New Securities Offering Possibilities Under the JOBS Act
by R. Shawn McBride
The Jumpstart Our Business Startups Act (JOBS Act) was signed into law on April 5, 2012. The JOBS Act included a number of major provisions covering a variety of areas: (1) reforming reporting requirements for “Emerging Growth Companies,” (2) allowing general solicitation in certain offerings to accredited investors, (3) crowdfunding provisions (discussed below), (4) small company capital formation provisions exempting certain additional private offerings, and (5) provisions adjusting the number of shareholders possible in a private company without triggering SEC registration. Many of the changes of the JOBS Act only become effective after SEC rulemaking is enacted in connection with the legislation.
This article focuses on summarizing the crowdfunding provisions of the JOBS Act (this is merely a summary—the detailed provisions should be reviewed before conducting any transaction). Crowdfunding is an acronym for “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012” which states the basic goal of this portion of the legislation. While the provisions have yet to take effect, the legislation has set a broad outline of what will be possible after SEC rules on crowdfunding have been enacted—and such rules are due within 270 days of the enactment of the JOBS Act.
The apparent goal of the crowdfunding provisions is to allow an issuer to make small offerings (up to $1 million depending on timing and other offerings previously made by the issuer) to investors (including non-accredited investors) through brokers or “funding portals.”
Available Purchasers.The crowdfunding provisions greatly enhance the practical universe of available investors for issuers. Investors with net worth or annual income less than $100,000 can purchase the greater of $2,000 or 5 percent of their net worth or annual income in issuer securities during each 12-month window. Investors with either net worth or annual income greater than $100,000 can purchase the greater of $10,000 or 10 percent of their net worth or annual income in issuer securities during each 12-month window.
Offering Conditions.Among other things, the broker or funding portal must provide disclosures to investors about the risks and other investor education materials as the SEC may require in its rulemaking. The broker or funding portal must also (1) ensure the investors review the disclosures provided, affirm their understanding of the risk of loss of their investment, and answer questions demonstrating risk and investment knowledge, (2) do fraud checks on the issuer as required by the SEC including background checks on officers, directors and 20 percent holders, and (3) comply with additional requirements set forth in detail in the crowdfunding provisions.
Use of Funding Portals. Funding portals is a new concept that creates a class of intermediary that can help issuers carry out crowdfunding transactions. The legislation provides that, among other things, to qualify as a “funding portal” the portal cannot (1) offer investment advice, (2) solicit purchases, sales or offers to buy the securities offered or displayed on its website or portal, (3) compensate its employees, agents or other persons for soliciting the sale of the securities or base compensation on the sale of securities shown on the website or portal, and (4) handle investor funds or securities. Additionally, the funding portal must comply with other prohibitions of the SEC to be included in SEC rule making.
The legislation provides that the SEC can exempt funding portals from registering as brokers or dealers under existing law if the funding portal: (1) remains subject to various authorities of the SEC, (2) is a member of a national securities association registered under the Securities Exchange Act of 1934, and (3) is subject to other rules as the SEC may dictate.
New Offering Possibilities.The crowdfunding provisions seem to suggest that a universe of offerings by issuers to small investors will open in the next several months. The markets will determine how quickly funding portals come online and become available for issuers. Substantial burdens are placed on the funding portals including background checks and ensuring investors understand risks. If the funding portals develop as anticipated by the crowdfunding provision, we may see a new era of small offerings by emerging companies.
R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C., which helps clients with transactional legal issues. He can be reached at firstname.lastname@example.org.