This past spring, President Obama signed the Jumpstart Our Business Startups Act, known better as the JOBS Act, a law that is expected to make equity crowdfunding a reality in the United States. The problem, however, is that the Securities and Exchange Commission must first promulgate regulations on equity crowdfunding before individual donors can start to receive stock and company equity.
Under the Securities Act of 1933, a business would need to be registered with the SEC or have a recognized exemption before it could sell stock to investors, but it is hard for many small businesses and investors to comply with either requirement. And, it has been even more difficult for these investors to receive sufficient funding from approved venture capitalists and banks. This situation has left many first-time entrepreneurs turning to crowdfunding to finance their startups.
Crowdfunding is a method of raising investments by using social media to collect donations. Entrepreneurs' use of crowdfunding has skyrocketed in the past couple years, with a 524 percent growth rate, which has translated into $1.5 billion raised. Unfortunately, the small businesses that are using crowdfunding are unable to pay back their investors with any kind of stock or company equity. They are limited to giving out gifts and discounts for future purchases, but the JOBS Act would allow investors to receive a stake in the company.
It is important to recognize that securities laws can be confusing. Not everyone in Miami will be able to understand the JOBS Act or an SEC decision at first glance, but working with a securities law attorney is a good way to gain insight into this important branch of federal law.
Source: Forbes, "Inside The JOBS Act: Equity Crowdfunding," Tanya Prive, Nov. 6, 2012