Crowdfunding: What You Can Do RIght Now

In April 2012, President Obama signed the JOBS Act into law. The JOBS Act permits crowdfunding, which basically allows a small business to raise up to $1 million in a year by issuing stock to many small-scale investors, without going through an IPO. The SEC will regulate crowdfunding and has to issue regulations on how it will be done before anyone can start doing any crowdfunding. The regulations are expected to be issued around the end of 2012. Here is a summary of how crowdfunding will work:

How it Works

• The key point is that NOTHING can be done to actually issue crowdfunding securities until after the SEC issues its rules (sometime around December 31, 2012)
• Crowdfunding issuers will be permitted to issue up to $1 million in securities per year, with different requirements at different investment thresholds.  There are net worth limits on how much a particular investor can invest
• Crowdfunding issuers will not be required to make all of the disclosures required in a public offering, but will have to make some disclosures in a crowdfunding offering memorandum, including:

1. Name, address, and legal status of the entity
2. Issuer’s business plan
3. Names of issuer’s officers and directors, and anyone holding more than 20% of the equity in issuer
4. Description of intended use of proceeds
5. Target offering amount and deadline to reach it
6. Price, or method for determining the price
7. Description of ownership and capital structure of issuer
8. Description of issuer’s financial condition, including specific financial statement requirements for target offering level:  Over $100,000, your financial statements must be reviewed by an independent CPA;  Over $500,000, your financial statements must be audited

• Issuer will be required to provide investors and the SEC with financial reports at least annually
• The SEC rules will require that crowdfunding issuers must use the services of a crowdfunding intermediary, such as a “funding portal” or a broker registered with the SEC, to issue the securities

1. The crowdfunding intermediaries will be strictly regulated and cannot give investment advice. Their primary role will be to provide information and disclosures to investors, and to reduce the risk of fraud.
2.  It is likely that FINRA (Financial Industry Regulatory Authority) will be appointed to oversee the crowdfunding intermediaries

What Can Be Done Now?

• Invest in your online presence and be as visible as possible to potential investors
• Note that the terms of the offering may only be disclosed by the crowdfunding intermediary
• Develop a plan for how much capital you need and what you will use it for
• Prepare your pitch and plan for investor questions. Begin to work on crowdfunding disclosure.
• Determine the rights of the crowdfunding shareholders (voting, etc.)
• There will likely be a cost to use the crowdfunding intermediaries, although those costs are not yet known
• Investigate crowdfunding intermediaries

Expect lots of attention around crowdfunding as we approach the SEC’s issuance of the rules later this year. If you are interested in crowdfunding, we would be happy to advise you.