The groundbreaking Jumpstart Our Business Startups Act (JOBS Act) was signed into law in April 2012. Its purpose was to motivate startup and small business funding throughout the nation. Title III of the Act, also known as Regulation Crowdfunding (Reg CF), made the acquisition of capital easier for businesses, and gave more people the option to participate in various investment opportunities – all with the goal of stimulating economic growth and creating jobs.
Reg CF made it possible for the little guy, so to speak, to participate in investment opportunities involving startups and small businesses. Prior to Reg CF, these investments were only available to investors with certain relatively high levels of annual income and net worth.
The Issues
Although Regulation Crowdfunding of the Jumpstart Our Business Startups Act took effect in May 2016, there have been difficult issues inhibiting the ability of potential issuers to take advantage of the new law. One issue involves the requirement on businesses seeking to raise more than $500,000 in capital to have GAAP standard financial statements prepared to share with prospective investors. This regulation is burdensome for small businesses that may not have the funds to pay for the preparation of these documents.
Additionally, Reg CF is a complex and lengthy document that requires legal examination to ensure its requirements are met.
As well, Reg CF of the Jumpstart Our Business Startups Act mandates that issuers, prior to raising capital, file a Form C with the SEC. This document is complicated and requires review from an attorney prior to submission. Again, many startups and small businesses do not have the available funds to cover the legal expenses associated with the required review.
There is also a $1 million per year fundraising cap on businesses – too low for certain small businesses and industries that need larger amounts of capital at the outset.
Another problem under the Reg CF provisions of the Jumpstart Our Business Startups Act is that issuers are not permitted to test the waters of the market, so to speak, by putting out nonbinding solicitations in order to at least test potential interest without first providing the required disclosures to the SEC.
Possible Solutions
A Fix Crowdfunding Act passed the House of Representatives in 2016 to help solve some of the issues mentioned above, however the bill stalled in the Senate.
* Some of the solutions that may be provided with a new bill are as follows.
* Raise the issuer cap from $1 million to $5 million
* Allow potential issuers to test the waters of the market and thus reduce the upfront costs of carrying out a Reg CF offering
* Base the percentage caps of investors on the greater of income and net worth, and not the lesser of those factors
* Lessen the burden on funding portals to evaluate Reg CF offerings they post for potential emissions are misstatements of issuers. Liability should only be imposed upon these portals if they purposefully and intentionally allow misstatements and/or omissions from the issuer, or knowingly engaged in fraudulent activity in some other way.
As is obvious, the Reg CF provisions of the Jumpstart Our Business Startups Act need improvement. Hopefully these issues will be addressed soon to help enhance opportunities for both issuers and investors.
