The Jumpstart Our Business Startups Act (or JOBS Act) flew through Congress and was signed by the President last week. It is heartening to see a good idea get through Washington once in a while. The JOBS Act loosens restrictions for raising money for new businesses, which, in turn, will create jobs.
There are two main points for the law that are important to you:
1. Private Placement Restrictions for advertising and solicitation have been eliminated; and
2. Crowdfunding is now allowed.
Let’s review these new and useful changes.
Under the prior law, you couldn’t widely advertise or solicit people you didn’t know to invest in your venture. Not every entrepreneur has a wide circle of friends and family willing to invest and so funding was stymied.
The new law eliminates these restrictions for Rule 506, Regulation D private placements. All purchasers under the new rules must be accredited investors, meaning they have an annual income of $200,000 a year ($300,000 if married) or have a net worth exclusive of their personal residence of $1,000,000 or more. If you fit the profile you can now learn of all sorts of investing opportunities.
The new law recognizes that there are plenty of accredited types out there who want to invest in new ventures. It anticipates that platforms will be created to facilitate Rule 506 offerings. These platforms won’t have to register as broker-dealers (an arduous process) but neither can they take any commission or compensation for their services.
The SEC is required to amend the Rule 506 law in the next 90 days. Look for an increase in these types of offerings.
Raising small amounts of money from a large number of people over the internet is crowdfunding. In the last several years entrepreneurs have tried this approach (most notably an attempt to buy the Pabst Brewery) only to find themselves in trouble with securities regulators. But fortunately some in power recognized this was a unique way to raise money, and, again, create jobs and the idea took hold.
Crowdfunding is now allowed if:
1) The offering raises $1,000,000 or less during a 12 month period; and
2) The amount sold to any investor during a 12 month period does not exceed:
a) The greater of $2,000 or 5% of the annual income or net worth of the investor if either is less than $100,000; or
b) If the annual income or net worth of the investor is greater than $100,000 then 10% of the annual income or net worth of the investor up to a maximum investment of $100,000.
So, for example, you could raise $1,000 from 1,000 people over the internet and be in business. But before you get started, know that crowdfunding transactions must be handled by a funding portal or intermediary broker registered with the SEC. These portals are forming now.
Under the new law companies raising money using this route must provide a great deal of information to investors, which is appropriate. You know there will be some bad apples in this new barrel, so allowing investors to make as much of an informed decision as possible is a good policy.
The SEC is required to adopt new crowdfunding rules and regulations in the next 270 days.
Together, these two changes to the securities law provide a dramatic step forward. As always, you must be cautious when investing. But at least now you will be exposed to more opportunities. And for entrepreneurs starting out or seeking to grow into new markets these changes provide an audience for ideas and opportunities. That is all any good entrepreneur needs.