The Jumpstart Our Business Startups (JOBS) Act passed Congress with bipartisan support and was signed into law by President Obama in April 2012. The bill was enacted to encourage small business and startup funding by reducing various federal regulations. It permits businesses to accept small contributions from individual investors, up to $1 million annually, without making an initial public offering.
Some of the specifics include that private individuals who earn less than $100,000 annually can invest a maximum of $2,000 or five percent of their income, whichever is greater. Those private investors whose annual income exceeds $100,000, however, can offer up to ten percent of their income. Furthermore, the JOBS Act creates certain exemptions from broker-dealer registration requirements.
The most highly celebrated provision of the JOBS Act is its Title III, entitled Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012 or the “CROWDFUND Act.” Title III enables “crowdfunding,” or the ability to sell securities in small amounts to a large number of investors. The JOBS Act also creates a new exemption from registration for qualified crowdfunding transactions. In order for a transaction to be eligible for the exemption, among other things, it must be conducted through a broker or “funding portal” that fulfils certain obligations in connection with the transaction, such as providing risk disclosures to investors. Nevertheless, the crowdfunding provisions of the JOBS Act are not yet operative until the SEC adopts new rules.
Several parts of the law are also aimed at helping a well-established small businesses more easily find accredited investors, those with a net worth of $1 million excluding the value of their primary residence. The law lifts a ban on advertising to the general public about investment opportunities, no longer compelling companies to hire brokers (the advertising ban has been in place since the 1930s for fear that fraudsters would deceive unsophisticated investors).
Further, the JOBS Act also aids companies in later growth stages, by easing the process for publicly selling stock. Previously, a company was forced to register with the SEC if it had more than 500 investors or raised upwards of $5 million. Dealing with the plethora of legal forms and independent accounting audits filing required was an expensive venture for most companies, as it could cost hundreds of thousands of dollars. The law relieves requirements for most companies by raising several constraints. A company with $10 million in assets will now have to register with the SEC only after its number of investors reaches 2,000, and companies with less than $1 billion in annual revenue can enter a five-year phase-in plan with the SEC.
“Crowdfunding,” as it has been dubbed, has led to a significant increase in the creation and use of website platforms such as Kickstarter, Indiegogo, and Fundable. These crowdfunding platforms have helped fund any and everything from startups, film and music projects, nonprofits, to all other genres of projects and small businesses.
The advent of such crowdfunding ventures has itself altered how businesses now seek to market their products. Businesses hoping to raise enough to fund their projects are tasked with learning how to market their product to the masses, and recruit advocates and advisors early on in their venture. This is especially true for platforms such as Kickstarter, which are an all or nothing prospect (an applicant must reach their targeted funding goal, or they receive nothing). The key to crowdfunding success is figuring out how to build a community of supporters before, during, and after your business launches.
Source: Bostinno – Sheena Townsend