Crowdfunding is an online money-raising strategy that began as a way for the public to donate small amounts of money, making it easier to raise capital for young companies. Under the federal Jumpstart Our Business Startups (JOBS) Act (HR 3606), small businesses and entrepreneurs will be able to tap into the “crowd” in search of investments to finance their business ventures.
Among other things, the JOBS Act amends § 4 of the Securities Act of 1933 to create a new exemption for offerings of “crowdfunded” securities. This amendment effectively exempts issuers from the requirements of §5 of the Securities Act when they offer and sell up to $1 million in securities, provided that individual investments do not exceed certain thresholds and the issuer satisfies conditions in the JOBS Act, some of which will required SEC rulemaking.
The regulators are still catching up. Congress directed the Securities and Exchange Commission to adopt rules within 270 days to implement a new exemption to allow crowdfunding. Until the SEC adopts these rules, no one can act as an intermediary or take advantage of the crowdfunding statute. On April 23, 2012, the SEC issued the following warning:
On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law. The Act requires the Commission to adopt rules to implement a new exemption that will allow crowdfunding. Until then, we are reminding issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.
Maine’s Office of Securities recently issued a similar advisory warning would-be investors to tread carefully when contemplating crowdfunding investment opportunities. According to the Office of Securities, the prudent approach would be to wait until SEC rules are adopted regulating crowdfunding. The bottom-line for investors is “wait and see” when it comes to crowdfunding.
News and commentary from the Financial Services attorneys at Preti Flaherty.
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