Equity Crowdfunding Is Currently Legal in U.S.

Last week President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) which includes amendments to the 1930s era fiscal regulations that restricted equity funding for start-up companies.

Equity crowdfunding is currently legal in the U.S.. The final bill is more restrictive than the one initially passed in the home, providing more regulation for the procedure and placating a few of the critics of equity crowdfunding.

President Obama’s Signing of JOBS Act

The Rules

• The legislation permits an entrepreneur or small company to increase around $1 million per year via an SEC-registered crowdfunding intermediary. The House bill did not call for an intermediary and could have enabled people to raise money via Facebook and other social networking websites.
• Intermediaries trying to help companies raise money through crowdfunding must register with the SEC, make sure investors are advised of the risks they’re taking, and take steps to reduce fraud.
• People with an income of less than $100,000 annually are permitted to commit the greater of $2,000 or five percent of the earnings.
• People with an income of over $100,000 can invest up to ten percent of earnings, with a cap of $100,000.
• Companies which utilize crowdfunding must provide financial statements to investors. Businesses seeking to raise $100,000 or less would need to offer tax returns and a financial statement certified by a business principal.
• Firms seeking between $100,000 and $500,000 in funds would need to acquire independent accountants to review these statements.
• Audited financial statements are required for businesses seeking more than $500,000 in capital.
• Providers can avoid registering with the SEC until they’ve 2,000 shareholders, up from 500 currently.

Research conducted by Daily Crowdsource suggests that in 2011 equity-based crowdfunded jobs raised $20.5 million globally using such intermediaries, five times more than was raised in 2010.

The SEC has nine months to prepare implementing rules; therefore, equity crowdfunding won’t truly take off until 2013. But firms can still work with intermediaries which are enrolled broker/dealers or have headquarters outside america. Around the start of July, intermediaries based in america that aren’t broker/dealers can start accepting crowdfunding requests but may only accept cash from”accredited” investors, per existing regulations.

To qualify as an accredited investor, a person should have a net worth in excess of $1 million, excluding the value of a primary home, or a minimum yearly income of $200,000 ($300,000 for a few ) for each of the previous two decades, plus a reasonable expectation of the current year’s earnings at least matching that level. The new rules say that no more than 500 investors at a crowdfunded business might be non=accredited investors.

Before the bill was signed, new equity crowdfunding sites sprung up, each boasting over 1,000 investors willing to invest. Among them are Crowdfunder, Wefunder, and Stone the Post.

1 factor which may deter potential investors is the lack of liquidity . There’s absolutely no mechanism for selling stocks. Investors need to wait until the company is sold or goes public.

Should Risky Investments be Restricted to the Wealthy?

The laws and regulations which before now constrained investments are over 75 years old, enacted during the Depression as a response to the stock exchange crash. In practice, by the late 1990s, these laws shut out all but institutional investors as well as the wealthiest individual investors. Nobody else could get in on initial public stock offerings.

The legislation purportedly were meant to safeguard the middle-class and the bad, based on the concept that wealthy people, since they’re wealthy, are smarter than people with less money, while also being able to absorb losses.

Individuals with less money are naïve, more likely to fall for investment scams, and shouldn’t be permitted to take part in investments with any more risk than a money market account. While investments in entrepreneurial undertakings are really insecure, when they succeed they could be lucrative.

When the JOBS Act passed, numerous financial analysts, bloggers and attorneys said that despite the rules added by the Senate and contained in the last bill, equity crowdfunding will lead to the passing of what’s left of the middle class. In an outpouring of condescension, they’re forecasting that those people with less than $1 million in assets aren’t bright enough to avoid becoming the victims of scam artists emboldened by the new law to provide all kinds of phony investments. The pundits also object to the crowdfunding intermediaries being exempt from some of the SEC supervision that apply to broker/dealers. But the SEC, recall, is the agency that failed miserably to protect both accredited and unaccredited investors from Bernard Madoff — the convicted investment swindler — despite repeated warnings.

In another interesting twist, there’ll be no regulation of crowdfunding websites that function on the donation model, or limitations on how much individuals can donate to jobs on such sites. The assumption is that these websites cater to limited jobs, not companies, and that the jobs will become relatively tiny amounts of money from those who expect no return on investment. Last month, video game manufacturer Double Fine requested $400,000 for a new adventure sport. The project raised $3.3 million from over 87,000 backers. It became the biggest crowdfunded project ever. The quantity of money given is largely irrational since the company only required $400,000. And bear in mind that equity crowdfunded companies will only be permitted to raise $1 million each year.

It’s very likely that lots of entrepreneurs and smaller businesses will observe the sum of money which may be raised through the donation model and take their job to those sites, avoiding the additional paperwork and limitations of their equity crowdfunding sites. And they won’t have to handle pesky shareholders.