Crowd Funding and the JOBS Act

Ryan Caldbeck explains the law’s implications for the tech industry:

  1. An IPO on-ramp: helps emerging firms transition from private to public by scaling regulatory requirements, easing the cost of compliance.
  2. Lifts the general solicitation prohibition: allows companies to advertise their fundraising to accredited investors (previously, private companies were prohibited from publicizing their fundraising to people with whom they did not have previously existing relations).
  3. Crowd funding: Allows unaccredited investors to invest in private businesses through registered portals.

Crowd funding connects start-ups with investors by taking small pledges from many people over the internet.  Websites like Kiva and Kickstarter already do something similar. Kiva allows thousands of people to lend money to borrowers in the developing world, and the lenders are paid back with no interest.  On Kickstarter artists and inventors pitch their creations online where supporters can make small donations to the project.   However, current state and federal law prohibits donors and lenders from receiving a return.

The Securities and Exchange Commission allows only accredited investors, shareholders with a net worth over $1 million, to purchase equity stake in private companies.  And no more than 500 shareholders can hold a stake in one firm. Thus, middle class investors are essentially blocked from buying into a private company.  The Jobs Act changes this.

According to the Sustainable Economies Law Center, a non-profit advocacy organization, many small businesses lack the funding and legal resources to register with the SEC.  Legal fees for public filing amount to tens of thousands of dollars, effectively shutting out promising start-ups.  In a petition sent to the SEC, the Law Center points to the main challenge of small businesses: “The types of investors that would be most inclined to invest in them – community, customers, neighbors, and friends…are mostly unaccredited,” and therefore are unable to.

By allowing an exemption for crowd funding, start-ups gain another avenue to capital.

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