Thursday’s signing of the JOBS Act (more formally known as the Jumpstart our Business Startups Act) by President Obama marks the most significant milestone in the brief history of the crowdfunding movement, but how will the new law make it easier for small businesses to raise capital?
Does the crowdfunding exemption apply to me?
- If you (the issuer of the securities) are a U.S. company;
- If you raise up to $1 million in a 12-month period;
- During that period, you raise up to $2,000 from each investor or 5% of that investor’s annual income or net worth (if it’s less than $100,000), or 10% of the investor’s annual income or net worth (if it’s more than $100,000).
If you are able to meet all of these criteria, congratulations, the crowdfunding exemption applies to you!
How do I go about raising the money? Can I collect it on my own?
- No, you must use a crowdfunding website that is registered with the SEC to conduct your company’s crowdfunding offering. This is a niche that will fill rapidly now that this bill has been signed into law.
What information do I have to disclose to my investors?
- Your company’s name, legal status, physical address, and website address.
- The names of the directors and officers and each person holding more than 20% of the shares of your company.
- A description of your business and the anticipated business plan of your company.
- A description of the purpose and intended use of the proceeds of the offering.
- The amount you plan to raise, the deadline to reach that amount, and regular updates on the progress of reaching your goal.
- The price of the securities you are selling to the public.
- A description of the ownership/capital structure of the company.
- After the offering, you must file annual reports with the SEC and provide investors with reports of the results of your operations and financial statements.
Is there anything I am specifically not permitted to do during my company’s crowdfunding offering?
- You cannot advertise the terms of your offering, other than referring potential investors to your crowdfunding website.
- You cannot pay anyone to promote your campaign without taking the steps required by the SEC to ensure that this person discloses their compensation.
What if I am not open or am dishonest to my investors?
- Your investors can sue you for any material misstatements or ommissions in your disclosure and try to recover the amount they paid for their securities plus interest (less any income they received from the securities), or, if they sold the securities, they can sue you for damages.
When can my investors sell their shares in my company?
- Investors must wait to sell their shares until one year from the date of purchase except if they are selling the shares 1) to the company; 2) to an accredited investor; 3) to a family member of the purchaser; 4) in a registered offering (e.g., an IPO); or 5) in connection with the death or divorce of the purchaser.