It’s really just removing the first of two obstacles that stand in the way of crowdfunding. The 2nd obstacle, which could get lifted later this year, would be to lift the accredited investor restriction. At that point, private companies could raise equity by advertising to a wider audience through crowdfunding websites such as www.CircleUp.com and www.Fundable.com. This will make it easier for small businesses to raise the capital needed to grow and stimulate the economy, but it could also open the door to fraud and high-risk investments. What do you think will be the impact of crowdfunding?
The legal restrictions and expenses related to raising capital can be prohibitive for many small to middle market businesses. The Jumpstart Our Business Startups, or JOBS Act would revolutionize the process of private capital raising through the legalization of “Crowdfunding”. Although President Obama signed the JOBS Act into law in April 2012, the SEC still hasn’t published the final regulations required for the law to take effect. The regulations will put a limit on the total amount eligible to be raised ($1 million), the total amount eligible to be sold to any single investor ($2,000 – $5,000 for investors with a annual income and net worth below $100,000, or up to $100,000 for wealthier investors). The issuers will need to file with the SEC and provide the investors with certain disclosure information and the transaction will need to be conducted through a broker or funding portal that complies with the SEC requirements.
The JOBS act will make it easier for small to middle market businesses to raise capital which will jumpstart innovation and job creation. It will also open up new and potentially very lucrative investment opportunities to unaccredited investors. On the flip side, these investments are risky and require a level of financial sophistication to evaluate so the JOBS act could result in unaccredited investors getting ‘swindled’ out of money they can ill afford to lose.