The JOBS Act: What Crowdfunders Need to Know To Raise Money

You might already know that the JOBS Act of 2012 provided a regulatory framework by which startups, entrepreneurs and crowdfunders could leverage the power of the internet and social media platforms to fund their small business enterprises. RaiseMoney.com provides a primer to further understand the crowdfunding and equity crowdfunding phenomena.

As explained by CrowdfundInsider, The Jumpstart Our Business Startups Act, or JOBS Act, was signed into law by President Obama on April 5 of 2012. The legislation had previously passed Congress the week prior to the signing with a 73-26 Senate vote and a 380-41 House vote approving the measure. While having many different functions, the one that has captured the most attention is the area surrounding Crowdfunding.

The Act requires the Securities and Exchange Commission to adopt rules to implement a new exemption that will allow for crowdfunding. The initial time frame was for 270 days for review. Issuers that generate any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws until such date as the regulatory groups have deemed it appropriate.

Six discrete bills, all tied up with a bow. Together, they have the following impacts:

  • Raises the number of shareholders a company can have before it is forced to go public. You could call this part The Facebook Act. Facebook, among others, was growing rapidly as a private company but quickly bumped up against the 500-shareholder limit, reducing its ability to compensate employees in one of the main coins of the Silicon Valley realm: stock. The new limit would be 1,000.
  • Permits entrepreneurs to “crowd-fund” their businesses — that is, would let small businesses raise money from large pools of small investors (limited to $10,000 or 10 percent of an investor’s annual income, whichever is less).
  • Creates a new category of firms called “emerging growth companies” that would be allowed a slower accession into the Security and Exchange Commission’s full regulatory and fee structure. The idea is that if small companies have fewer fees, they can go public faster and use the money they get from the public markets to create more jobs.
  • Allows small firms to use advertisements to solicit investors, a practice previously banned by the SEC.
  • Lets companies looking to raise up to $50 million in share sales avoid SEC registration, up from the $5 million level set 20 years ago.
  • Increases the number of shareholders allowed to invest in a community bank from 500 to 2,000.