Yesterday, President Barack Obama signed into law the Jumpstart Our Business Startups Act (JOBS), a measure that includes U.S. Sen. Michael Bennet's "crowdfunding" amendment, easing securities regulations in a variety of ways with the goal of aiding small businesses. Many of us have been pushing for easing the requirements needed for startups to raise initial seed money from the public.
In the past several years, the term “CrowdFunding” has been kicked around. The website Kickstarter is jumped out as the clearer in the space creating a marketplace for startups and users to barter startup capital for products or other incentives, other than equity.
It’s always amazed me that anyone could go to Las Vegas and invest $1,000 on the craps table, yet if that same person wanted to invest $1,000 in a startup, they needed to be an accredited investor, meaning you must make $200,000k a year (for the past 3 years) or have a liquid net worth of $1 million or more. The JOBS Act removes this barrier.
Now for the first time in the United States the average Joe Investor (non-accredited) can make investments based on their income or net worth. Companies will be able to raise up to $1 million in a 365 day period. There are some requirements we know about already, they include:
- Companies must provide CPA reviewed tax returns or audited financials based on the amount they raise, here is the breakdown:
- Less than $100K: You are required to provide your income tax returns and have your financial statements certified by your CEO.
- $100K to $499K: Your financial statements will need to be reviewed by a public accountant.
- $500K to $1 Million: You will need to provide the investors with audited financials.
- Companies must have a defined communication plan to communicate with its investors. Since investors can’t look up a stock symbol to get their news, another plan must be developed.
- No single investor invests more than a specified amount in the offering, namely:
- The greater of $2,000 or 5% of the annual income or net worth of the investor, as applicable, if the investor has annual income or net worth of less than $100,000; or
- 10% of the annual income or net worth of the investor, as applicable, if either the annual income or net worth of the investor is equal to more than $100,000, capped at a max of $100,000 invested.
- The websites offering CrowdFunding services must register with the SEC as a Registered Broker or “Funding Portal”.
There are a lot of additional conditions, including background checks on the issuer. For a complete list, check out CrowdSourcing.Org
The skeptics of the equity CrowdFunding bill are concerned with entrepreneurs dealing with hundreds of inexperienced investors funding startups. This is true with anything new. People will need to learn the pit falls of investing in a non-liquid asset. It will be interesting to see if markets will be started to trade these assets. Who knows what the future will bear?
It will also be interesting to see what happens in the current investor models. We’ve already seen Angel investors and Angel funds lead in SEED and Series A funding, pushing the VCs to later stage companies. Will companies that use CrowdFunding sites for their seed capital have problems in later rounds of funding from institutional or accredited investors?
The next step is for the SEC to craft guidelines and rules for the law that CrowdFunding portals, investors and entrepreneurs can work with. The SEC has 270 days ( nine months), to make final changes to the regulation. So nothing will happen until next year.