You have all probably seen support for the JOBS Act floating around and have asked questions on exactly what impact it will have for start-ups! Without becoming technical about the regulatory changes and the sublet implications of the legislative change on IPOs, reporting requirements and tax rules, we wanted to focus in on the big issue at the forefront of everyone’s mind which is related to crowdfunding. Chances are if you are focusing on the IPO rules and the reporting requirements you already have a good handle on the material.
Permitting Start-Ups to raise money through Crowdfunding – Now you may ask yourself, “wait there are crowdfunding sites that exist today.. why does the law need to change?”. Individuals and legal entities currently are allowed to solicit funds, but are not permitted to imply an economic return in exchange for that money. So what does that mean exactly?
Scenario #1: I’m running a pizza store and I need to raise $10,000. I email my friends and ask them for the money and tell them if they each give me $200 (50 friends) I MIGHT be willing to give them free pizza for a month. Obviously, we don’t sign any paper work and what I told them doesn’t even qualify as a verbal contract as I never really promised it to them and there are no obligations for me to fulfill. This Scenario is legal.
Scenario #2: I’m running a pizza store and I need to raise $10,000. I email my friends for the money and tell them to each invest $200 (50 friends). In exchange I would be willing to provide them each with a 0.25% ownership interest in the company (for a total 12.5%) which would allow them to receive $12.50 for every $100.00 that was made. This Scenario is illegal as it falls under something referred to as ‘general solicitation’.
Working for a large financial institution, this is not a concern that you deal with often as typically we have been through all the hoops and hurdles, regulatory disclosures and our investors tend to large financial institutions as well. So when you’re rich enough, you are referred to as an “accredited investor” which means you’re pretty much smart enough to do whatever you want with your money (aka millionaires or funds and banks). Otherwise, you’re too stupid to tell right from wrong and you need Big Brother to tell you what you can and cannot invest in. However, if you’re old enough, you can piss your life savings away at the craps table…. No that’s not entirely fair, there are well structured protectionist measures that, moving forward, will attempt to protect us.
With the new legislation you will be able to solicit investments from your network and all individuals using the various modern day tools that are at our disposal! And as exciting as this is, I would have to say ‘caveat emptor’. But I truly believe the knowledge base of the crowd will be a huge deterrent for fraud and fleecing schemes.
So Senate, time to pass the JOBS Act!!