On April 5, 2012, President Obama has signed H.R. 3606 referred to as the “Jumpstart Our Business Startups (JOBS) Act” or the “Crowdfunding Act."
Oddly enough, in the United States a person can gamble away all of their money at a casino or donate to countless flakey charities, but it has been very difficult for an American citizen to invest $10 in another person’s startup business, regardless of how dynamic the business might be. H. R. 3606 may change that.
The Act, passed by both houses of Congress and signed into law by the President, is designed to ease some significant regulatory restraints on small business or “emerging growth companies” in their process of raising capital. Some of the rules of the bill went into effect immediately, while other parts of the bill are still in the drafting process. The Jobs Act directs the SEC to amend its rules to meet the intent of the Act. The SEC has been tasked to establish the rules and regulations pertaining to the law...and has 270 days to do so. Therefore, many part of the law may not be effective for nine months, if even then. Much depends on what the SEC deems their charter to be and how their ruling may affect the law. The difficult part of creating a final Act will be for the SEC to create final rules that will still meet the intent of Congress. The SEC and FINRA were the major opponents of the Act.
However, the SEC is taking an excellent approach to the task assigned to it. They are asking for public input and comments, including drafting the rules and allowing the public to see and comment on the comments. Comments can be submitted on the SEC website –
While the pros and cons of the H. R. 3606 are still being debated and defined and kinks being worked out, it has been signed into law and, as currently written, there does seem to be some dramatic differences in how companies may raise working capital.
On April 16, 2012, the SEC issued guidance on Title 1 of the JOBS Act which affects “Emerging Growth Companies” (“EGC”) An EGC is defined in both the Securities Act of 1934 and Exchange Act of 1934 as an issuer with “total annual gross revenues” of less than $1 billion during its most recently completed fiscal year. Title 1 of the JOBS Act provides scaled-down disclosures for EGG’s, now treating them as small business issuers. Some changes that have been made is that EGCs now only need to provide two years of audited financials instead of three for an IPO registration and an EGC will be treated as small business for the reporting of executive compensation; have no Sarbanes-Oxley Act 404(b) auditor attestation requirements and are able to test the waters with communications to QIBs and institutional accredited investors prior to an offering. There is much that a company and their legal counsel must know about and EGC to move forward. Many decisions are still being made as to what changes will be made in fundraising for an EGC.
The full text of this guidance is available on the SEC website. Title 1 of the JOBS Act provides scaled- down business disclosure for Emerging Growth Companies (EGC’s)
For smaller and startup companies, the Act could have very significant changes for raising needed capital.
The Act most dramatically affects Rules 505 and 506 under Regulation D.
The JOBS Act allows for so-called (“Crowdfunding”).
“CROWDFUNDING” – This title may be cited as the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012” or the “CROWDFUND Act of 2012”.
Some possible changes are listed below, however some may not be firm yet:
The Bill ends the ban on general solicitation or advertising in regulation D, Rule 506 offerings, but only if the purchasers are accredited investors. For example, under the Act, private placements of capital per Regulation D Rule 506 could now be solicited via general advertising provided that all purchasers are accredited investors. (see “Accredited Investors” U. S. Securities and Exchange Commission.) There may no longer be a limit to the number of such investors.
And crowd funding investors do not count against the threshold number of shareholders that triggers mandatory periodic reporting to the SEC. In a nut shell, while strictly prohibited in the past, the Act allows companies to bypass former rules and raise up to $1 million from large pools of small investors by directly soliciting them, from a present data base, over the internet, Facebook, local newspaper, billboards or even junk mail.
Crowdfunding opens up equity investment in non-public start-up entities to everyone and anyone on some level providing that the
A company can raise up to $1,000,000 in a 12 month period.
Each investor can only invest the greater of $2,000 or 5% of the annual income or the net worth off the investor is less than $100,000.
Investors with more than $100,000 in annual income or net worth may invest up to 10% of their annual income or net worth not to exceed $100,000
WE ARE STIL ATTEMPTING TO GET MORE CONCRETE INFORMATION AS DECISIONS ARE MADE.