Crowdfunding is a means for a large group of people to give a small amount of money for a specific purpose. Websites like Kickstarter and IndieGoGo allow individuals to donate to a cause, company, or project usually in exchange for a gift, free product, or other added benefit. The Federal EMPLOYMENT Act enacted in March 2012 legalized equity crowdfunding subject to a number of legal requirements and regulations, which are currently being drafted by the Stock Exchange Commission. Prior to the JOBS Act, receiving securities in exchange for a small contribution was either illegal or highly impractical.
Crowdfunding creates a new financing structure for issuers seeking up to $1 million, and it is expected that there will be a cap on the amount investors can invest according to their annual income and net worth. Issuers will be required to file with the SEC a comprehensive business plan, how the securities are valued, and financial statements. The issuer will have annual filing requirements with the SEC.
It is anticipated that Crowdfunding will be largely internet based, and using the structure will have a funding portal intermediary or broker who will have to register with the SEC and FINRA. The portal will not be able to offer investment advice or solicit buyers. The portal must ensure that every investor understands his investment. The Portal will be subject to SEC reporting requirements with respect to each issuer. The portal will be charged with implementing investor protection as directed by the SEC.
Foreign entities will not be able to use crowdfunding, as it will only be available to entities hosted in the United States. Publishers and intermediaries will be subject to disqualification from the use of crowdfunding for prior misconduct.
To strike a balance between allowing the issuer to raise a small amount of capital and protecting the rights of investors, the issuer is permitted to sell the aggregate amount to any investor over a 12 month period up to:
(i) is greater than $2,000 or 5 percent of the investor’s annual income or net worth, as applicable, if the investor’s annual income or net worth is less than $100,000; and
(ii) 10 percent of the investor’s annual income or net worth, as applicable, does not exceed the maximum aggregate amount sold of $100,000, if the investor’s annual income or net worth is equal to or more than $100,000. Net worth does not include where the investor lives.
The issuer will be responsible for any misstatements, and the law requires the issuer to submit financial information and reports to the Stock Exchange Commission and provide investors and internet brokers or funding portals with certain information, including but not limited to:
1) name, legal status, physical address and website address of the publisher;
2) names of directors and officers (and any person holding the same status or performing the same function), and any person holding more than 20 percent of the issuer’s shares;
3) an overview of the issuer’s business and the issuer’s anticipated business plan;
4) a description of the issuer’s financial condition, including, for offers that, together with all other offers from the issuer in the previous 12 month period, have, in aggregate, a targeted bid amount of $100,000 or less;
Also, 5) the income tax return filed by the issuer for the last year completed (if any); and the issuer’s financial statements, which if offered for $100.00 or less, will be “certified” by the issuer as true and complete in all material respects, and which if the issuer has offered more than $100,000, but not more than $500,000, the financial statements ” reviewed” by a public accountant independent of the issuer, using professional standards and if the issuer has offered more than $500,000 (or such other amount as the SEC may determine, under regulation), audited financial statements;
6) a description of the intent and purpose of using the bidding funds requested by the issuer in relation to the target bid amount; targeted number of offers,
7) deadline for achieving the target number of offerings, and periodic updates on the progress of the issuer in meeting the target number of offerings;
8) the price of the securities to the public or the method for determining the price, provided that, prior to the sale, each investor must be provided in writing the final price and all necessary disclosures, with a reasonable opportunity to cancel the commitment to purchase the securities.
The buyer must hold the securities purchased for at least one year after the date of purchase. The JOBS Act requires the SEC to enforce the final rules for crowdfunding by December 31, 2012, but there are strong indications that the SEC will not enforce such rules by that date. Until the SEC issued its final rules, equity crowdfunding was against the law.