This is a guest post by Genevieve Silverman, Director of Finance at the Louisiana Technology Park in Baton Rouge.
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President Obama recently signed legislation known as the Jumpstart Our Business Startups Act, or “JOBS Act”, which creates a new way for startups to raise capital. Previously, companies not registered with the SEC could receive investments only from accredited investors, who meet a minimum net income and net worth threshold. The new legislation paves the way for a new alternative called “crowdfunding”, which allows companies to solicit small investments from a large number of non-accredited investors. The JOBS Act essentially creates a new class of investors for startups to turn to when seeking funding. Here are the basics:
Any business can crowdfund a deal, but they must do so through an SEC-approved broker or funding portal. Issuers are limited to $1,000,000 raised by crowdfunding in a 12-month period, and they can only accept up to 500 non-accredited investors. The issuer must provide required disclosures, including a business plan, terms, valuation, tax returns and financial statements. Also, all directors, officers and persons owning more than 20% of the company must be listed on the portal, and submit to a background and SEC history check. Issuances are subject to a target offering amount and deadline, and the issuer must return the funds if the targets are not met.
Anyone can invest in the deal through the portal, with a 21-day document review period, but the investor is limited to investments of $2,000 – $100,000 into one company (depending on income/net worth level). Investors must also review certain investor education information and provide certain affirmations through the portal. The JOBS Act provides investors with legal recourse against issuers providing material misstatements or omissions.
So how do you get into the (JOBS) act? The SEC has 9 months to issue the rules for crowdfunding, so you should be able to crowdfund your deal in early 2013. Until then, look into existing crowdfunding platforms such as the popular Kickstarter or Indiegogo, which are currently only allowed to take donations, often in exchange for small rewards or free copies of a product (film, music, games). Also checkout platforms such as Angelist which match startups with accredited angel investors. These types of platforms will likely be the early adopters of true crowdfunding under the JOBS Act, along with many other anticipated new entries, including beta sites Crowdfunder and WeFunder.
With this new ability for startups to receive investments from ordinary citizens, 2013 could be the year to take your business to the next level. So start planning now!