The Jumpstart Our Business Startups Act (“JOBS” Act) was signed into law on April 5, 2012. One portion of the JOBS Act addresses “crowdfunding.” Crowdfunding involves seeking funding over the internet from a potentially large group of investors putting in relatively small amounts. The JOBS Act amended the federal securities laws to provide for a new crowdfunding exemption from SEC registration, as well as preemption from state Blue Sky laws.
The conditions of the crowdfunding exemption are:
The aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the crowdfunding exemption during the 12-month period preceding the date of the transaction, cannot be more than $1,000,000;- The aggregate amount sold to any investor by the issuer, including any amount sold in reliance on the crowdfunding exemption during the 12-month period preceding the date of the transaction, cannot exceed (a) the greater of $2,000 or 5% of the annual income or net worth of the investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; or (b) 10% of the annual income or net worth of an investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000;
- The transaction is conducted through a broker or funding portal that complies with the requirements of the exemption; and
- The issuer complies with a number of specific informational and other requirements (including financial information) specified under the exemption. In addition, warnings of the risks related to the investment must be provided to investors.
The SEC must issue rules to implement this provision no later than 270 days following enactment, and until that time the SEC has stated that the crowdfunding exemption IS NOT AVAILABLE.
There was much excitement among potential issuers and investors when news of the new crowdfunding exemption was first publicized. Since that time, however, concerns about the exemption and the risks of using the exemption – by both issuers and investors – have continued to grow. Raising small amounts from a large number of “unsophisticated” investors poses many problems for issuers. Simply managing such a large shareholder base on an ongoing basis will be a challenge for many issuers. In addition, it is already being predicted that many fraudulent offerings will be conducted with issuers claiming that they comply with the crowdfunding exemption when they do not, in fact, comply.
