Why is September 24th a Huge Day for Entrepreneurs? Title II of the US JOBS Act and Crowdfunding for Accredited Investors Begins

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Crowdfund Capital Advisors |  Sherwood Neiss  |  Sept 22, 2013

Sherwood NeissOn September 24th, there will be a sea change in how entrepreneurs can seek money from early stage investors - one of the largest changes to securities laws in 80 years.  On September 24th, Title II of the JOBS Act (a seven-part Act signed into law by President Obama on April 5, 2012) goes into effect.  Here are the key questions to be asking.

Question: What is the change is that is going into effect?

Effective as of September 24, 2013, Issuers of shares (under New Rule 506c) may use general solicitations and general advertising to effect a private placement. Prior to this any public means of communication like magazines and television were excluded from avenues for raising money for companies unless they were public. You really needed to know someone who was raising money in order to invest. There must have been a pre-existing relationship. Now that pre-existing relationship doesn’t have to be there. So businesses can reach more potential investors, faster, via the Internet and social media.

Now private companies can use those mediums as well as the Internet and the social network to reach millions of potential investors.  This reverses an eight-decade-old law.

Question: Can anyone invest?  Is this crowdfunding for unaccredited investors that we’ve been hearing about?

No, not anyone can invest. While anyone can see the solicitation for funds, the completed sales, must only be to “accredited investors” and the Issuer (the company, broker/dealer or 3rd party Web platform) has the burden to verify that the investor is “accredited.” An accredited investor is someone who makes over $200,000 for the last 2 years or has a liquid net worth of $1M.  Crowdfunding for unaccredited investors is still waiting on the SEC to come out with the proposed rules. Unaccredited investors that might see these solicitations cannot invest in these offerings. Companies accepting funds must be careful to verify accreditation.

Question: What is the maximum amount that can be raised?

Unbeknownst to many people there is no cap on the amount that can be raised.  While this has always been there, the ability to use the Internet to reach more investors has the potential to lead to a lot more investment money. This influx into the economy could be a boon for businesses and jobs. This can be beneficial for startups, small businesses and even Venture funds.

Question: What are the risks?

There are many.

First, as with any investment there are no guarantees that you will see a return, that you will get your money back or a timeline attached to if and when you see a return.

Second, there is no review of the offering by the Securities and Exchange Commission. Solicitations can be online or offline and made to any potential investor. While forms need to be submitted to the SEC, there is no requirement for review of the offering by any State Securities Commission. Since State Securities police the markets there is an opportunity for fraud.

Third, this is really buyer beware.  Investors need to be cautious before they invest.  Investors should only invest in people they know and trust and opportunities they believe in. They should take time to educate themselves about investing in the private markets and understand that in many cases the securities they buy will not be liquid, meaning they are not converted into cash easily.  As a matter of fact in many cases you might have to hold on to them until the business sells, merges or goes public.

Question: What are the benefits?

The majority of wealth in corporations happens at their early stage.  While there is a tremendous amount of failure after 5 years, companies that succeed not only create a vast number of jobs but a return on investment that exceeds many other investment opportunities.  That being said, investments into high-risk companies like startups and small businesses should never equate to more than 10% of an individual investor’s portfolio.

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Related:

Huffington Post:  Equity Crowdfunding and Advertising:  Be Careful What you Wish For

 

The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry.  NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place.   Join our growing network of industry stakeholders, fundraisers and investors.  Increase your organization’s profile and gain access to a dynamic group of industry front runners.  Learn more eBrochure | Prezi or contact us at casano@ncfacanada.org.

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