As I am writing this, a new law called the "Jumpstart Our Business Startups Act" (J.O.B.S. for short) has passed both houses of Congress and is sitting on the president's desk awaiting signature.
Among other things, the law will change the federal securities laws to make it easier for small companies to raise capital from total strangers by "crowdfunding" -- soliciting small investments from hundreds (sometimes thousands) of individual investors and their retirement accounts through online advertising.
Up to now, there have been two major regulatory roadblocks to "crowdfunding" in the United States:
1) The Securities and Exchange Commission (S.E.C.) requires a startup company to go through the cumbersome initial public offering (IPO) process if it intends to sell more than $1 million in securities by "general solicitation or general advertising" (basically, by any means of mass communication, including the Internet).
2) Even though offerings of less than $1 million are exempt from this requirement, the securities laws (known as "blue sky laws") of most states impose additional restrictions on these small offerings. For example, in Connecticut, the proposed sale of securities to more than 10 people (whether or not Connecticut residents) triggers a requirement that the company file a detailed business plan with the state Department of Banking.
The new J.O.B.S. Act opens the door to crowdfunding in two major ways:
1) It states clearly that offers and sales of up to $1 million in securities may be sold by "general solicitation and general advertising" as long as certain conditions are met (more on those later).
2) It expressly overrules state "blue sky laws" that are inconsistent with the federal law.
So small companies looking to raise capital should be breaking out the champagne, right?
Not so fast...
The J.O.B.S. Act imposes a few conditions on "crowdfunding." Here are the most important:
-- The amount of each individual's investment is limited to $2,000 or 5 percent of the individual's annual income or net worth, whichever is larger, if the individual's annual income or net worth is less than $100,000.
-- The amount of each individual's investment is limited to $100,000 or 10 percent of the individual's annual income or net worth, whichever is less, if the individual's annual income or net worth is $100,000 or more.
-- The transaction must be accomplished exclusively through a "funding portal" that is registered with the S.E.C.
-- The company must file an offering statement with the S.E.C. and deliver copies to each investor.
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