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GAMABrief: Crowdfunding: Funding Your Business After the JOBS Act

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Information about GAMABrief: Crowdfunding: Funding Your Business After the JOBS Act
Business & Mgmt

Published on November 21, 2013

Author: gamalaw

Source: slideshare.net

Description

While the JOBS Act was approved by Congress in 2012, the provisions regarding crowdfunding have yet to be implemented. The JOBS Act directs the SEC to create the rules regarding crowdfunding. In October of 2013, the SEC proposed an initial set of rules, but the final framework has not yet been adopted.
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GAMABrief: Crowdfunding: Funding Your Business After the JOBS Act You have a great idea for a new app, but you need some money to get it started. Where do you turn? The Internet. These days, rather than relying on the help of friends and family, entrepreneurs and startups are engaging in online crowdfunding to get their businesses off the ground. In 2012, crowdfunding platforms raised $2.7 billion, financing more than one million projects.1 The industry is expected to grow to $5.1 billion by the end of 2013.2 Current laws prohibit crowdfunded companies from selling securities to the public unless the company is registered with the Securities and Exchange Commission (“SEC”)—a costly and time-consuming process. However, with the pending implementation of the SEC’s new crowdfunding rules, all of that is about to change. Recognizing the growing popularity of crowdfunding, the U.S. government launched Title III of the JOBS Act in 2012. Short for Jumpstart Our Business Startups, the JOBS Act loosens security regulations for small businesses financed through crowdfunding websites. The intent of Title III is to both encourage investment and make it easier for startups and small businesses to raise money from multiple investors. While the JOBS Act was approved by Congress in 2012, the provisions regarding crowdfunding have yet to be implemented. The JOBS Act directs the SEC to create the rules regarding crowdfunding. In October of 2013, the SEC proposed an initial set of rules, but the final framework has not yet been adopted.3 Crowdfunding  Today Currently, crowdfunded companies cannot offer donors a share of the financial returns or profits from the projects to which they contribute. In order to do so, the donor would have needed to own equity in the company, which implicates federal securities laws. If the company wants to offer equity, it must be registered with the SEC or meet a specific exemption, such as Regulation D. Either way, the company is still obligated to jump through a number of legal hoops, the difficultly and expense of which is oftentimes not feasible for startups and small businesses. As such, crowdfunding is generally limited to donations where the donor receives some sort of token, like a T-shirt or access to a film premiere, as thanks for the contribution. The SEC’s proposed rules mean to change all that, creating an exemption from burdensome securities laws for equity crowdfunding. The  Proposed  Rules   In October 2013, the SEC voted to propose a new set of rules regarding crowdfunding. The rules, which are open for public comment for ninety days from their release, create the regulatory framework for Title III of the JOBS Act. Key aspects of the proposed rules include: One.  A crowdfunded company can raise a maximum of $1 million through offerings in a twelve-month period. Two. Investors whose net worth or annual income is less than $100K can invest up to the greater of $2K or 5% of their income over the course of a twelve-month period. Three.  Investors whose net worth is greater than $100K can invest up to the greater of $100K or 10% of their annual income over the course of a twelve-month period. Four.  Crowdfunding offerings must be made through a registered broker or registered funding portal (e.g., sites like Kickstarter or Indiegogo). A  GAMA  White  Paper  produced  by  Chris4na  Gagnier  &  Emily  Poole                                            ©  2013.  Gagnier  Margossian  LLP.    All  rights  reserved.  

Proposed  Rules  (cont.) Five.   Crowdfunded companies must share certain information with the SEC, as well as with investors and the crowdfunding intermediary. Such information includes a description of the company’s business and use of funds; detailed information about the sale of the securities; certain financial statements and a description of the financial state of the company; and information about the company’s officers, directors and those who own at least 20% of the company. Six.  Crowdfunded companies must file an annual report with the SEC and provide it to investors.   Preparing  for  the  Change While the rules regarding crowdfunding have not yet been finalized and certain provisions will likely be amended, your company can begin preparing for the change now. First steps may include incorporating the business, writing or refining your business plan and getting your accounting records and financial statements in order. For  more  informaAon  or  guidance  on  geBng  your  business  ready  for  the  new  crowdfunding  regulaAons,  contact  an  aEorney  at  Gagnier  Margossian  LLP. Footnotes 1 Massolution, The Crowdfunding Industry Report (2013), available at http://research.crowdsourcing.org/2013cf-crowdfunding-industry-report. 2 Id. 3 Regulation Crowdfunding, 78 Fed. Reg. 66427 (proposed Oct. 23, 2013) (to be codified at 17 C.F.R. pts. 200 et al.), available at http:// www.sec.gov/rules/proposed/2013/33-9470.pdf. Internet Intellectual Property Privacy Social Media Technology The Good Stuff #nerdlawyers Los Angeles Sacramento T: 415.766.4591 F: 909.972.1639 E: consult@gamallp.com gamallp.com @gamallp San Francisco

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