In last week's column, I dissected the "crowdfunding" provisions of the new federal "Jumpstart Our Business Startups Act" (J.O.B.S. for short). The new law, which was signed by President Obama last week, changes the federal securities laws so as to enable startups and other privately owned companies to raise capital from strangers on the Internet (known as "crowdfunding," and, up until now, illegal).
While the "crowdfunding" provisions of the J.O.B.S. Act (sections 301 to 305) are getting all the press and media, I don't think those provisions will enable "crowdfunding" -- at least in the short run -- the way many entrepreneurs hope. As I pointed out last week, the Act requires "crowdfunding" to take place via Internet "portals" that will have to comply with Securities and Exchange Commission (S.E.C.) regulations that are months, if not years, away from being drafted. Also, companies that avail themselves of "crowdfunding" will have to jump through many of the hoops companies launching initial public offerings (IPOs) have to go through today -- including the drafting of a mini-prospectus and the filing of annual reports with the S.E.C.
All in all, you aren't going to see a lot of "crowdfunding" under these provisions for quite some time, and there's a real danger that startup companies absorbing the media "hoopla" and thinking it's now permissible to sell stock on the Internet will launch stock offers online that remain illegal despite the J.O.B.S. Act.
There is another provision of the J.O.B.S. Act that I think will have a huge impact on early-stage companies looking to raise capital in a difficult market.
Since the 1930s, it has been illegal to use "general solicitation or general advertising" to raise capital without registering an IPO. Section 201(a) of the J.O.B.S. Act removes that requirement for companies seeking capital online as long as all of the "purchasers" of the company's securities -- as opposed to people who receive only "offers" to buy the securities -- are "accredited investors" within the meaning of the federal securities laws. Currently, that means institutional investors and certain very wealthy individuals (people having a net worth of more than $1 million or annual income of more than $200,000).
Under Section 201(a), a company can post an offer to sell securities on its website or on other websites (yet to be created) designed to facilitate such sales -- heck, they can even take out full-page ads in The New York Times or The Wall Street Journal -- as long as actual sales happen only to "accredited investors". Here's how this would work:
--When posting the ad, the company would indicate that the securities are being offered to "accredited investors" only;