Money from the masses

Jonathan Storper

Capital investment is going viral. By early 2013, companies should be allowed to raise capital online from numerous, previously untapped investors. On April 5, 2012, President Obama signed the Jumpstart Our Business Start-Ups (JOBS) Act, which included the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure (CROWDFUND) Act. Once the Securities and Exchange Commission (SEC) has finalized the applicable rules and regulations, the CROWDFUND Act should provide an additional exemption to SEC registration requirements, freeing up the ability of an emerging company to raise money from new investors.

Although some parts of the JOBS Act are already in effect, the CROWDFUND Act includes a 270-day rulemaking period for the SEC to develop specific regulations related to “crowdfunding.” According to the SEC’s current timeline, the new rules should be complete by December 31, 2012, with the crowdfunding registration exemption available early in 2013. 

The concept of “crowdfunding” involves soliciting relatively small investments from a large number of people. This concept has already been used to fund projects such as international concert tours, startup watch companies, and a revival of a discontinued video game series. Websites such as kickstarter.com and rockethub.com offer companies and individuals an opportunity to pitch their business ideas or creative projects online where others may then “donate” various dollar amounts to the projects. In exchange for these “donations,” investors receive rewards, such as sample products from the company or exclusive tickets to a concert. Selling an ownership interest in the company itself, however, still subjects a company, regardless of size, to significant SEC reporting requirements under federal securities laws.

Under the CROWDFUND Act, on the other hand, a company will be able to raise such funding by selling its own equity interests without violating federal and state securities regulations, and should only be subject to minimal SEC reporting requirements. And whereas current securities regulations deter companies from offering equity to non-high net worth individuals, the CROWDFUND Act should open up access to a previously inaccessible group of investors who wish to buy a stake in a company’s future.