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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