Crowdfund investing is possible because of the passage of the JOBS Act. So, what exactly did the JOBS Act legislation change in the U.S. financial regulatory system? And how do these changes stand to benefit business owners and investors?
Promoting emerging growth companies
The JOBS Act created a new category of companies called emerging growth companies (EGCs) and gives small, growing companies a five-year window in which to become fully compliant with accounting regulations. To qualify as an EGC, the company must
Have less than $1 billion in annual revenue
Not have gone public more than five years ago
Have issued no more than $1 billion in debt securities
Have floated less than $700 million in stock securities
You may find it downright funny to see such high revenue, debt, and stock numbers used in combination with the words small and emerging. Nonetheless, this provision is important because it allows growing companies to have access to the public markets and not be crushed by the regulatory burdens.
Redefining who can invest in small ventures
Prior to the passage of the JOBS Act, accredited investors often were the only people who could invest in private debt or equity transactions. One of the biggest changes the JOBS Act created was lifting the restriction on soliciting unaccredited investors to purchase stock.
This means that companies that use crowdfund investing to raise capital are legally able to solicit people of all net worths and income levels to purchase their shares. You can’t solicit anyone and everyone, though. You have to follow SEC regulations that require you to directly solicit only people who are members of your online social networks.
Setting up the structure for online investment
Title III of the JOBS Act spells out, among other things:
The maximum dollars a business or entrepreneur can seek via crowdfund investing, which is $1 million per year.
The maximum amount an individual can invest via crowdfunded ventures in a year, which may be a flat $2,000, 5 percent of the individual’s annual income or net worth, or 10 percent of the individual’s annual income or net worth. The limit depends on the person’s specific finances.
The means by which a company may seek investments and an individual may make them, which is via SEC-registered online funding portals.
The legislation also specifies other parameters that seek to promote the business sector while preventing fraud and protecting the investor.
