally, entities issuing securities under the JOBS exemption are required to sell the securities over a registered securities broker or through a registered portal, which will likely operate a website in order to facilitate transactions.  Additional requirements, including disclosing specific information to both potential investors and the intermediary over which the securities are sold, will be required of the venture.

Once the SEC issues its final rules, the JOBS Act exemption from securities regulation will become available for use, and ventures will experience a greatly expanded opportunity to access capital.  However, any business that is considering taking advantage of the JOBS Act exemption should proceed carefully to ensure that they are complying with each of the requirements that the SEC ultimately decides a business must satisfy.