Last week President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) that includes revisions to the 1930s era financial regulations that limited equity funding for start-up businesses.
Equity crowdfunding is now legal in the U.S. The final bill is more restrictive than the one originally passed in the House, providing more regulation for the process and placating some of the critics of equity crowdfunding.
President Obama's Signing of JOBS Act
- The law allows an entrepreneur or small business to raise up to $1 million per year through an SEC-registered crowdfunding intermediary. The House bill did not require an intermediary and would have allowed people to raise money via Facebook and other social media websites.
- Intermediaries seeking to help companies raise money through crowdfunding must register with the SEC, make sure investors are advised of the risks they are taking, and take measures to prevent fraud.
- Individuals with an income of less than $100,000 per year are allowed to invest the greater of $2,000 or five percent of their income.
- Individuals with an income of more than $100,000 can invest up to ten percent of income, with a cap of $100,000.
- Companies that use crowdfunding must provide financial statements to investors. Companies seeking to raise $100,000 or less would have to provide tax returns and a financial statement certified by a company principal.
- Companies seeking between $100,000 and $500,000 in capital would have to get independent accountants to review these statements.
- Audited financial statements would be required for companies seeking more than $500,000 in capital.
- Companies can avoid registering with the SEC until they have 2,000 shareholders, up from 500 currently.
Research conducted by Daily Crowdsource indicates that in 2011 equity-based crowdfunded projects raised $20.5 million worldwide using such intermediaries, five times more than was raised in 2010.
The SEC has nine months to prepare implementing rules; so, equity crowdfunding will not really take off until 2013. But companies can still work with intermediaries that are registered broker/dealers or have headquarters outside the United States. Around the beginning of July, intermediaries based in the United States that are not broker/dealers can begin accepting crowdfunding requests but can only accept money from "accredited" investors, per existing regulations.
To qualify as an accredited investor, an individual must have a net worth in excess of $1 million, excluding the value of a primary residence, or a minimum annual income of $200,000 ($300,000 for a couple) for each of the past two years, plus a reasonable expectation of the current year's income at least matching that level. The new rules state that no more than 500 investors in a crowdfunded business may be non=accredited investors.
One factor that might deter potential investors is the lack of liquidity of investments. There is no mechanism for selling shares. Investors have to wait until the business is sold or goes public.