The JOBS Act 101

The JOBS Act 101

Back in 2010, I was running the Community Supported Enterprise (CSE) Program at the nonprofit Sustainable Economies Law Center (SELC).

I had co-founded SELC with another attorney, Janelle Orsi, to help changemakers navigate the rules that could get in their way as they try to create a healthy, just, and sustainable economy.

That summer the CSE program had some great law student interns.  We decided to focus on changing the securities laws – the laws that govern how enterprises can raise capital from investors.

The interns drafted and I signed a petition for rulemaking to the Securities and Exchange Commission.  Our request was simple: exempt from any regulatory requirements an offering of an investment opportunity in which no investor could invest more than $100.  We figured that if the most that anyone could possibly lose was $100, requiring the enterprise to jump through a bunch of regulatory hoops was unnecessary.

The American Sustainable Business Council was an early supporter of the idea and they helped to promote it.  Amazingly enough, the idea started to spread and the White House endorsed the idea of an exemption from securities law requirements for investment crowdfunding.

On April 5, 2012, President Obama signed the JOBS Act.  It had changed quite a bit from our original proposal, but it did create several new exemptions for different types of investment crowdfunding.

Below is a summary of the new tools in the tool box created under the JOBS Act.  Note that even before the JOBS Act passed, investment crowdfunding was legal and had been legal for decades (see this post for more details on the pre- versus post-JOBS Act options).  However, the JOBS Act added some new legal compliance options for enterprises that want to be able to advertise their investment opportunities to everyone.

Title II of the JOBS Act – Rule 506(c)

This exemption allows a company to publicly advertise an investment opportunity and there is no cap on the amount that can be invested by each investor or the total amount raised.  However, under this Rule, all the investors must be accredited, which generally means individuals with at least $1 million in net worth (excluding their primary residence) or $200,000 in annual income.

Title IV of the JOBS Act – Regulation A+

This exemption allows a company to raise up to $50 million and ANYONE can invest – not just accredited investors.  The offering can be publicly advertised in all 50 states.  The downside is that the company must have audited financials and must complete a filing process with the Securities and Exchange Commission that can take approximately four months and costs $75-$125,000 in legal fees.  Once a company has raised money under Regulation A+, it can file to become a public company and its securities can be freely traded on an exchange.

Title III of the JOBS Act – Crowdfunding Exemption

This is the part of the JOBS Act that took the longest to go into effect – it took over four years for the Securities and Exchange Commission to complete the detailed rules governing how this exemption could be used and for the crowdfunding platforms authorized under the law to go through the registration process.

Starting on May 16, 2016, this part of the JOBS Act finally became available.  Here are the basic requirements:

  • You can raise up to $1 million per year
  • There is a per investor cap on the amount that can be invested: 5% of the lesser of the investor’s annual income or net worth (or 10% if the investor’s net worth and annual income are greater than $100,000)
  • Offerings must be conducted through a registered intermediary – you are not allowed to talk about the offering outside of the registered online crowdfunding portal
  • You can accept investors from all 50 states
  • If you’re raising more than $100,000, you have to get reviewed financials from a CPA
  • Your financials are public and must be available on your web site

These three new tools obviously all have their pros and cons as all capital raising strategies do.  It’s important to understand all of the options before choosing your strategy.

For a comparison chart of various crowdfunding options, click here.

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New Crowdfunding law creates access for women/underserved entrepreneurs

New Crowdfunding law creates access for women/underserved entrepreneurs

On May 16, Title III of the JOBS Act comes into effect, the landmark federal crowdfunding exemption allowing businesses to raise money through online platforms from both accredited and non-accredited investors. This change provides greater access to capital for entrepreneurs, especially women, minorities, and others who have not succeeded in finding money from more traditional sources.

“When I first started looking for capital, it seemed like every investor was only interested in tech start-ups with sexy exit strategies,” says Lynn Johnson, an Oakland-based entrepreneur and “I am building a business that is about compassion and connection and community. I am not afraid of slow growth and am in this for the long haul. I hope my daughter will take over the business one day.”

