The Missouri Securities Commissioner, Robin Carnahan, issued an advisory release to alert entrepreneurs of the impact of the new crowdfunding exemption contained in the recently passed Jumpstart Our Business Startups (JOBS) Act. The exemption will allow entrepreneurs to use crowdfunding over the Internet to raise capital for small businesses. The purpose of the alert is to inform entrepreneurs of the changes and issues that arise with the passage of the exemption.
The purpose of the exemption is to allow small business owners to raise $1 million in a 12-month period through any medium, including the Internet. Under the exemption, investors whose net income is less than $100,000 can only invest the greater of $2,000 or 5% of their annual income, while investors whose net income is greater than $100,000 may not invest more than the greater of 10% of their annual income or $100,000. The crowdfunding exemption also requires that crowdfunding securities be sold through a broker or a “funding portal,” which will be defined by rules to be adopted by the Securities and Exchange Commission (SEC). Also, the broker or “funding portal” and the small business will still be responsible for making proper disclosures to the SEC and potential investors.
Commissioner Carnahan notes four potential areas for entrepreneurs to be aware of before selling crowdfunding securities. First, entrepreneurs are encouraged to not “jump the gun.” The JOBS Act gave the SEC a 270-day deadline to create a crowdfunding rule; however, it is possible that the exemption may not be in place until 2013. The previous federal and state securities law prohibitions, including the ones against general solicitations, are still intact until the crowdfunding rulemaking has been completed.
Second, the crowdfunding exemption is only meant to exempt entrepreneurs from the registration requirements and not from the current disclosure requirements. If entrepreneurs do not comply with disclosure requirements, even after the new rules take effect, they can be liable for securities fraud.
Third, entrepreneurs should consider hiring an attorney to get legal advice. It is important for entrepreneurs to ensure that they are complying with the crowdfunding requirements as well as federal and state securities laws. The advisory release suggests speaking to experienced securities law attorneys to help with crowdfunding offerings.
Finally, entrepreneurs need to be careful in choosing the broker or funding portal. Although portals are expected to be approved under the new rules, unapproved or shared portals may try to take advantage of entrepreneurs who are more vulnerable and less familiar with the exemption.
Commissioner Carnahan warns entrepreneurs to be mindful that if their broker or funding portal is not in compliance with SEC rules relating to the crowdfunding provision, the entrepreneur may be subject to liability for an unregistered offering.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.