JOBS Act Brings Together Venture Capitalists And Crowdfunding

By: George Zack,
The two major sources that investors consider to raise capital include venture capitalists and crowdfunding (sometimes referred to as crowdsourcing). In terms of funding, the two are at opposite ends of the spectrum.

Venture capitalists typically comply with much stricter regulations compared to crowdfunding. In terms of the type of investors, venture capitalists generally cater to large investors who are accredited, which means that the investor must earn more than $200,000 per year (or have a net worth of over $1 million). On the other hand, any investor can participate in crowdfunding, and contribute as little as $10 dollars toward a venture.

Venture capitalists can only raise funds from those investors with whom they have a pre-existing relationship, whereas crowdfunding is exempt from such fussy requirements. Moreover, venture capitalists cannot publicly invite investors through mediums such as fundraising websites to invest in their ventures, whereas online fundraising is a perfectly permissible and common practice in crowdfunding.

A Catalyst: JOBS Act 2012

The Jumpstart Our Business Startups Act 2012 (JOBS), introduced by the Obama administration, was the first major step toward removing the distinctions between venture capitalists and crowdfunding.

Due to the the Act’s lax regulations, venture capitalists can now easily follow the practices pursued in crowdfunding. It even allows the general advertising of private placements for the first time since the Securities Act of 1933 was implemented, and has removed the investor accreditation requirement for venture capitalists.

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