The intent of Title V of the new JOBS Act is to encourage companies who were not yet willing or able to take on the additional burdens of becoming a public reporting company to seek to raise capital and expand their businesses. Opponents are concerned that the crowdfunding exemption will give rise to abuses of the law.
Prior to the JOBS Act, the 1934 Securities Act required an issuer with more than $10 million in assets and with securities held by 500 or more holders to register with the SEC. Title V of the JOBS Act raises the threshold for mandatory registration from 500 shareholders of record to 2,000 shareholders of record as long as there are less than 500 non-accredited investors.
As proposed by Title V, Investors who purchase their shares in a crowdfunding transaction and investors who receive their shares through employee compensation plans generally would be excluded from the counts.
President Obama has said, “For start-ups and small businesses, this is a potential game changer. They will now have access to a big, new pool of potential investors — namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”
Opponents are concerned about the crowdfunding exemption. Crowdfunding is the practice of inviting a large group of people to invest in your business or project in exchange for equity. Skeptics believe that investors will be inundated with investment swindles and offerings from scam artists which securities law enforcement will no longer be able to track because of the sheer volume of new offerings.
Even before the passage of the JOBS Act, crowdfunding was growing quickly. In 2011 an estimated 452 crowdfunding platforms worldwide (mostly in Europe and North America) raised nearly $1.5 billion, according to a May report from Crowdsourcing.org. That study estimates that volume will hit $2.8 billion in 2012.
Growth could be exponential once the SEC issues the new rules. The reason is that U.S. crowdfunding sites like Angel List have been (under pre-JOBS law) able to sell stock only to “accredited” investors—those with a net worth of more than $1 million or an annual income of $200,000 or more ($300,000 for a couple). Title V will throw this wide open.