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Editor's Note: The following comes to us courtesy of Candace Klein, founder of SoMoLend and securities attorney Sean Peppard from Ulmer & Berne, LLP. This should answer some of the questions that came up during Monday's live chat on the JOBS Act and crowdfunding in the U.S. moving forward. We'll be posting a summary of that lively conversation very soon.
The JOBS Act passed…so what? What impact will this have on my business?
President Obama signed the JOBS Act into law on April 5th, which, among other things, will allow small businesses to raise money from their social networks and online platforms. But, the law requires the Securities and Exchange Commission to develop regulations outlining what is and is not allowed under this new law. So, what does this mean for your business today?
Background: The goal of the Act was to stimulate job creation and economic growth by improving access to capital. To achieve this goal, the law made significant changes to federal securities laws to speed and ease access to capital. Among other things, the Act:
Unfortunately, neither of the above provisions are immediately effective. As an example, to qualify for the crowdfunding exemption a crowdfunding intermediary must “take such measures to reduce the risk of fraud….. as established” by the SEC. The SEC has 270 days to make these rules. So, as a result, crowdfunding intermediaries may not utilize the newly created exemption for 270 days.
Moral of the story…businesses are limited to raising money from traditional sources for the next 90 days, and can only accept money from accredited investors after that. Unfortunately, crowdfunding won’t be an option until early 2013.
No one said this would be easy, but meanwhile, two thoughts:
First, obviously, for those of you raising money, the first change mentioned above significantly liberalizes traditional fundraising offerings after the above-noted 90 day period, allowing you to reach a much wider audience by soliciting investments.
However, be careful who you accept money from…make sure they are accredited investors and don’t begin any solicitation until July…
Second, for those platforms seeking to facilitate Regulation D offerings (the only thing available on July 4, 2012), you may not be able to charge investors for fundraising offerings on your platforms. Why? One of the principal issues facing pre-Act crowdfunding was the fact that such sites would be regulated as a broker/dealer. Unfortunately, the Act specifies that any site hosting a “Rule 506” offering on a site will only be exempt from broker/dealer laws only if, among other things, they receive “no compensation in connection with the purchase or sale” of a security. You may, however, charge for providing due diligence services (so long as it does receive a separate fee for making investment advice or recommendations to issuers or investors) or for providing form documents.
Moral of the story: Be careful how you charge your clients…
What about the SRO?
As the JOBS Act was signed into law, a group of crowdfunding platforms organized to form a self-regulatory organization for this new crowdfunding industry. A principal goal of the SRO is to work closely with the SEC and, potentially, state regulators to create rules for the crowdfunding industry that will be beneficial to investors and fundraisers.
As we write this, companies are engaging in general solicitations in violation of the law and don’t know it. The SRO will also be responsible for informing affected parties as to what is and (more importantly) what is not permitted under the new law.
So, if you are a company interested in raising money, you must conduct all fundraising offerings in a manner consistent with pre-Act law for the next 90 days. After that, be careful to only reach out to accredited investors for the next 270 days, and if you do decide to offer a fundraising platform during that time, you are not permitted to take a fee. The actual “crowdfunding exemption” will not allow you to charge a fee until January, 2013 at the earliest. If you are a platform, get involved with the SRO to ensure that your customers are appropriately served.
Stay tuned to Crowdsourcing.org for opportunities to speak with regulators and industry experts to get more information, and to engage in the discussion. It will take a great amount of discussion to get this right.