Indiana Business Lawyer Blog
The Jumpstart Our Business Startups Act (“JOBS Act” or “the Act”) was a bill passed with bipartisan support by Congress in 2011 and signed into law by President Obama in April 2012. The goal of the law is to encourage funding for small businesses, or “emerging growth companies” in the words of the Act, to facilitate job creation and investment by easing various securities regulations. It enables a private company to sell up to $1 million of securities over a 12-month period to investors without needing to register the securities with the Securities and Exchange Commission (SEC). Sales of this type are what the Act describes as “crowdfunding:” the novel yet democratic process by which capital and other resources are aggregated from a traditionally smaller group of people for the purpose of funding a business venture, investment opportunity, or even a nonprofit.
The JOBS Act exempts the securities sold through crowdfunding from many federal securities laws as well as from such state laws, commonly known as Blue Sky laws. Initially, the Securities Act of 1933 provided the federal government with exclusive jurisdiction for regulating nationally traded securities and generally prohibited states from doing so, except where the issuer (the company issuing the securities) has its principal place of business or is incorporated in a given state. However that Act of 1933 did enable states to investigate and bring enforcement actions for securities and transactions involving fraud, deceit, and/or other unlawful conduct by a broker, dealer, or issuer. The JOBS Act continues with that trend of separation and only permits a state security commission to require a filing or fee for the sale of securities if the issuer’s principal place of business is located there or in any state in which purchasers of at least 50 percent of the aggregate amount of the securities issued are residents.
The JOBS Act also extends the general prohibition of state regulation and the regulatory scheme just discussed to what are known as “funding portals”. A business seeking to engage in crowdfunding does not offer the securities directly to investors. This is achieved through an intermediary, which can either be a registered broker-dealer or a funding portal-a virtual or website-based third party that will be charged with the duty of providing investors information and data about the company issuing the securities. Funding portals are exempt from registering as a broker-dealer, but they still must register with the SEC as such and satisfy certain recordkeeping and operational requirements.
For a company to be exempt from the relevant federal and state securities laws which impose financial reporting and corporate governance requirements, it must have an annual revenue of less than $1 billion. Additionally, the Act imposes limitations on investors with regard to the amount in which they can invest during a 12-month period. For example, under the Act, the aggregate amount sold to all investors by the issuer during a 12-month period cannot exceed $1 million. Additionally, if either the annual income or the net worth of an individual investor is less than $100,000, then the aggregate amount sold to that investor cannot exceed $2,000 or five percent (whichever is greater) of the annual income or net worth of that investor. Furthermore if either the annual income or net worth of the investor is equal to $100,000, the Act limits the amount that investor can purchase to ten percent of that investor’s annual income or net worth, with a maximum aggregate amount of $100,000.
Finally, the Act mandates that the issuer file with the SEC information and data related to the business for potential investors. Although these documents are filed with the SEC, ultimately the intermediary (the funding portal or registered broker-dealer) purveys it to the interested parties to examine and review. Among the requirements with which issuers must comply includes filing with the SEC the name, legal status, physical address, and website address of the issuer; the names of the directors and officers, and each person holding more than 20 percent of the shares of the company; a description of the company’s business and anticipated business plan; a description of the company’s financial condition; a description of the stated purpose and intended use of the proceeds of the offering that the company seeks; the target offering amount and regular updates regarding the company’s progress in meeting the target offering amount; the price to the public of the securities, or the method for determining the price; a description of the company’s ownership and capital structure. Although this list of requirements is not exhaustive, it does provide insight into the reporting and disclosure requirements for companies seeking to raise capital through crowdfunding.
Jeremy Fetty is a partner in the law firm of Parr Richey Frandsen Patterson Kruse with offices in Lebanon and Indianapolis. He often advises businesses and utilities (for profit, non-profit and cooperative) on organizational, human resources, and transactional matters and drafts and reviews commercial contracts.
The statements contained herein are matters of opinion and general information only and are not to be considered legal advice and should not be construed to form an attorney-client relationship. If you have any questions regarding this article, please contact an attorney.
