Crowdfunding: A New Way to Raise Capital
Shumaker Williams, P.C.
The Jumpstart Our Business Startups Act (the “JOBS Act”) enacted in April 2012 provides for a new method of raising capital without requiring registration of the offering with the Securities and Exchange Commission (the “SEC”). The securities offered will also be exempt from state registration requirements and, in contrast with some other offerings that Congress has exempted from state registration requirements, the states may not require a notice filing or the payment of a fee. However, both Federal and state antifraud laws and regulations will apply to offerings made pursuant to this exemption.
The JOBS Act exempts the sale of securities by an issuer that is not an SEC reporting company to an unlimited number of purchasers, who need not be accredited investors and who will not count as holders of record for the purpose of determining whether the issuer has exceeded the threshold (now 2,000 for banks and bank holding companies) for becoming a reporting company, through a broker-dealer or a “funding portal.” A funding portal can be a third-party website that is registered as such with the SEC and provides a platform where issuers can provide information about their offering and potential investors can review this information.
The JOBS Act contains dollar limits applicable to both the issuer and the participating investors. The aggregate dollar amount of securities sold by the issuer in the current offering, together with all securities sold in reliance on the exemption in the previous 12 months, cannot exceed $1,000,000. With respect to investors, the aggregate dollar amount of securities purchased by any one investor in the current offering, and in all other offerings under the new exemption (including offerings by other issuers) in the previous 12 months, cannot be more than the greater of $2,000 or 5% of his/her annual income or net worth if it is less than $100,000, or 10% of his/her annual income or net worth if it is $100,000 or more, subject to an investment cap of $100,000.
Although the issuer is not required to file a registration statement with the SEC, the JOBS Act does require it to provide significant disclosure to the broker-dealer or funding portal and to each investor; this information must also be filed with the SEC. The issuer will also be required to provide information annually to investors and the SEC concerning the results of its operations and its financial condition.
For a period of one year following their purchase, securities exempt under the crowdfunding provisions of the JOBS Act can only be transferred to the issuer, to an accredited investor, pursuant to a registration, to a member of the investor’s family, upon his/her death or divorce or upon other events to be specified by the SEC in rules it is required to enact.
As under many of the provisions of the JOBS Act, the SEC is required to develop rules to further define the parameters and additional requirements of the exemption the Act provides for crowdfunding, including relating to the registration of funding portals and issuer disclosure; such rules are required to be issued within 270 days of the JOBS Act’s enactment on April 5, 2012. It is unclear how onerous these rules may be, since some SEC officials have voiced their concerns about whether the exemption weakens investor protections too much. Companies looking to raise a small amount of capital should keep the availability of this new exemption in mind and, when the SEC issues its rules, determine whether or not it offers a cost effective avenue for raising capital.