The Jobs Act and the Legalization of Crowdfunding

traverselegal - April 5, 2012 - Internet Law, Internet Lawyer

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Good afternoon, my name is John Di Giacomo, and I’m an attorney with Traverse Legal, PLC and you are listening to Traverse Legal Radio.  I’m here to talk to you today a little bit about the new Federal Jobs Act, which will be signed by President Obama today at, of all things, a signing ceremony, and this is particularly an exciting event because President Obama has generally not used signing ceremonies. But, because this is such an important bill, he has decided to do so. 

So, what is the Federal Jobs Act?  Well, the Federal Jobs Act is a short acronym for jump-start our business start-ups, and it contains many provisions.  Two of the most important provisions for internet law, in general, are the legalization of crowdfunding provisions the legalizing requests for equity financing provisions, which relate to the general advertising solicitations for equity financing in a start-up business.

So, what does this mean?  Well, this new Act legalizes certain aspects of crowdfunding in exchange for equity.

So, what is crowdfunding?  Crowdfunding is the idea that if you ask the general public for money in exchange for equity, that you’re more likely to get smaller amounts of money in mass quantities than you are if you ask a traditional bank.  And as we all know, the capital markets are fairly constricted still, even though there has been some increase in lending, so this Act is intended to loosen up those capital markets and provide individual investors, smaller investors, with the ability to invest in start-up companies without registering with the Security and Exchange Commission.

Additionally, start-ups are now allowed to advertise to the public that they are seeking equity financing.  Prior to this bill, generally speaking, a private fund could not advertise to the public but instead they had to either seek an exemption under the SEC Act or otherwise register with the SEC.

Let’s talk a little bit about the legalization of crowdfunding.  Companies can raise (and remember these are start-up companies) up to $1 million in financing by providing equity in the company after registering with the Securities and Exchange Commission.

What does this mean?  Well, basically, the SEC has stated that it will promulgate some smaller registration requirements for crowdfunding platforms, and through these platforms, companies can now raise up to $1 million in start-up financing.  And this is a significant amount of money for a start-up business.  It’s usually more than you’re going to get from a commercial bank, so it’s a very significant change in the law.

Additionally, from the investor side, individuals can now invest 10% of their annual income or $10,000, whichever is less, without being subject to additional SEC reporting requirements.  What this does is, generally speaking, it provides start-ups outside of major metropolitan areas, such as Los Angeles, San Francisco or some of the larger New England cities, with the ability to access capital, because traditionally speaking, venture capitalist are usually located in those cities.  So, it is very difficult for a small company, for example, in Milwaukee or even in a smaller area such as Traverse City, Michigan, to get financing, and this part of the law is intended to alleviate some of those problems.

Additionally, venture capital is no longer limited to wealthy investors.  Statistically speaking, venture capitalist are the 1%, as we now like to use that term colloquially.  Venture capital, prior to this bill, was reserved for the very, very wealthy.  And now, individual investors can invest in these companies and, hopefully, get some kind of return on their investment if they’ve done their due diligence.  Obviously, there are some concerns that commentators have expressed, such as the fact that these investments are ripe with the potential for fraud, but we’ll see how that plays out.  Obviously, there will be some changes as this bill goes along.  There probably will not be changes prior to it becoming law, but there will likely be some changes in the marketplace on how we deal with these types of things.

So, the second part is the legalization of requests for equity financing.  Prior to the Jobs Act, private funds, like I said before, could not advertise or solicit the public for general investment without registering with the Security and Exchange Commission, which is a very, very costly process.  It takes a long time and, quite frankly, you have to hire an attorney, you spend a lot of money on that attorney, etc.  This was under Rule 506 Regulation D.  And anyone that’s gone through this process will tell you that it takes a long time, and again, it is very expensive.

Well now, these funds – these private companies – can advertise and generally solicit directly to the public.  They can take out pay-per-click ads.  They can advertise on television.  They can do a number of things that otherwise they couldn’t do before.

So, what does this do?  It removes costly compliance burdens that small businesses face when seeking capital from the public.  Additionally, though there is a new opening of this rule and is no longer prohibited to generally solicit from the public for financing, you cannot advertise the very specific terms of the deal.  You can only advertise generally, so you cannot say, for example, I will give you preferred stock in exchange for an investment of $10,000.  That’s probably something that you will get into as you negotiate. But, at the end of the day, you can’t generally say that.

So these are some of things that are arising out of this Jobs Act and it’s a very interesting time to be an internet entrepreneur because, quite frankly, this changes the game.  It allows individual investors to, through crowdfunding portals, invest and otherwise solicit for funds and likely will lead to the creation of numerous new start-ups, so we look forward to seeing what the end result of this is.

Again, this has been a Traverse Legal Broadcast.  I am Internet Attorney John Di Giacomo, and if you ever need an internet attorney, do not hesitate to contact us.  Thanks you.

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