Johnson and her wife, writer/blogger Allison Kenny, are the co-founders of Go Girls! Camp, a summer day camp for young girls to learn and practice social/emotional skills through the arts. “As an artist and a woman of color, I was never encouraged to go out and make any real money. I was supposed to be a starving artist. But, I’m not into that. I am more interested in growing a thriving and socially responsible business. Now, I can get the capital I need from the people who support our mission.”

Jessica Nowlan, also of Oakland and Founder and CEO of Create Shoppe, an online platform that allows customers to design handmade gifts that are created by Artisan Crafters, is also optimistic about investment crowdfunding because it expands her options for who can invest in her business. “When you are building a business, they always tell you to reach out to your friends and family for help. But, I grew up poor. My friends and family were poor and I didn’t go to college so I didn’t have the networks. That wasn’t working for me.”

Nowlan launched her first business in 2010. “I had no money, no savings, and bad credit. I was living in subsidized housing and receiving public assistance, but I was determined to make it work. I had read so many stories about bootstrapping and entrepreneurs that made it and I was determined. I tried to go for loans, went through programs to access capital, and even asked friends and family, but I was either denied or told to be realistic and get a real job. I was depressed and felt like a failure. Without capital, I knew I couldn’t fund my dreams.”

Both Johnson and Nowlan are now prepared to raise $100,000 on the WeFunder platform starting on May 16 and they give a lot of credit to their work with Jenny Kassan, a Fremont-based attorney, consultant and recent appointee to the Securities and Exchange Commission’s (SEC) Small Business Advisory Committee, who worked diligently to help pass this legislation in 2012. “Fewer than .01% of entrepreneurs raise money from venture capitalists and yet that is the only narrative we hear about,” says Kassan. “There are so many amazing entrepreneurs out there who are building businesses designed for social and environmental impact, not just financial return. And, many of these entrepreneurs are women.”

Kassan believes, “Investing in these kind of entrepreneurs is so important because they are really the backbone of our economy. Unlike the overvalued unicorns that get so much attention, small mission-driven businesses invest back into their own communities and create local jobs and wealth.”

“When you grow up a girl in poverty, you are not taught to fail,” states Nowlan. “Instead you are taught that succeeding comes from playing it safe. There is a certain level of entitlement in that “just go do it” attitude that entrepreneurs need to have to succeed. Not everyone has a net. Getting this access to capital means that we can now participate in that process of trying and failing and trying again. That might be the most important part.”

 

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Insights from Hint Water Founder Kara Goldin

Insights from Hint Water Founder Kara Goldin

Kara Goldin started Hint Water 11 years ago because she was passionate about encouraging more people to drink water instead of unhealthy sweetened drinks.

She financed the company with her own funds for the first two years but soon realized she would need outside funding to continue her early success.

Her first investor was a wealthy family that was passionate about her mission and willing to be patient because they knew that the brand represented a whole new product category and would take some time to gain traction.

When she needed to raise more money, she listed her offering on the online angel investing platform, AngelList.

Hint Water raised $2.5 million in two weeks! It turned out that a lot of the investors on AngelList drank Hint Water and were huge fans of the brand. They especially loved the mission of the company. By the end of the raise, Hint Water had added about 100 new equity investors! Kara made sure to talk to every one of them before allowing them to invest to make sure there was values and personality alignment. Kara’s advice: don’t accept any investor that you wouldn’t want to go out to dinner or go on a hike with.

These investors purchased non-voting common stock. This means that there were no rights associated with the stock – no preferred dividends, no liquidation preference, no right to elect a board member, etc. Kara does make sure they receive cases of Hint Water every month! She also sends them quarterly financial reports. Some of the investors have asked for more detailed information or have asked her to present specific company to information. She has had to decline these requests and reminds them that it would be impossible to accommodate these kinds of requests for all 100 of her investors! She feels the best way to serve her investors is to build a great company and brand, and not to spend time responding to individual investor requests for information.

Many of the investors come from the world of tech and have been willing to offer advice on Hint Water’s online strategy.

After 11 years in business, Hint Water is on track to have its first profitable quarter.

I asked Kara what her plans are for the future of the company. She isn’t certain at this time, but said she would be interested in exploring an IPO. She knows that being the CEO of a public company can be a very tough job, especially since it is not a world known to be very friendly for women, but she is up for the challenge!

