By Alan Rukin
The new Jumpstart our Business Startups Act of 2012 ("JOBS Act"), signed into law on April 5, 2012, implements significant changes to the federal securities laws, in an effort to assist small and mid-sized businesses seeking to raise capital. This Client Alert, which focuses on "Crowdfunding," is the first in a series addressing some of those key changes.
Part One: CROWDFUNDING IS AUTHORIZED AT THE FEDERAL LEVEL - Caution Regarding State Law Compliance
The Crowdfunding title of the JOBS Act will allow a private company to raise funds from a larger pool of investors who are not "accredited" so long as the amounts raised from those investors is limited and the offering complies with additional requirements.
Companies using these provisions can raise up to $1 million from the "crowdfunding investors" in a rolling 12-month period. A company using crowdfunding must sell its securities either through a registered broker or through a funding portal registered with the Securities and Exchange Commission ("SEC") and a self-regulatory organization.
Investors whose annual income or net worth is less than $100,000 will be able to invest up to the greater of $2,000 or 5% of their annual income or net worth in the company. Investors whose annual income or net worth is at least $100,000 will be able to invest 10% of their annual income or net worth up to a maximum of $100,000.The JOBS Act mandates that a company using the crowdfunding provisions must disclose information regarding its officers, directors and shareholders with more than a 20% stake in the company, and background checks on those individuals must be performed. In addition, these companies must make financial disclosures, which will vary, based on size of the offering.
The JOBS Act imposes various other required disclosures and conditions, including disclosure of risk factors, establishing a minimum threshold for the offerings and allowing investors to cancel their investment commitments as set forth in new SEC rules to be adopted. The SEC is required to adopt conforming rules within 270 days after enactment.
Companies making securities offerings under the crowdfunding provisions will be subject to tiered financial disclosure. The level of disclosure will be based on the aggregated total value of securities offered within the prior 12 months, including the offering for which the company will make the disclosure. The law directs the SEC to adjust the following amounts for inflation at least every five years.
For offerings of $100,000 or less:
o Income tax returns for most recent year; and
o Financial statements certified by principal executive officer
For offerings greater than $100,000 up to $500,000:
o Financial statements reviewed by an independent public accountant using SEC approved standards and procedures
For offerings greater than $500,000 up to $1 million:
o Audited financial statements
Important Notes: Although the JOBS Act implements certain changes at the federal level, securities offerings must continue to comply with applicable state securities laws. While the JOBS Act limits the reach of some state laws, others continue to apply to the offerings, and those laws do not yet contain similar exemptions. In addition, the JOBS Act contains numerous technical provisions regarding eligibility and compliance requirements. The SEC is required to publish rules designed to more fully clarify many of these new requirements. Accordingly, readers are urged to consult with counsel when contemplating any securities transactions, including those using the new JOBS Act exemptions.