On April 5, 2012 President Obama signed into law the Jumpstart Our Business Startups Act, or JOBS Act. Business owners and entrepreneurs need to know about the JOBS Act because it will allow startups and existing businesses to raise up to $1 million in investment capital each year using the Internet and other social media platforms.
Raising money on the internet has exploded in recent years. This type of money raising, called “crowdfunding” or “crowdsourcing,” is used by both nonprofit and for profit organizations. Crowdfunding projects are advertised or posted on various websites like kickstarter.com. Prospective investors can view the projects on the Internet and make funding pledges online. However, investors do not receive any stock in the company promoting the project nor do the investors receive any monetary return on their investment. In essence, the investor’s investment constitutes a charitable contribution to a project that the investor believes will benefit society. This type of crowdfunding has been termed “charitable crowdfunding.” With charitable crowdfunding, no shares of stock can be sold to investors nor can investors receive a monetary return on their investment because such events violate both federal and state securities laws. Therefore, under the current law, charitable crowdfunding cannot be used to raise investment capital.
Beginning in January 2013, new and existing businesses can raise up to $1 million per year in investment capital utilizing crowdfunding. Companies will not be able to raise money on their own website. Instead, they will have to use a licensed securities broker or an intermediary (also called a funding portal) registered with the U.S. Securities and Exchange Commission.
Companies using this new type of crowdfunding, called “equity crowd funding,” must prepare substantial documentation to meet the requirements of the JOBS Act. The Act requires a company to disclose certain information to potential investors including:
• Background information on the officers, directors and 20 percent shareholders of the company;
• The amount of money sought to be raised;
• How the money will be used by the company;
• A description of the ownership and capital structure of the company.
Each company must also prepare and submit a detailed business plan and provide detailed information on the company’s financial condition, if more than $100,000 in equity capital is sought.
Since the JOBS Act will not become effective until January 2013, new and established businesses have a little time time to gear up and take advantage of the new law. Those interested in equity crowdfunding should become familiar with the JOBS Act and what needs to be done to comply with the Act. Interested companies should:
• Prepare an extensive business plan;
• Perform market research to support the business plan;
• Prepare a list of contacts of those who may be interested in investing in the business;
• Prepare a video that promotes the company’s products or services;
• Review crowdfunding websites like kickstarter.com to see how successful projects are presented on crowdfunding websites.
Mark Svejda is Scottsdale-based attorney. You can email him at email@example.com.