Last April, President Obama signed off on the Jumpstart Our Business Startups Act (JOBS Act), a bipartisan piece of legislation geared toward giving startups and small businesses access to a large new pool of investors. The Securities and Exchange Commission (SEC) was initially given a 90-day deadline to implement the JOBS Act—a deadline that has long since passed.
Why the Delay?
Although frustrating for businesses eager to find new sources of funding and startups in the crowdfunding sphere, it is no surprise that the SEC is taking its time implementing the new rules. Much of the discussion has revolved around lifting the ban on “general solicitation,” and once the ban is removed, companies would no longer need to register their financial information with the SEC. Thus, the SEC is attempting to balance allowing companies the freedom to raise funds from investors with protecting those investors from potential fraud.
FINRA Requests Voluntary Submissions
On January 10, 2013, the Financial Industry Regulatory Authority (FINRA) announced that it is inviting prospective funding portals (defined in the JOBS Act as any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others solely pursuant to the new crowdfunding exemption added by the JOBS Act) to submit their proposed business models, activities and operations so that FINRA can become more familiar with the funding portal community and thereby assist in developing rules specific to funding portals. Once the crowdfunding rules are finalized, funding portals will register with FINRA and the SEC in a similar way as broker-dealers do.
What Can We Expect?
Although it remains to be seen what the final rules will be and exactly how the SEC will regulate crowdfunding and the intermediaries that businesses will use for crowdfunding purposes, we do have some information based on the text of the JOBS Act.
Title III of the JOBS Act amended the Securities Act of 1933 to allow an individual with a net worth or annual income below $100,000 to invest up to the greater of $2,000 or 5% of their annual income in a small business in a 12-month period. Individuals whose net worth or income exceeds $100,000 would see that limit increase to the greater of 10% of annual income or net worth.
The solicitation for crowdfunding from these investors would be made through an intermediary, which could be a broker-dealer or funding portal registered with the SEC or FINRA. These funding portals roles will be to carefully review the businesses soliciting equity or debt crowdfunding to prevent fraud. Crowdfunding intermediaries will also be responsible for providing disclosures to investors related to risks and other investor education materials. To further help prevent fraud, Title III of the JOBS Act prohibits intermediaries from compensating promoters, finders or lead generators for providing the intermediary with potential investor information. Additionally, directors, officers or partners of intermediaries cannot have a financial interest in the businesses raising money.
What to do Now?
If you are interested in raising money for your small business, there are other potential options currently available to you based on rules already in place under the Securities Act of 1933. Contact our office to discuss these options with our experienced attorneys. Additionally, entrepreneurs interested in learning more about becoming a funding portal can contact Larry Horwitz at firstname.lastname@example.org.