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Mark May 16, 2016, on your calendar. That's the day that U.S. securities law will experience one of the biggest changes since the Securities Act of 1933. On May 16th, the S.E.C.'s "Regulation Crowdfunding" final rules go into effect, allowing everyday people to join investment bankers and venture capitalists to directly fund startup businesses.
It'll be a whole new world. Here's how attorneys can prepare.
A Whole New World of Investment
Today, if you want to invest your retirement in a new app company, for example, it's not easy. Securities law, crafted in response to the Great Depression, made raising capital difficult. Businesses were typically relegated to gathering investments through limited financing sources and expensive intermediaries.
In 2012, however, Congress passed the Jumpstart Our Business Startups Act, or JOBS Act, and crowdfunding is at its heart. The JOBS Act "democratizes" startup funding, allowing regular people to invest in promising new companies -- starting May 16th.
Some of those funders, and entrepreneurs seeking funding, could soon be seeking your advice. Here's what you should know.
Equity Crowdfunding Basics
The SEC's new crowdfunding rules are meant to reduce the costs of raising capital, but they don't make it as simple as clicking "fund" on Kickstarter. First, companies can raise only $1 million a year in equity crowdfunding, in aggregate, through registered broker-dealers and financial portals. Issuers have to make a series of disclosures, as well, including disclosing information on the business's officers, directors, and major owners, the uses of the proceeds, and the business's financial condition.
Crowdfunding is available to most companies, but not all. Those excluded from crowdfunding include non-U.S. companies, companies already registered and reporting with the SEC, companies that have no business plan, companies whose business plan is business plan is to get bought up by another company (so must tech startups?), and more.
To keep everyday investors from selling their house to invest in the next Candy Crush, the SEC rules impose some stringent limits on individual investors as well. So before your clients put their condo on the market, remind them that individual investors who make under $100,000 a year are entitled to invest the greater of $2,000 or five percent of their income or net worth, every year. Those making more than $100,000 can invest up to ten percent of their income or net worth in equity crowdfunding, but they may never invest more than $100,000, in aggregate, a year.
Going Beyond the Basics
Those are the basics. And they are very basic. As with all securities law and SEC regulations, there's much more practitioners should know. Thankfully, there are great resources available out there to get you beyond the basics. Aspatore's Crowdfunding: Practical Guide To The SEC's FINAL Rules For Raising Capital is one such resource. (Disclosure: Aspatore is owned by Thomson Reuters, FindLaw's parent company.)
This guide to the new crowdfunding universe covers everything from offering statements, reporting requirements, liability, disqualification, and more. Coming in at over 800 pages, it is a tome, but don't let the size intimidate you. The book is well-organized, straight-forward, and easy to reference, while including all the background and SEC material you could need.