The Crowdfund Act - What Is It?

In early April President Obama signed the JOBS (Jumpstart Our Business Startups) Act into law, after it passed both houses of congress by a wide margin. Among other provisions to ease the restrictions on “small” business access to capital, is the Crowdfund Act.

The Crowdfund Act allows small investors to invest in U.S. based startups and established businesses with less than $5 million in annual sales. Each business is allowed to raise as much as $1 million during any twelve month period through SEC approved crowdfunding portals.

Under crowdfunding regulations (to be completed by the SEC by January 2013) individual investments in any one crowdfund issuer are limited by income or net worth. Investors earning less than $100,000 per year will be limited to the greater of $2,000 or 5% of their annual income or net worth. Investors earning more than $100,000 will be limited to 10% of their annual income or net worth up to a maximum of $100,000.

Crowdfunding transactions must be conducted through a broker or funding portal that has registered with the SEC and any applicable self-regulatory organization. The intermediaries will play an important gate keeping role in crowdfunding transactions, and will have significant responsibility for preventing issuer fraud and protecting investors. 

These responsibilities include educating and screening potential investors, taking appropriate action to reduce the risk of fraudulent transactions (including checking the background of the issuer and its insiders), providing disclosure to the SEC, ensuring that the issuer does not receive any investors’ money until the target offering amount has been raised, and taking steps to ensure that investors do not purchase more than their annual limit of securities of the issuer. 

Issuers making a crowdfund offering must disclose the amount of money they intend to raise.  Investors will be able to rescind their commitments if the issuer does not reach this target.