Overview of the JOBS Act about Equity Crowdfunding and Success Stories

The University of Memphis Cecil C. Humphrey’s School of Law law magazine (Spring 2017) has an excellent and concise five page overview article concerning the JOBs Act and crowdfunding.  The article describes three types of equity crowdfunding under the Act and discusses the related regulations.  The article notes that, “As of this writing, there were over 20 debt and equity crowdfunding platforms, with 186 companies having launched a campaign through them, and with 79 of those companies hitting their minimum funding target.”  Apparently, $19 million was raised for the 186 companies.  Interestingly, the real estate sector is a strong participant in crowdfunding. One success story described in the article concerns Zenefits, a human resources services company for smaller entities which notably raised $300,000 “on Wefunder.com at a $9 million valuation in March 2013; [r]aised $15 million at a $70 million valuation in January 2014; [r]aised $66 million at a $500 million valuation in June 2014.”  The second interesting story concerns Elio Motors, which raised $16 million on “StartEngine from 6,600 investors in early 2016.”  According to the article, Elio Motors has an over $1 billion valuation. 

The article points to Indiegogo (“movies, games and tech gadgets”) as an equity crowdfunding platform that “is expected to bring millennials” into the game.  Indiegogo’s website notes that over $1 billion has been raised over 650,000 projects in 222 different countries since 2008.  Indiegogo’s equity crowdfunding platform is called, First Democracy VC, a partnership with MicroVentures.  The First Democracy VC website apparently went live in December of 2016 and a couple of companies have raised a half million dollars (US) or more. 

US Securities and Exchange Commission Rules on Crowdfunding Effective

The U.S. Securities and Exchange Commission (SEC) rules on crowdfunding became effective on May 16, 2016.  The rules are a hefty 685 pages long and are available, here.  The Investor Bulletin issued by the SEC Office of Investor Education and Advocacy provides an overview of the rules and the JOBS Act tailored to potential investors, here.  The Investor Bulletin explains that anyone can make a crowdfunding investment, but that there are limitations based on net worth and annual income on the amount that can be invested.  The Investor Bulletin explains: 

If either your annual income or your net worth is less than $100,000, then during any 12-month period, you can invest up to the greater of either $2,000 or 5% of the lesser of your annual income or net worth.
If both your annual income and your net worth are equal to or more than $100,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $100,000. 

Additionally, crowdfunding investments can only be made through a portal and not through other direct means.  "The broker-dealer or funding portal—a crowdfunding intermediary—must be registered with the SEC and be a member of the Financial Industry Regulatory Authority (FINRA)."  The Rules provide numerous requirements for intermediaries to protect investors.  The Investor Bulletin also provides numerous warnings to potential investors concerning the risks associated with crowdfunding.  The Rules provide that, "An issuer is permitted to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period." 

Notably, the Rules also state that: 

Certain companies are not eligible to use the Regulation Crowdfunding exemption. Ineligible companies include non-U.S. companies, companies that already are Exchange Act reporting companies, certain investment companies, companies that are disqualified under Regulation Crowdfunding’s disqualification rules, companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.

Offering documents must disclose: 

Information about officers and directors as well as owners of 20 percent or more of the issuer; • A description of the issuer’s business and the use of proceeds from the offering; • The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the issuer will accept investments in excess of the target offering amount; • Certain related-party transactions; • A discussion of the issuer’s financial condition; and • Financial statements of the issuer that are, depending on the amount offered and sold during a 12-month period, accompanied by information from the issuer’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor. An issuer relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the issuer are available that have been audited by an independent auditor. 

Happy investing!

 

Good News for Crowdfunding for Start-Ups? President Obama nominates Mary Jo White to head Securities and Exchange Commission.

Late last week, President Obama nominated Mary Jo White as the head of the Securities and Exchange Commission (SEC).  Her appointment awaits confirmation by the U.S. Senate. Hopefully, this is an indication that the new SEC rules implementing the JOBS Act will become effective soon and thus, the legal landscape concerning crowdfunding for startups in the United States will be clarified.  Apparently, part of the hold-up relating to approval of the rules has revolved around concerns with inadequate investor protection in the rules and questions concerning the identity of the new member of the SEC.   A description of the issues concerning crowdfunding is provided by startup guru Yoichiro“Yokum” Taku here.