Crowdfunding hopefuls still waiting for rules

The implementation of equity crowdfunding, a way for small businesses to raise capital, has been delayed again.

In my column last week, I said that the rules for launching the JOBS Act, which legalizes equity crowdfunding, would probably be finalized by this spring. That is not likely now.

According to David Marlett, founder of the National Crowdfunding Association, “Now we are hoping for by end of 2013.”

The trade association’s website, nlcfa.org, says that it is both an opportunity and a risk for investors to “invest money into or loan money to small entrepreneurial companies.”

The U.S. Securities and Exchange Commission is trying to minimize the risk as they wrestle with perfecting the rules.

In a worst-case scenario, I can envision a dishonest small-business person legally complying with the law and selling $1 million worth of unregistered stock in his fledgling company. Then he spends the money by paying himself a salary and whiling away his days playing Grand Theft Auto on his new business laptop at Siesta Beach.

The SEC wants to write crowdfunding rules to protect investors from that happening. At the same time, it doesn’t want to make the rules too cumbersome and expensive that they deter small-business owners from participating in the program.

Mike Marshall, an Atlanta-based lawyer with Miller & Martin, says the JOBS Act’s objectives are to “balance need to facilitate capital formation against investor protection.” Thus the rule-makers want to simplify the process for entrepreneurs to market their stock through licensed crowdfunding portals that will protect investors.

To further protect investors, the JOBS Act limits how much stock an investor can purchase per year.

“The crowdfunding legislation says that investors with annual income and net worth below $100,000,” Marshall says, will have their stock purchase limited to “the higher of $2,000, 5 percent of income, or 5 percent of net worth.” So if the business fails, the investor’s loss is limited.

The act permits wealthier individuals to take more risk. Accordingly, for investors with “annual income and net worth above $100,000, then the limit is the higher of 10 percent of income or 10 percent of net worth, up to a cap of $100,000.”

Marshall says that if a small business issues $100,000 of stock or less, it will be required to disclose its tax returns and financial statements. The owner will certify that the documents are true and correct. For a $100,000 to $500,000 stock issue, the financial statements will be reviewed by an independent accountant. A $500,000 to $1 million issue will require audited financial statements.

Basic information such as the company’s legal status, physical and web address, and the names of directors and officers will be required. The purpose of the offering and intended use of its proceeds will also be explained. Promotional material, such as videos and brochures, are only permitted to be disseminated from the licensed portals.

The crowdfunding portals are tasked with posting the required documents and promotional material and letting investors know about the inherent risk associated with investing in a small business through crowdfunding. The Financial Industry Regulatory Authority is writing the rules to license them.

Source: Herald Tribune – Jerry Chautin

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