Limitations on the Crowdfunding Legislation

Now that the Jumpstart Our Business Startups –“JOBS” — Act has passed, lots of individuals are jumping to get in the crowdfunding game. There are masses of start-ups and operating companies which are working to use crowdfunding for a means to access cash for their new ventures or to expand current business operations. Additionally, there are many scrambling to become an”intermediary” between those who need the money and people that would like to finance a project. The excitement is overwhelming, but we have to realize that the Act put into place constraints and duties for intermediaries and businesses — i.e. issuers — to follow. These obligations and limitations, while intended to protect the small investor, may drive up the cost of attempting to get this capital.

Prerequisites of Intermediaries

The U.S. Securities and Exchange Commission has warned that the Act requires intermediaries to follow certain obligations and principles that the SEC has been granted the ability to determine. The SEC has said on its site that intermediaries need to perform the following.

  • Adequate disclosures. Must provide disclosures as the SEC may determine are appropriate by issuing rules. These disclosures will consist of providing disclosure information to the prospective investors.
  • Inform investors. Must ensure that every investor: (a) reviews investor education materials; (b) positively affirms that the investor knows that the investor is risking the loss of the whole investment, and that the investor could endure such a reduction; and (c) answer questions that demonstrate that the investor knows the degree of risk generally applicable to investments in startups, emerging companies, and smaller issuers and the risk of illiquidity.
  • Shield privacy. Must take steps to safeguard the privacy of data collected from shareholders.
  • Minimize risk of fraud. Take such steps to decrease the possibility of fraud related to such transactions according to the SEC rules, such as acquiring a history and securities enforcement regulatory background check on each officer, manager, and person holding over 20 percent of the outstanding equity of each issuer whose securities are offered by such individual.
  • Pass together issuer information. Make available to investors and the SEC, at least 21 days prior to any sale, any disclosures provided by the issuer — i.e. the company getting the cash.
  • Track the cash. Ensure that offering proceeds are only given to the issuer once the aggregate capital increased from all investors is equal to or higher than a goal offering amount, and allow all investors to cancel their obligations to invest;
  • yield maximum limitations. Make efforts to make certain that no investor at a 12-month period has bought crowdfunded securities which, in the aggregate, from all issuers, exceed the investment limitations set forth in section Title III of the JOBS Act; and
  • Other principles. Any other requirements that the SEC determines are appropriate.

Even though the obligations and constraints described above are directed in the intermediary, those attempting to raise money will have to provide the information and disclosure documents for the intermediary to comply with the SEC rules. The more comprehensive the disclosure documents will need to be, the more costly they’ll be to generate.

Rules To Be Determined

The exemption for crowdfunding won’t be available until 2013. As you can see, lots of the rules above are described generally and haven’t yet been determined. The SEC has been issue answers to queries and it is conscious that lots of websites are attempting to jump in the crowdfunding arena ancient. It has begun to provide public warnings regarding the availability of crowdfunding and the requirements involved in these transactions to notify the people to be wary of any site which purports to be an intermediary dealing in securities. When the exemption is available, it is going to be a fantastic choice for raising money. However, intermediaries and businesses must be aware that there’ll still be lots of files and disclosures required before they could access the audience.