On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act), making sweeping changes to federal laws regulating capital formation. One of the more significant changes to existing law was a directive to the SEC to promulgate rules to implement equity based crowdfunding, a groundbreaking exemption to federal securities laws which will allow companies to raise up to $1 million per year from an unlimited number of unaccredited investors meeting specified requirements without a full blown, expensive and time consuming SEC registration – and without having to generally comply with state securities laws requiring registration. Although the JOBS Act required that this exemption be implemented by the SEC within 270 days of the enactment of the JOBS Act, proposed rules have yet to be promulgated by the SEC, and all indications are that this will not happen until the latter part of 2013.
In testimony by the SEC’s new Chairman, Mary Jo White, before the House Committee on Appropriations, on May 7, 2013, Chairman White made it clear that implementing necessary regulations under the JOBS Act is a high SEC priority, while at the same time making it clear to Congress that more money is needed by the SEC to be able to effectively carry out its statutory mandates – a message she delivered to the House Financial Services Subcommittee coupled with a budget request by the SEC for $1.674 billion for FY 2014. The full text of Chairman White’s testimony can be accessed here. http://www.sec.gov/news/testimony/2013/ts050713mjw.htm
With the explosion of social media, the phenomenon of “crowdfunding” or “crowdsourcing” has emerged, with various non-profit organizations and start-up businesses seeking to raise funds over the Internet from small contributions by a large number of individuals. Prior to the JOBS Act, this type of fundraising would generally be illegal under federal and state securities law if the contributor received an interest in profits of a business, particularly where the fundraising was conducted through general solicitation on the Internet or involved a large number of contributors. Though the JOBS Act provides specific guidelines to meet this exemption, implementation awaits an extensive rulemaking process. Until these rules are implemented, crowdfunding involving receipt of in interest in profits generally remains illegal under federal law.
Until the SEC implements final crowdfunding regulations, equity based crowdfunding in the US is generally illegal. However, there is one notable exception – equity crowdfunding to individuals and entities who are “accredited investors” – where no “public solicitation” or “advertising” is involved. There are a number of types of accredited investors, the most common being individuals with an income of more than $200,000 per year or a net worth, excluding primary residence, of $1 million, and entities owned by accredited investors. The tricky part, from a securities law point of view, is the ability to access these accredited investors through the Internet without engaging in general solicitation or advertising. This is where an experienced SEC attorney comes in.
Case in point – CircleUp.com, a crowdfunding portal associated with WR Hambrecht + Co., a FINRA registered broker-dealer. CircleUp is a crowdfunding portal whose niche is investments in consumer products companies – and whose crowdfund investors are currently restricted to accredited investors. Circleup.com made headlines this week when it announced the closing of its own $7.5 million Series A financing to fund CircleUp’s crowdfunding platform. The group investing in CircleUp was led by a venture capital firm, and included Google Ventures as one of CircleUp’s investors. For those who question whether equity crowdfunding will emerge as a viable source of equity financing for startups and early stage companies with limited access to traditional sources of capital – who am I to argue with Google?
And CircleUp is not the only game in town in what is expected to be a crowded field of equity crowdfunding Internet portals, especially when crowdfunding becomes available to unaccredited investors. Equity themed crowdfunding Internet portals are already springing up in a variety of niche areas, ranging from technology to commercial and multi-family real estate. Although these portals are initially limited to accredited investors, many of these portals can be expected to expand into crowdfunding with unaccredited investors once the SEC implements final regulations under the JOBS act provisions.
About the Author – Samuel S. Guzik is a corporate and securities attorney and business advisor admitted to practice before the SEC and in New York and California, with over 30 years of experience. During this time he has represented a number of public and privately held businesses, from startup to exit, concentrating in financing startups and emerging growth companies. For additional information regarding Mr. Guzik and his firm, Guzik & Associates, please visit his website at www.guziklaw.com.
