As a former public accountant, the topic of the JOBS Act in relation to crowdfunding intrigues me. Going through the twenty-two page Act (yes, I actually read it all), I may have slightly geeked out and dusted off my old SEC Handbook from college to follow along some of the references in the new law. H.R. 3606, or more commonly known as the Jumpstart Our Business Startups (JOBS) Act. The JOBS Act was signed into law on April 5, 2012 by President Obama, as a fairly bipartisan vote with 390 yeahs and 23 nays in the House and 73 yeahs and 26 nays in the Senate.
So then, what is the purpose of the JOBS Act? In a nutshell, it has to do with providing greater access to capital. The Act changes some of the SEC rules (Securities & Exchange Commission) with the intent to provide leniency on “emerging growth companies” (which the Act basically defines as companies issuing stock with revenues less than $1 billion in a fiscal year), specifically when it comes to accessing capital. There are a couple aspects of this law that has interested me the most.
ADVERTISING THE OFFERING
Thanks to Title II of the Act, these emerging growth companies can now publicly advertise and solicit to potential investors online or through social media, even if the offering is considered “private” (meaning they don’t have to register through the SEC). Enter crowdfunding. Instead of quietly going to financial institutions, other businesses, and high net worth individuals who may not find it worth their while to give them money, these companies can now publicly advertise their offering on their website or through social media to find other investors.
Of course, in the words of Genie from Aladdin, “There are a few provisos, a couple of quid pro quo.” One condition is that no more than $1 million of equity can be crowdfunded in a 12-month period. Another is that a company may only crowdfund equity through a site that is registered and approved by the SEC and FINRA.
Despite these and other stipulations, the SEC has eased up on some of its regulatory requirements for emerging growth companies. These companies are only required to provide two years of audited financials instead of the traditional three for their IPOs. They’ve also exempted other requirements typical to issuers related to certain accounting and auditing procedures. These exemptions and changes should ultimately reduce the regulatory costs normally associated with issuing stock, providing more capital-raising opportunities for smaller companies.
WHO CAN INVEST?
As of right now, the law still allows only accredited investors (ie, people with a very high net worth) to crowdfund. Title III would bring the rest of us to the table, but has not yet been put into effect. This title is still pending, and at least one site says it should be complete by end of this year. In fact, Congress is currently wrestling with this part of the law as we speak. Until then, you’ll have to keep that investment money stashed away, or put it in some other investment vehicle.
At the moment, Title III says you and I do not need to be “accredited” investors to invest in these companies. This obviously sounds exciting for a lot of people who’d like to get in on these IPOs and private offerings who currently can’t. Of course, there are stipulations on the investor side. For one, there are limitations to how much you’re allowed to contribute based on your net worth. If you’re annual income or net worth is less than $100,000 you may contribute up to $2,000 or 5% or your income or net worth. If your income or net worth is greater than $100,000 you may contribute up to 10% of said income or net worth. Then there’s the risk you’re taking of the business not panning out as you’d hoped. You now take part in both the profit AND losses of the company. Welcome to the wonderful world of investing!
You may have heard about the heat Oculus Rift got from the media and specifically its contributors when Facebook bought the company for $2 billion last month. Oculus Rift’s campaign was on Kickstarter, and therefore a reward-based campaign—not equity-based. Its goal was to get $250,000. It received $2.4 million! Had the company crowdfunded equity, that would have been a nice return on investment! Such is the nature of reward-based crowdfunding.
WHAT ALL THIS MEANS
There are pros to this Act. It breaks down barriers of capital access. It provides new mediums which provide companies easier access (and solicitation) to accredited investors. And if Title III does pass, then it gives more people the ability to make their money work for them in different ways.
There are, as usual, potential risks. Fraud is definitely at the top of the list. Images of Ponzie schemes and other tricks to scam grandma out of her money come to mind. However, there will be requirements companies have to follow to help reduce the risk of fraud.
However you look at it, one thing is for certain: crowdfunding is only going to get bigger.
What are your thoughts on equity crowdfunding? Do you think it will catch on? Do you support or oppose these changes and why? Tell us your thoughts in the comments below.