New law will open up crowdfunding to all
Published: Monday, September 3, 2012 at 1:00 a.m.
Last Modified: Sunday, September 2, 2012 at 11:06 p.m.
Do you remember my niece, Kiki Karpus? I wrote about her participating in "crowdfunding," a concept that permits lots of donors to make small contributions to for-profit projects they consider worthwhile.
Kiki, for example, made three small donations to projects she admired. In return she received a T-shirt, a book and a sticker for her car. You can read my May 14 column online at tinyurl.com/c5dm92a.
Peer-to-peer lending is a similar concept whereby many individuals lend small amounts of money. But unlike the nominal compensation crowdfunders receive, peer-to-peer loans earn interest.
Neither of these concepts offer ownership shares to investors. If they did, securities laws would apply. The filing and disclosure requirements would become extensive, costly and, in most cases, the investors would have to be "accredited investors."
An individual accredited investor would need a minimum net worth of $1 million, excluding her home. Alternatively, she would have had to have earned at least $200,000 during the two years before investing.
But that is about to change.
On April 5, President Barack Obama signed the JOBS Act into law. In part, the Act permits entrepreneurs to raise up to $1 million, in any 12 month period, with much less stringent requirements. Moreover, non-accredited investors will be permitted to invest up to $2,000 each.
The SCORE Association and the National CrowdFunding Association sponsored a webinar last month about the JOBS Act's effect on crowdfunding.
David Marlett and Bill Hubbard, two lawyers who are monitoring and shaping the impeding crowdfunding rules, were the presenters. Marlett also founded the National CrowdFunding Association.
According to the webinar, more than 100 million American households are not accredited investors but will become potential investors when the JOB Act's rules are written.
The Federal Trade Commission and the Securities and Exchange Commission are charged with writing the securities rules.
The Federal Industry Regulatory Authority, an independent regulator for all securities firms doing business in the United States, is writing the requirements for licensed broker-dealers. Entrepreneurs are expected to hire a broker-dealer to sell the securities and guide them through the crowdfunding process.
The process begins with the entrepreneur posting a business plan and equity offer on a registered investment crowdfunding portal. Potential investors will have a limited time to evaluate the offer and invest.
The investments will be held in trust by an escrow agent until the offer is fully pledged during the allotted timeframe. If it is fully pledged, the money goes to the entrepreneur after service fees are deducted. Alternatively, the funds will be returned to the investors.
The entrepreneur will transfer stock, through a transfer agent, to complete the transaction.
The webinar presenters said that the new crowdfunding rules may be written by the second quarter of 2013, and fundraising can commence. Furthermore, there will not be any restrictions from acquiring debt, such as bank loans.
To keep up with the rulemaking status and learn more about crowdfunding, check out the National CrowdFunding Association's website at NLCFA.org.
Jerry Chautin is a local volunteer business counselor with Manasota SCORE, Counselors to America's Small Business. Send business questions and stories to him at jkchautin@aol.com and follow him on Twitter.com/JerryChautin.
All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.