To Jumpstart Our Business Startups Act – Does the Act Need a Fix with Respect to Crowdfunding?

The Jumpstart Our Business Startups Act (JOBS Act) which was signed into law in April 2012 was designed to help encourage financial investments in small businesses and startups throughout the U.S. Title III of The JOBS Act, also referred to as Reg CF, or Regulation Crowdfunding, was the instrument that opened the door for investment crowdfunding. In addition to its purpose of opening the door for small businesses and startups to access capital more easily, it was also designed to spur investment among more people – all of which combined together would stimulate growth in the economy and create jobs.

Crowdfunding and the Ordinary Inventory
Crowdfunding is the process of accessing capital for business by raising relatively small amounts of money from a significant number of investors, often through a crowdfunding website on the Internet. Prior to Title III of the Jumpstart Our Business Startups Act, the only people who could invest in private capital raises were individuals with the minimum income of $200,000 ($300,000 if married) or a net worth of $1 million or more (not including the person’s primary residence), and certain qualifying trusts and companies. Title III, or Reg CF has opened up this opportunity to individuals with much lower incomes as well.

Regulation Crowdfunding allows small businesses and startups to raise up to $1 million in capital (the maximum limit can increase over time) during a rolling 12 month period for many individual investor. This can include non-accredited investors as well. The issuers of these securities must use online funding portals to raise the capital.

Problems with Title III (or Reg CF)
One of the main problems with Reg CF of the Jumpstart Our Business Startups Act since its inception in May 2016 is that it places high costs and regulatory burdens on the backs of businesses and startups attempting to raise capital. Several of these burdens and costs include:

 * Businesses that need to raise more than a half-million dollars must prepare GAAP standard financial statements to share with potential investors. The financials may need to be audited as well, if the business has previously used Reg CF. The accountant fees required to prepare these financials properly or often too high for startups and small businesses.

 * Issuers are required to file Form C with the SEC before raising capital. This document is complicated and often requires legal review. The cost of the legal fees associated with such review is often too high for small businesses and startups to pay.

 * Reg CF is also a complex and lengthy process that requires ongoing legal assistance and other expenses to ensure its requirements are met.

 * Reg CF does not allow issuers to announce an offering without first making required disclosures with the Security and Exchange Commission – this includes filing Form C.

All of this upfront effort and ongoing effort for the annual fundraising limit of $1 million means that Reg CF will not be for everyone. It’s a fantastic financing option for those who understand it’s benefits and risks and who properly plan for them.

Attempted Fix
The House of Representatives passed a bill in June 2016 called the Fix Crowdfunding Act in order to fix some shortcomings of the Title III of the Jumpstart Our Business Startups Act. However, it fell short of passage in the Senate.

Suggested Fix
It has been suggested that raising the above-mentioned issuer cap from $1 million to $5 million would enable more businesses to start successfully and flourish. In additional, the limitation on the maximum amount that investors can invest could be raised in a manner that would improve the capabilities of small businesses and startups to raise capital.

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