U.S. Legalizes Startup Crowdfunding — What It Means for Hyperlocals

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The JOBS Act signed by President Obama on April 5, 2012 offers hyperlocal businesses an opportunity to get investments through crowdfunding. It’s a “game changer,” according to President Obama.

“For the first time ordinary Americans will be able to go online and invest in entrepreneurs that they believe in,” President Obama told reporters on April 5, 2012 at the White House. What does it mean for hyperlocals? They will no longer have to depend solely on private or angel investors — they can raise up to $1 million per year from small investments online and through social media. People in the community who believe they have a vested interest in their hyperlocal businesses can contribute by making small investments.

The Jumpstart Our Business and Startups Act takes the regulatory burden off small companies. One particular feature of the new law is that it allows the use of crowdfunding. The JOBS Act amends the federal Securities Act by permitting companies to use the internet and social media to sell up to $1 Million of securities within any 12-month period to an unlimited number of investors. There are restrictions. The amount sold to any investor by an issuer cannot exceed:

  • The greater of $2,000 or five percent (5%) of the investor’s annual income or net worth, so long as such investor’s annual income or net worth is less than $100,000; or
  • If the investor’s annual income or net worth is equal to or more than $100,000, ten percent (10%) of the investor’s annual income or net worth, not to exceed a maximum aggregate amount of $100,000 of securities sold.

Also, crowdfunding transactions must be conducted through a broker or funding portal. The issuer must comply with certain filing and disclosure requirements, including:

  • Identifying the directors, officers and current investors that hold more than 20% of the shares of the company;
  • A description of the business and a business plan;
  • Depending on the size of the target offering amount, a description of the financial condition of the issuer, either by making available an income tax return, a financial statement reviewed by an independent public accountant or an audited financial statement;
  • Disclose how the company will use the proceeds;
  • The target offering amount;
  • A description of the ownership and capital structure of the issuer; and
  • Such other information as the SEC may require under rules it must prepare for the JOBS Act.

The JOBS Act gives the Security Exchange Commission 270 days to prepare rules for the new crowdfunding provisions, which means that seeking investors through crowdfunding likely will not be available to new businesses until 2013.

“I think the biggest impact will actually be at the “mom-and-pop” level, helping small businesses that normally wouldn’t have a chance at getting a loan or venture capital funding,” said Hillary Kramer of Kramer Research, adding “another place access to crowdfunding will help is by giving startups more time to grow and refine their business models before making an IPO, which could lead to higher quality IPOs in the long run.”

Robert Kington, CEO of VacationView of Dublin, Ohio, believes a million dollars would give a startup enough time to build a product. “One million dollars can fund a lot of work,” Kington said. “It gives enough time to build a product, test our value proposition and pivot based upon user feedback.”

Crowdfunding may help level the playing field for hyperlocals that are located in smaller and mid-size cities: “The ability to garner funds in smaller increments can be effective for start ups who have trouble gaining an audience in areas (like central Ohio) where funding sources are more limited, as compared to tech areas such as Silicon Valley, New York, Boston or Austin,” Kington said.

“Crowdfunding provides young businesses with money, plain and simple,” Rose Levy, spokesperson for the crowdfunding site IndieGoGo.com, told Street Fight. IndieGoGo.com currently runs more than 5,000 campaigns. According to Levy, more than 90% of IndieGoGo.com campaigns meet their target funding goals and offer a product. “Until now, crowdfunding efforts could only thank funders with products, gifts, or other token appreciation of support. Thanks to the JOBS Act, new ventures can actually provide small funders a piece of the action – so all of us can be investors in new ideas we believe in.” Levy said that IndieGoGo.com is working with other crowdsourcing sites to implement a self-regulatory program to facilitate crowdfunding under the JOBS Act.

In 2009, journalist Leah Betancourt prepared a white paper suggesting that that crowdfunding may be the future of journalism. “Think public radio, or television pledge drives.Think political campaigns. Think tip jar,” she wrote. Until now, any crowdfunding opportunities were limited to to people making contributions or donations to a project, with the reward being either an acknowledgment for the donation or the satisfaction for supporting the efforts of hyperlocal journalists or businesses. Will the JOBS Act add an incentive for local involvement?

Not all are crazy about the act, however. Matt Taibbi of Rolling Stone Magazine argues: “This law actually appears to have been specifically written to encourage fraud in the stock markets.

Levy had a more positive perspective: “Projects that begin through online crowdfunding have built-in risk mitigation, because the public nature of the solicitations forces transparency regarding demand of the product or service,” she said.

Getting this thing off the ground is the next challenge. What rules will the SEC implement?  The industry already has jumped on the bandwagon to promote self-regulatory procedures for crowdfunding. Today, the National Crowdfunding Association (www.NLCFA.org) expressed its support for Crowdfunding Accreditation for Platform Standards (CAPS), which establishes best practice standards for the operation of crowdfunding portals globally, see, www.crowdsourcing.org/caps. Organizations such as SoMoLend.com and RocketHub.com have obtained CAPS certification. Next week, we will follow up with more on the JOBS Act and crowdfunding. 

Brian Dengler is an attorney with Vorys Legal Counsel and journalist who covers legal issues in eMedia. He is a former vice-president of AOL, Inc., a former newspaperman, and an EMMY-winning TV journalist. He teaches new media issues as an adjunct at Kent State University and formerly at Otterbein University.

Image courtesy of Flickr user aresauburn.

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