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Investment Crowdfunding under the JOBS Act – coming on May 16!

Investment Crowdfunding under the JOBS Act – coming on May 16!

It’s been over four years since the JOBS Act was signed be President Obama and in a few weeks, starting May 16, you will actually be able to raise money under the federal crowdfunding exemption that the JOBS Act created.

Here are some things to know to help you decide whether it’s right for you!

Fun Fact! What does the CROWDFUND Act stand for?

Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act.

Do I have to have a U.S. company?

Yes, only U.S. companies can take advantage of the crowdfunding exemption.

How much can I raise?

You can raise up to $1 million in any one year period.

Do I have to use an online platform?

Yes. You can only raise money under the Crowdfunding Exemption by posting your offering on an online platform that has been licensed by the Securities and Exchange Commission. In fact, all of the communications with potential investors must take place through the platform.

What is the per-investor cap?

(i) If either the investor’s annual income or net worth is less than $100,000, the greater of $2,000 or 5% of the lesser of the investor’s annual income or net worth; or

(ii) If both the investor’s annual income and net worth are equal to or more than $100,000, 10% of the lesser of the investor’s annual income or net worth, not to exceed $100,000.

Note that this is a cap on what an investor can invest in all crowdfunding campaigns in a year.

How am I supposed to know if an investor is within the per year cap?

You can rely on the efforts of the crowdfunding intermediary to ensure that the aggregate amount of securities purchased by an investor will not cause the investor to exceed the limits, provided that you don’t know that the investor has exceeded the investor limits or would exceed the investor limits as a result of purchasing securities in your offering.

Are state level filings required?

Only the state of your principal place of business and the state where more than 50% of your investment comes from can require a notice filing and a fee.

Can I be raising in a different way at the same time?

Yes! Unlike many other capital raising strategies, you are allowed to raise money under the crowdunding exemption at the same time that you are raising money in another way, such as through a private placement.

What filings are required?

When you set up your offering on a platform, you have to complete a form that provides detailed information about your company and your offering.

If you’re raising $100,000 or less, you have to provide tax returns. If you’re raising more than $100,000 you have to provide financials reviewed by a CPA. Reviewed financials can cost several thousand dollars.

You also have to file an annual report which is required to be posted on your web site.

Can people who buy securities in my offering re-sell them to someone else?

Yes, but not before one year after the initial purchase.

What else do I need to know?

I would recommend finding a Title III platform and reading through all of their terms of use, instructions, etc. for issuers raising money under Title III. There are 37 organizations currently working on getting approval to be a crowdfunding portal.  We don’t know for sure which ones will be up and running on May 16.

Be sure to subscribe to my newsletter to get up to date information as the crowdfunding exemption starts to get tested in the real world!

Interested in learning more? Get in touch!

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Investors are Incredibly Diverse

Investors are Incredibly Diverse

When you think of investors, what do you picture?  White guys in suits or khakis looking for the next Snapchat?

Or do you picture a group of young people who say things like this:

To invest is to put resources (energy, work, finance, love) into something to create change over time.  We must seek, with our investments, to fundamentally change the very shape of the economy.

At the Confluence Philanthropy Gathering in Boston, I caught up with Kate Poole, one of the founders of Regenerative Finance.

Regenerative Finance is an organization of young people “with access to wealth and class privilege who believe in a more just world. . . . Regenerative Finance shifts the economy by transferring control of capital to communities most affected by racial, climate and economic injustice.”

The members of Regenerative Finance look nothing like the stereotype of an investor and their goals and worldview could not be more different from the typical venture capitalist or investment fund.

When you picture an investor, keep an open mind!  That kid with all the piercings and tattoos sitting next to you at the coffee shop could be your next investor. Approximately 55% of Americans invest in the stock market. Many more have savings at financial institutions.

A majority of the population of the U.S. is made up of investors! The more you broaden your definition of potential investors, the greater success you will have raising capital. Instead of fishing in that tiny pond of venture capitalists, professional angels, and investment funds, why not fish in the ocean of non-professional investors – some subset of which might be really excited by your vision and passion.

Interested in learning more? Get in touch!

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