What Is It?
Crowdfunding is major change in the way small businesses can raise capital. Once federal regulations are finalized (which should be by the end of 2013), entrepreneurs will be able to raise capital online and reach an infinite audience of potential investors.
As of April 5, 2012, the President signed the JOBS Act which permits entrepreneurs to raise funds for their business in exchange for equity by using the internet and an intermediary known as a funding portal. There are various requirements to which entrepreneurs and funding portals must comply; however, this is a major shift in the law. Under current law, there can be no use of the internet since they can be no advertising or soliciting for investors. This is all currently changing as you read this information.
How Does It Work?
Anyone who has a business or business idea will have to use a funding portal in order to make their offering. The entrepreneur (or 'issuer' in accordance with statutory language) must prepare various documents and disclosures that have to be given to the funding portal. The funding portals are regulated entities under the jurisdiction of the SEC and FINRA. It will be important for entrepreneurs to have a well thought out business plan with accompanying financial documentation, but by observing the requirements of the law Congress passed and the forthcoming to be revealed regulations that the SEC and FINRA are establishing, entrepreneurs will have a wide reaching new tool to raise money for their businesses.
It's also important to recognize that while the internet provides a great new way to raise money for businesses who may otherwise not be able to raise capital or have challenges in do so, investors also need to be protected. Therefore, Congress has placed provisions in the law so as to help ensure that investors' risk of fraudulent offerings is minimized, and the SEC and FINRA are still promulgating rules to further that goal.
Overall, we are the very beginnings of a new and powerful mechanism in the small business world. The strength of the internet will open the doors of opportunity in balanced, somewhat regulated way. As the new rules are laid out by the SEC and FINRA, we shall see some exciting changes taking place as capitalism shines at its best.
If you or your company has more questions on how this may work for you, please don't hesitate to contact us for more details.
Also, download article below to read Joe Donnini's recently published article on how crowdfunding works under the law.
"Funding for the Future: Crowd Funding and
Small Business Online Offerings," OC Lawyer,
|Joe Donnini, Esq. is a member of CFIRA (Crowdfund Intermediary Regulatory Advocates), which is an entity that is committed to building a united crowdfunding industry voice for collaboration with securities regulators, financial industry professionals, investors, and entrepreneurs. CFIRA includes members of the crowdfunding industry, along with legal and securities experts that helped lead the charge advocating for crowdfunding legislation.