Crowdfunding ~ Part 1
The Jumpstart Our Business Startups Act, or JOBS Act, was signed into law on April 5, 2012. This law was designed to encourage funding of small businesses in the United States by easing many of the country’s securities regulations. Title III, also known as the CROWDFUND Act, went into effect on September 23, 2013 and has drawn a lot of public attention because it creates a way for companies to use crowdfunding to issue securities, something that was not previously permitted.
The CROWDFUND Act requires these “funding portals” to register with the SEC through one of several means. It also requires compliance with certain obligations such as implementing procedures to reduce fraud, performing background checks on company directors and executives, and making sure that investors don’t invest more than they’re permitted to under the law.
Also, investors must understand that securities purchased through a crowdfunded offering cannot be sold or transferred for one year unless they are sold back to the issuing company, an accredited investor, a family member or as part of a registered offering. In other words, crowdfunded investments are likely to be illiquid for at least one year from the date on which they’re purchased. In a worst case scenario, investors may have no way to exit an investment before it loses most or all of its value.
Regulations that once prevented companies from raising capital from non-accredited investors through public channels are going away, but that doesn’t mean that the new regulations created by CROWDFUND Act are insignificant. Both funding portals and companies will still have to follow the rules. Ultimately those rules may not deter the fraud many are worried about, although they will require crowdfunding participants to jump through more than a few hoops.